The answer? Well, like most matters patent law, ‘it’s complicated’.
Yes, you can. But the question you might want to ask is, ‘do I really want to?’
The answer is yes, you can. However, this may only be a benefit to you in theory.
Licencing an unregistered patent is technically possible, but there are some risks and downsides (and importantly, there are also alternatives), so there’s a lot you need to understand before you consider taking this path. But with the right patent attorney, it is possible to devise and implement a robust commercial arrangement that can limit your risks and mitigate any liability for sunk costs.
It is true that patent licences vary greatly from one agreement to the next, because of rapidly evolving technology, new modes of doing business, and legislative and other legal changes.
However, what remains constant is that under section 13 of the Patents Act, a patent gives the patentee the exclusive rights, during the term of the patent, to exploit the invention and to authorise another person to exploit the invention. This means that the patentee becomes the outright owner, and can manage the patent as such. This includes the right to grant licences – a right that necessarily establishes a legal framework that encompasses the applicant as well.
On the other hand, in circumstances where a patent has not yet been granted, an applicant has no rights under the Act. In this case, the applicant has the option either to agree to licence a future registered patent, or to pursue the path of protecting confidential information as a trade secret if the undisclosed information sufficiently qualifies as such.
Patents give the owner the exclusive right to exclude others from making, selling, using or importing a particular product or service in exchange for full public disclosure of your invention. Conversely, trade secrets are formulas, processes, or other business information that derive their commercial value from being remaining undisclosed, and that a company is making reasonable efforts to keep secret. As such, both have potential for licensing opportunities. For more information on trade secrets click here (6th Blog article).
Given that the technology that is the subject of the unregistered patent remains entirely unprotected right through until grant, it’s not difficult to see why potential applicants might be hesitant to enter into this sort of agreement – if it is drafted without the requisite expertise and precision, it can easily be a case of all risk and no ultimate reward especially if it is poorly managed.
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Are you considering licencing your patent before obtaining registration?
Although it is possible to licence a pending patent, doing so is certainly not without its risks.
The parties involved need to consider the potential opportunity versus the would-be risks, such as confidentiality, de-risking any loss of novelty by exposure into public domain, inclusion of provisions that concern royalty payments, and options for termination.
Safeguard your IP before being exposed – consider the risk of exposure
The criteria of novelty must be met in order to satisfy that the idea, technology, or invention has not been in the public domain. Licensing a pending patent can put this crucial prerequisite in jeopardy.
Even if information has only been made available to a small number of people, novelty is likely to be lost, which will irretrievably extinguish your ability to patent. According to case law (see Sunbeam Corp v Morphy-Richards (Aust) Pty Ltd) we know that novelty is likely to be lost even if publication is made in an obscure journal. So, while a grace period exemption may apply (see page 22 here), the risks associated with even minimal exposure cannot be understated.
In addition, the requirement to ensure no exposure to the public domain is not limited to national boundaries. Exposure in the public domain, even outside of your jurisdiction, will result in loss of novelty which significantly undermines the patentability of an idea or invention.
If you are considering licensing a pending patent for the purposes of business profits, the idea, technology or invention must not be exposed to clients. However, it may be discussed with employees or business partners, but only once a confidentiality agreement or non-disclosure agreement has been put into place and signed but all necessary parties.
Remember, if you discuss or publish information relating to your idea, technology or invention, it cannot be protected, and its commercial value will be damaged.
To safeguard your future patentability, speak with an IP attorney at Platform IP before taking any action, or sharing any information at all relating to your innovation.
Safeguarding with a priority date
A ‘provisional application’ may be submitted to IP Australia or IPONZ to secure a ‘priority date’. The priority date is the date at which the patent criteria are assessed. Obtaining a priority date can confer a considerable advantage on a business, because it prevents potential competitors from obtaining their own.
For a patentee to enjoy the benefit of a priority date originating from a provisional application, a ‘complete specification’ must be filed within 12 months of the filing of the provisional application.
One key issue is that provisional patents are not on the public record, or accessible to the public. This necessarily means that it will be very difficult for potential licensees to be able to establish the full nature and characteristics of the patent in question. For this reason, it is better that inventors make contact with potential licensees about licensing once the patent application has commenced the examination stage, rather than the other way around. Again, it is crucial to put into place strict confidentiality guidelines and agreements to protect the idea, and prevent loss of novelty and non-consensual disclosure.
However, drafting a licence agreement at this point in time still leaves the licensee open to significant financial obligations for an invention that may ultimately not be realised. This is because where agreements are drafted prior to the grant of a patent, licensees can be liable to pay royalties for the invention, even if the patent does not grant. In these circumstances a good contract or intellectual property lawyer can seek to negotiate additional provisions during negotiations, and reduce the financial burden on the licensee by requesting that royalty payments be deferred until the patent grants.
In these circumstances, the licensor may attempt to negotiate royalties at an agreed rate throughout the application phase. If the patent is not in the end granted, a lesser rate may then be applicable. At first glance this may appear less desirable to a licensee than the ability to terminate the agreement. However, in these circumstances the interests of the licensee are weighed against those of the licensor, who will expect to be compensated for affording the licensee preliminary access to the invention. Such early access bestows on the licensee a ‘commercial head start’ – a significant opportunity to dominate the market.
In circumstances where a licence has been issued for a patent that hasn’t yet granted, whether or not the agreement is enforceable is determined according to the ordinary rules of contract law, with consideration given to the express terms of the contract, as well as to terms implied by the courts.
Case law establishes that where the parties have a shared understanding about the parameters and meaning of the agreement, and the substance of the agreement is lawful, then it can be enforced even in circumstances where the patent does not grant.
Most important is that the agreement includes a provision anticipating the situation where the patent office rejects the patent entirely.
It is clear that there are a host of issues a licensee may face when it comes to licensing a pending patent, and in many cases it may not be a worthwhile course of action. If this is the case, there are other options available to the licensee that may be more desirable.
One option is for the licensor, for the time period prior to grant, to licence their innovation as a trade secret. This route is not without its own difficulties, because the licensee will still pay royalties for the trade secrets, and because certain issues can arise that will affect the registrability of the patent. So, as is the case when dealing with unregistered patents, it is important that the agreement is drafted by a patent attorney with a high level of skill, experience and expertise.
So, while it is not an entirely hazard-free endeavour, you can licence a patent that is as yet unregistered after a consideration of the full range of benefits and dangers. The most important task is to anticipate the situation you face should the patent not ultimately grant. This involves careful thought and negotiation around royalties and the ability to terminate in light of the interests of each party.
Talk to an IP commercialisation consultant today about licenses.