Patent Licensing & Assignment Agreements

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Patents can be assigned or licensed just like other forms of intellectual property. In addition, the patent application can be assigned. These transfers of interest in the intellectual property are covered by 35 U.S.C. § 261 (Ownership; Assignment).

§261 provides that patents and patent applications, or any interest in these, can be assigned by writing. Although the written agreement does not need to be recorded, the failure to record the transfer of rights with the PTO within three months makes it

“void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice….”

EXAMPLE (1): Donald holds a patent on the “Ledger Lightener,” a machine which magically shrinks paper. On December 1, 2003, he assigns ownership of the patent to Scott, who pays him $1000. The assignment is put in writing but is not recorded with the PTO. On March 25, Donald agrees to sell this same patent to David, who pays $500. Because David is a purchaser for consideration and the original patent assignment was not recorded with the PTO, David actually owns the patent now; the assignment to Scott is void as against David. Of course, Scott might have a remedy available against Donald for fraud, but at best he will receive money damages…David will not be stripped of the patent.

EXAMPLE (2): Assume now that the transfer to Scott was not recorded, but David knows Scott and knows that Scott bought the patent from Donald. This means that David had notice of the prior transfer, and even if he is a subsequent purchaser for valuable consideration he is not one “without notice,” so the sale to Scott will prevail over the sale to David. Basically, if David knows that the patent has already been sold it’s hard for him to argue that it’s only fair for him to keep it anyway.

There are a great many ways in which patent licenses and sales can be structured. In any license, issues to look out for include the royalty calculation method, payment terms, quality control, and limits on production. A license should spell out what happens if the patent is found invalid or unenforceable (which means the licensee would have paid for nothing, since no license would be required to produce an unpatented product). Similarly, a licensee might want to make sure that if the patent owner makes improvements to the invention that the licensee would be entitled to incorporate those into its products.

Certain representations and warranties will be asked for by the purchaser (or licensee) of the patent, including that the patent is valid and enforceable. While in contracts for sale of other property, such promises might survive the sale (i.e., the promise would be binding beyond the date of sale), no such survival clause would be appropriate in a patent sale. That is, when selling a patent it is best simply to warranty that the patent holder has no knowledge of anything which would threaten the validity or enforceability of the patent and that it is both valid and enforceable as of the date of sale to the best of the patent holder’s knowledge (rather than warranty that the patent is valid and enforceable, period).

A recent U.S. Supreme Court holding in Bowman v. Monsanto Co., 569 U.S. 278 (2013), discussed the implication of a limiting first sale doctrine as it applied to products sold under a narrow license that prohibited certain uses of the licensed products.  In this case, soybeans (a.k.a. Round-Up Ready seeds) were sold under a license that they could be planted for one growing generation, but the resulting produced seeds were for consumption and not to be replanted.  The Supreme Court held that the license limitation was valid to prohibit certain uses of a patented product once it was sold.

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