Problem: A competitor has a pending patent which appears to block a new product which you wish to introduce.

Objective: Remove the risk that you may now, or at some time in the future, be prevented from selling a product addressing a key market in your industry. Eliminate the risk of you-bet-your-company liability from up to six years of sales on which treble damages could be due.

Response: Negotiations could begin to determine whether your competitor is interested in discussing terms for licensing the technology.

A license is an agreement not to sue. Therefore the object of the negotiation is to obtain a license so your competitor cannot sue. In any negotiation it is important to know what you want and what you are willing to pay for it.

Types of license:

A paid up (royalty free) non-exclusive license. For a fixed compensation which is independent of the number of units sold or total sales, the patent owner agrees not to sue you on the basis of a particular patent or any patent relating to a particular technology. The patent owner retains the right to sue or agrees not to sue other competitors.

A cross license is where the parties exchange promises not to sue. The cross license is normally limited to particular patents. Each party may exchange only promises not to sue or they may agree to pay or receive a royalty.

A royalty may be a payment based on the number of units, or the dollar value, of the product sold which infringes one party's patent or patents.

Typically a license includes a "most favored nation" clause which states that if the patent owner ever licenses someone on better terms (for a lower royalty) the current licensee gets the benefit of the lower royalty. However, conditions must be comparable, that is capable of being compared. When a license is exchanged for a license the value of the licenses exchanged is indeterminate and unique. Thus the patent owner in selling a license in return for a license does not establish a price, which other potential license purchasers can reasonably demand.

Typical royalty rates are 3-5 percent of gross sales, taken at the market level of the one who buys the license, usually wholesale. In a cross licensing situation, however, royalties (if any) should be considerably less. Often the patent owner will want a fixed royalty per unit sold. This provides the patent owner information about unit sales of his competitor and protects royalties from a drop in the price of the product licensed.

If your competitor appears to have a strong patent position but is unreasonable in the terms (royalties) it demands, it can still be advantageous to negotiate a license if up-front costs can be kept low. Once a license is obtained, the downside risks are limited to the agreed-upon royalties instead of possibly lost incremental profits tripled. Options then are still available for avoiding payment of royalties by redesigning your product to avoid the issued patent. Alternatively, royalties can be paid while sales are small and patent validity or claim scope may be contested when sales justify the expense.

The foregoing discussion is concerned with eliminating risk with respect to a competitor's prospective patent. Another approach is to estimate this risk and accept it. The approach for minimizing risk is to minimize investment in the product, when and if a patent issues to your competitor, immediately stop manufacturing and shipping the product and consult patent counsel. If your product does not infringe, obtain opinion from counsel to that effect and, in reliance on the opinion, begin manufacture and sale of product. If product appears to infringe, design around the patent, scrap existing inventory, and introduce new product in reliance on opinion from counsel.