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Remuneration and the inventor

Whenever a party intends to commercially exploit technology invented by another party, the question arises as to the proper method of quantifying the remuneration payable to the inventor.

Whether the payment is by way of a lump sum, staged fixed payments, or a royalty, or any combination of them, there is a general rule of thumb that the inventor should receive approximately one-quarter of the additional profit made by the commercialising party as a result of the rights held by the inventor in the invention (such as a patent). However, some industries have customs and practices which can, in effect, fix royalties payable for the exploitation of certain classes of invention, based upon surveys of royalties paid in a range of industries.

Lump sum payments have the benefit of providing certainty to both parties, but in calculating the amounts payable, both parties are necessarily relying on forecasts of the profit to be gained from commercialising the invention. Royalties give the inventor a greater chance to share in the revenue resulting from the spectacular commercial success of the invention, but also place the inventor at risk if the invention is a commercial failure.

The licence agreement should define the licensed products that may be made in accordance with a patent. Royalties can then be calculated on the basis of a percentage of sales of licensed products. Alternatively, royalties can be calculated on the number of units made according to the licensed technology, which may avoid problems with defining a licensed product.

OTHER LICENSING ISSUES…

The following issues need to be considered before coming to any agreement with a potential commercialising party:

• term
What should be the duration of the agreement? How is this affected if the relevant patents expire?

• exclusivity
Will the commercialising party have exclusive rights? If so, will they be limited to a particular commercial fi eld, to a particular purpose or to a specific class of customer?

• geography
Will the rights be geographically separated?

• obligations to commercialise
Should a business plan be annexed to the agreement, and should the commercialising party be held to that business plan and any other performance obligations unless the inventor agrees to a variation?

• role of the inventor
Will the inventor have an ongoing role as a consultant to the commercialising party in order to transfer know-how?

• quality control and audits
Will there be appropriate quality control procedures and associated audit and inspection rights?

• warranties
What warranties will the inventor be prepared to offer? Will the inventor warrant that the invention is patentable?

• sub-licensing
Will the agreement permit sub-licensing of the technology?

• cost of patent protection
Who will pay the ongoing costs of obtaining and maintaining patent rights? Who will pay for the cost of enforcing the patent?

• infringement
Who is to be responsible for defending any action brought by a third party alleging that the working of the invention infringes the third party’s intellectual property rights?

• improvements
Who is to own the intellectual property in any improvements to the invention by either party?

• assignment and change of control
To what extent will the rights granted to the commercialising party be able to be assigned?

• product liability
Who is to be responsible for any product liability claims? Professional legal advice should be sought in relation to each of the above issues before any commercialisation agreement is signed.

Linda King is a Partner and Thai Loi is an Associate in the Commercialisation & Litigation practice group at Shelston IP. Email lindaking [at] ShelstonIP.com Ph: (02) 9777 1111.