Licensing your patent: how to negotiate, what to include in agreements 🤝

Securing a patent is just the beginning of your innovation journey. A patent gives you exclusive rights to make, use, and sell your invention. But what if you don’t have the infrastructure, capital, or expertise to commercialize it yourself?

That’s where patent licensing comes in. By licensing your patent, you allow another party to use your invention in exchange for royalties, lump-sum payments, or other benefits. Done right, licensing can open new markets, generate passive income, and even turn competitors into partners.

This article walks you through the essentials: how to negotiate a strong licensing deal and what must be included in a licensing agreement under Indian law.

What Is Patent Licensing?

Patent licensing is a legal arrangement where the patent owner (licensor) grants permission to another party (licensee) to use, make, sell, or distribute the patented invention under specific terms.

Licensing doesn’t transfer ownership—you remain the patent holder. Instead, you grant certain rights in return for financial or strategic benefits.

Common types of patent licenses include:

• Exclusive License: Only one licensee (and not even the patent holder) can exploit the invention.

• Non-Exclusive License: Multiple licensees can use the invention.

• Sole License: One licensee has rights, but the patent holder also retains usage rights.

• Cross-Licensing: Two companies license patents to each other—common in tech industries.

Why License a Patent?

• Monetization without manufacturing: Earn royalties even if you lack production facilities.

• Market expansion: Partner with companies in regions where you don’t operate.

• Risk reduction: Let licensees handle regulatory approvals, production, and distribution.

• Strategic alliances: Build partnerships with larger players instead of competing head-on.

In India, licensing is especially useful for startups, university spin-offs, and individual inventors who may not have the resources to scale on their own.

Step 1: Preparing for Licensing

Before you start negotiating, you need to get your house in order.

1. Patent Strength Check: Ensure your patent is valid, enforceable, and has a broad enough scope to attract licensees. Weak or narrow patents will struggle in negotiations.

2. Market Research: Identify industries, regions, and potential licensees who can best exploit your invention.

3. Valuation: Estimate the financial worth of your patent. Factors include market potential, cost savings to licensee, and remaining patent life.

Think of this stage as polishing your “IP pitch” before stepping into a deal.

Step 2: Negotiating the License 🤝

Negotiation is where the real business happens. Both sides aim to balance risk and reward. Here are key elements to focus on:

1. Scope of Rights

• What can the licensee do—manufacture, sell, export?

• Is the license exclusive, non-exclusive, or sole?

• Are rights limited to specific territories or industries?

Example: You may grant rights only for the Indian market while retaining global licensing opportunities.

2. Royalty Structure

Royalties are the financial backbone of licensing. Common models include:

• Running Royalties: A percentage of sales (e.g., 5% of net sales).

• Lump-Sum Payments: One-time upfront payment.

• Milestone Payments: Payments triggered by events (FDA approval, hitting sales targets).

• Hybrid Models: Combination of upfront fees + running royalties.

A smart licensor ensures the royalty model aligns with market realities.

3. Duration of the License

Licensing terms often run until the patent expires (20 years from filing in India), but shorter periods may apply.

4. Exclusivity vs. Flexibility

Exclusivity can attract a higher royalty, but it limits your options with other partners. Non-exclusive deals allow you to license widely.

5. Minimum Performance Obligations

To avoid a licensee “sitting” on your patent, include minimum sales targets or commercialization obligations. If unmet, you should have the right to terminate.

6. Confidentiality

Licensing often involves sharing technical know-how beyond the patent disclosure. Protect trade secrets with strict confidentiality clauses.

7. Dispute Resolution

Specify how disputes will be handled—Indian courts, arbitration, or international arbitration (common in cross-border deals).

Step 3: Drafting the Licensing Agreement

A well-drafted agreement is your shield against future conflicts. Here are essential clauses to include:

1. Parties to the Agreement
   Clearly identify licensor and licensee with their full legal details.

2. Grant of License
   Define exactly what rights are being transferred—use, make, sell, export, etc.

3. Territory & Field of Use
   Specify whether the license is global, regional, or limited to a specific application.

4. Term & Termination
   State the duration of the license and conditions for termination (breach, non-performance, insolvency).

5. Royalty & Payment Terms
   Define payment structure, due dates, audit rights (to verify sales reports).

6. Confidentiality & Know-How
   Cover technical data, trade secrets, or training shared during the license.

7. Indemnity & Liability
   Allocate responsibility for legal claims, product defects, or third-party IP issues.

8. Improvements & Future Patents
   Address whether improvements or derivative inventions belong to the licensor or licensee.

9. Dispute Resolution & Governing Law
   Choose jurisdiction and method (litigation vs. arbitration). For cross-border deals, arbitration under ICC or SIAC is common.

10. Force Majeure
    Cover unforeseen events (pandemics, wars, natural disasters) that may affect obligations.

A strong agreement balances flexibility for growth with safeguards against misuse.

Step 4: Regulatory Compliance in India

Patent licensing in India must comply with the Indian Patents Act, 1970, and may also trigger competition law considerations.

• Registration with the Patent Office: Though not mandatory, recording the license with the Controller General of Patents provides legal recognition and enforceability against third parties.

• Competition Law (Antitrust): Avoid clauses that unfairly restrict competition, such as price-fixing or excessive territorial restrictions, as these may violate the Competition Act, 2002.

• Tax Implications: Royalties paid to foreign licensors may attract withholding tax; GST may also apply depending on the arrangement.

Common Mistakes in Patent Licensing

• Overvaluing or undervaluing patents: Unrealistic expectations derail negotiations.

• Ignoring termination rights: Without exit clauses, you may be stuck with a poor-performing licensee.

• Loose confidentiality protections: Licensees may learn your technology and later compete against you.

• Not monitoring licensee performance: Regular audits are essential to ensure correct royalty payments.

Case Study: Licensing Success Story

A well-known example in India is CSIR (Council of Scientific and Industrial Research), which has licensed several patents to pharmaceutical and agrochemical companies. Instead of commercializing products themselves, CSIR generates revenue while private players bring innovations to market.

This model shows how licensing can bridge the gap between research and commercialization.

Conclusion: Turning Patents into Partnerships

Licensing is more than a legal transaction—it’s a business strategy. A well-negotiated license agreement protects your rights, ensures steady income, and creates partnerships that can scale your invention globally.

The key is preparation: know your patent’s value, structure negotiations carefully, and craft an agreement that anticipates future challenges. Done right, licensing can transform a single patent into a long-term growth engine 🚀.

Next Step: If you’re considering licensing your patent, speak with an experienced IP attorney who can help with valuation, negotiations, and drafting a watertight agreement tailored to your business goals.