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License Your Invention: Sell Your Idea and Protect Your Rights with a Solid Contract
     

License Your Invention: Sell Your Idea and Protect Your Rights with a Solid Contract

5.0 1
by Richard W. Stim
 

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Brilliant inventions are much more common than brilliant inventions that make money. The difference between the two lies in knowing how to get your idea to the right market.
Fortunately, you have help. Intellectual property law expert Attorney Richard Stim tells you everything you need to know to enter into a good written agreement with the manufacturer, marketer

Overview

Brilliant inventions are much more common than brilliant inventions that make money. The difference between the two lies in knowing how to get your idea to the right market.
Fortunately, you have help. Intellectual property law expert Attorney Richard Stim tells you everything you need to know to enter into a good written agreement with the manufacturer, marketer or distributor who will handle the details of merchandising your invention.
In License Your Invention, he shows you, step-by-step, how to draft a license that will be fair to all parties and he addresses such issues as:
* ownership
* applicable patent
* copyright and trademark laws
* license scope
* dispute resolution
* finances
* and much more
A sample tear-out agreement is included and all forms are provided on disk.

Editorial Reviews

Baton Rouge Advocate
Gives detailed instructions on working with manufacturers, marketers and distributors, and addresses issues on copyright and trademark laws, ownership, finances and much more.
Electronics Now
Tells inventors everything they need to know to enter into a solid licensing agreement.
Book News
With an array of forms on disk, in combination with the insights of intellectual property attorney Stim, inventors can hold onto the titles and profits of their inventions rather than sell out to companies. To foster the dream, there is practical information on licensing, financing, and record-keeping. Tempering the dream is the chapter No False Hopes! Reviewing Your Invention's Commercial Potential.
Greg S. Weber
I found License Your Invention to be thorough, accurate and well presented...This book is a tremendous asset for an inventor with the desire and inclination to ‘do it yourself.’ As an intellectual property attorney specializing in licensing transactions, I have enjoyed paging through this book and brushing up on a variety of issues, and yes, even learning a thing or two!
Booknews
With an array of forms on disk, in combination with the insights of intellectual property attorney Stim, inventors can hold onto the titles and profits of their inventions rather than sell out to companies. To foster the dream, there is practical information on licensing, financing, and record-keeping. Tempering the dream is the chapter "No False Hopes! Reviewing Your Invention's Commercial Potential." Annotation c. by Book News, Inc., Portland, Or.
Wall Street Journal
"Nolo's home page is worth bookmarking."

Product Details

ISBN-13:
9780873378574
Publisher:
NOLO
Publication date:
08/15/2002
Edition description:
3RD BK&CDR
Pages:
352
Product dimensions:
8.38(w) x 10.78(h) x 0.73(d)

Related Subjects

Read an Excerpt

Introduction

Eureka! You've developed an invention and believe it has commercial potential. What's next? For many inventors, the best way to profit from an invention is to have someone else -- usually a company that already specializes in similar products -- develop, manufacture or market the invention. However, since an inventor holds ownership rights (sometimes called title) in an invention, another company cannot do these things unless the inventor gives permission. Broadly speaking, this permission is called a license.

This chapter will give you an overview of the licensing process and help you screen out potential problems that could hinder your ability to license your invention. Review this chapter if you answer "yes" to any of the following questions:

  • Would you like an explanation of the difference between a license and an assignment?
  • Do you want a brief description of the legal rights related to your invention?
  • Have you signed any documents regarding your invention?
  • Would you like a clearer understanding of who might own your invention besides yourself?
  • Have you shown your invention to -- or discussed it with -- anyone?
  • Do you want some help in keeping track of your business transactions?
  • Would you like more information about how to assess what your invention may be worth in the marketplace?
What We Mean By an Invention

The term "invention" as used throughout this book refers to any innovation, device or process that can be commercially used or developed. Although the strongest form of protection for your invention is a patent, this book does not deal solely with patented or patentable inventions. Many inventions may not qualify for patent protection but can be protected under some other legal principle such as trade secret or copyright. If your invention has commercial potential and is protectible under some form of intellectual property law, you can use this book to help you license it to others. See Chapter 2 for an overview of the different ways your invention may be protected.

Licenses

A license is simply an agreement in which you let someone else commercially use or develop your invention for a period of time. In return, you receive money -- either a one-time payment or continuing payments called royalties. Your power to make this kind of agreement is based on the premise that you control the right to make and sell your invention. Your right to make and sell your invention depends upon whether your invention is protected under intellectual property laws (see Chapter 2). If your invention cannot be protected under intellectual property laws, it is unlikely you will license your invention. Why? Because if your invention is not protected, anyone can make and sell it. Therefore, why should they pay you?

If your invention is protectible, you can stop others from making or selling it. In other words, a company can only make and sell a "protected" invention if you give them permission. By negotiating a license, a company can make, sell or use your invention without fear of a lawsuit. In other words, a license gives the company a right to do something it would otherwise be prohibited from doing.

You Are the Licensor, They Are the Licensee

For purposes of this book, you, as owner of the invention, will always be the licensor and the party receiving the license for your invention is called the licensee. In law, the person who is the source of the activity gets an "er" or "or" suffix (such as employer, lessor, discloser). The person who is the recipient of the activity gets an "ee." So, an employer provides employment, while a person who is employed is called an employee. Similarly a lessor leases property to a lessee and a discloser discloses information to a disclosee. Since you're licensing your invention, you're the licensor and the party receiving the license is the licensee.

1. When You License, You Are Leasing Your Legal Rights

A license for an invention is similar to a lease for a house or apartment. A tenant makes periodic payments to an owner of property for the right to use it. If the tenant fails to honor the terms of the lease or rental agreement, the owner can reclaim possession and make the tenant leave. Similarly, a licensee pays you royalties (similar to rent) for the right to manufacture, sell or use your invention for a period of time. If the licensee fails to pay you or otherwise breaches your agreement, the agreement may terminate and you can license your invention to someone else (provided the license is drafted properly).

It is also important to realize that you do not license your invention, per se. Rather, you license your legal rights to the invention. This distinction causes confusion for some inventors. Legal rights -- patent, copyright, trademark, or trade secret rights -- are what give you title or ownership of the invention, much like a deed to a house gives you title to the property. When you license your invention, what you are really transferring to the licensee are your legal rights such as your rights to manufacture, sell and use the invention. These legal rights will be explained in more detail in Chapter 2. However, it is beyond the scope of this book to assist you in securing intellectual property protection. In Help Beyond This Book, we refer you to other resources for protecting intellectual property.

For now, keep in mind that the primary goals in licensing are to determine what legal rights you have, acquire the appropriate protection for those rights, and license those rights to others who can make you money.

2. Licenses Can Be Flexible

A license agreement can be drafted according to the specific needs of the licensor or licensee. For example, you can limit the license of your invention for a period of time, such as one year. You can limit the license to a certain area, such as Canada. You can even license your invention to more than one manufacturer at one time.

EXAMPLE: Joe invented a patented flotation device. Two companies are interested in it: a toy company and a company that makes boating products. Joe can sign two license agreements and earn royalties for both uses.

Because a license can be as flexible as the parties wish it to be, the task of drafting a license typically involves much more than simply agreeing to standardized language often found in legal agreements. That is what this book is all about -- teaching you how to draft a license agreement that is just right for you. Drafting a license agreement is covered thoroughly in Chapter 8.

Forms of Intellectual Property

Since licensing basically involves lending your legal rights to someone else, it's crucial that you know precisely which legal rights are associated with your invention. These rights are sometimes referred to as proprietary rights or intellectual property rights. Below are examples of the common forms of intellectual property rights associated with inventions. Chapter 2 provides more information on intellectual property.

Utility patents protect inventions that are new and unique. When you have a utility patent, you can stop others from making, selling or using your invention. You must apply for and receive a patent from the federal government before you have patent rights in the United States.

Design patents protect decorative designs that are used on inventions. You must acquire a design patent from the federal government before you have design patent rights. As with utility patents, you can’t stop illegal copying of your design until your design patent has been issued.

Trade secret law protects confidential information that gives you an advantage over competitors. You must treat the information with secrecy and disclose it only to those who agree to keep it secret. No registration is necessary as registration would defeat the confidentiality requirement. A trade secret is sometimes an alternative or complement to patent protection, particularly for inventors who don’t wish to make their methods or processes public. Trade secrets are also used as a form of protection during the period after an inventor has applied for a patent but before the patent is issued.

Copyright protects the artistic expression contained in writing, software, art, music and movies. Copyright does not protect functional objects such as clothing or furniture, only the artistic elements such as fabric designs or ornamental furniture legs. You get a copyright as soon as you create the work. You don’t have to register your work to get copyright protection, but we advise doing so to strengthen your rights.

Trademark law is in a family of laws known as "unfair competition" (see below) and protects your right to exclusively use a name or symbol to signify your goods or services. Trademark law also protects certain designs or features of your goods, such as the uniquely shaped Calvin Klein Eternity perfume bottle. You get trademark rights once you use the trademark in commerce (that is, once you sell the goods to consumers). You don’t have to register your work to get trademark protection, but we advise doing so to strengthen your rights.

Unfair competition law protects the way you sell your product. There are a number of state and federal laws prohibiting business practices that unfairly hinder marketplace rivalries, such as making fraudulent (false) claims about a competitor's invention. Generally, however, with the exception of rules about trademarks, unfair competition does not pertain to the rights that you are licensing.

More information on the different forms of intellectual property protection is provided in Chapter 2.

3. Licenses Can Be Written or Oral

Most licenses involving technology are written. However, a license doesn't have to be written to be valid. An oral license may also be enforceable as long as it qualifies as a contract under general contract law principles. However, there are limits on oral agreements. For example, in most states, an oral agreement is only valid for one year. Because of these limitations and because it is usually more difficult to prove an oral agreement than one set out in writing, we strongly recommend against relying on an oral licensing agreement.

Assignments

Unlike a license, an assignment is a permanent transfer of ownership rights. When you assign your invention, you are the assignor and whoever purchases the rights is the assignee. An assignment is like the sale of a house, after which the seller no longer has any rights over the property. As the assignor, you may receive a lump sum payment or periodic royalty payments.

Even though they have different legal meanings, the terms assignment and license are sometimes used interchangeably. Indeed, these two types of agreements sometimes seem to have the exact same effect. This is true in the case of an unlimited exclusive license, in which a licensee obtains the sole right to market the invention for an unlimited period of time. Since, in this situation the licensee is not keeping any rights that could be made the subject of another license, the license really has the same effect as an assignment. For more information on assignments, see Chapter 4.

Because the two terms may overlap, it's important to examine the specific conditions and obligations of each agreement rather than simply to rely on terms such as assignment and license.

The Licensing Process

Licensing is a union between the inventor (the licensor) and the company that licenses the right to manufacture or distribute your invention (the licensee). It begins with a meeting and disclosure period followed by a proposal and negotiation stage. If you agree on the major principles, a formal relationship is created. After entering into the agreement (often called executing the agreement), there is a continuing review by both parties called monitoring. If either party breaches (fails to honor) the agreement, the agreement may be terminated.

The following sections describe the various stages in the licensing process.

Should You Manufacture and Market Your Invention Instead of Licensing It?

Before considering licensing, it's important for an inventor to consider the two other basic options to licensing -- assigning your rights or manufacturing and selling the invention by yourself. Although a license allows you to retain ownership of the invention, some inventors prefer to assign all rights in return for a large one-time payment. As for manufacturing and selling the invention yourself (referred to as a venture), most inventors do not have the funds or experience to create ventures or to market their own products. Manufacturing and marketing requires money, knowledge about the industry, connections with distributors and a lot of hard, hard work. In addition, many inventors cannot afford the significant expense of pursuing infringers. For this reason, most inventors choose licensing instead of ventures. However, if you are inclined to sell your invention on your own, we provide some resources for ventures in Chapter 18, Help Beyond This Book.

1. Meet & Greet the Potential Licensee

The most difficult step you will face is finding a company to license your invention. For a shy, introverted inventor, meeting marketing people and displaying work at trade shows can be a jolting and frustrating experience.

Sometimes an inventor is so relieved to find a receptive company that she fails to properly evaluate the opportunity. Once you find a prospective licensee, you should thoroughly research it; this book will explain how. Every business opportunity is not a great opportunity. Sad as it may seem, you may be better off with no license at all than a license with a company that has a reputation for acting unethically. In addition, you must be careful during the disclosure process to properly protect confidential information. Disclosing your invention requires a balancing act: presenting the best aspects of your invention while protecting the confidential aspects of your work. We'll discuss confidentiality and disclosure in further detail in Chapter 7.

It is beyond the scope of this book to inspire you to make great sales pitches or presentations, although we will offer some tips and guidelines in Chapter 11. We will also help you locate appropriate trade magazines and trade shows at which you may find prospective licensees (see Chapter 6). And we'll help you identify and avoid scam marketing companies that will rip you off.

2. Negotiating the License

Negotiation skills are learned, not inherited. The simple rule is that the best approach to negotiating your licensing contract is to educate yourself and to set goals. Good negotiators are well-prepared and have a realistic knowledge of the marketplace. Chapter 6 provides information about researching industries and markets. Also important in any negotiation is flexibility, being willing to adapt your goals to match the situation. We will provide an overview of common negotiating strategies in Chapter 10.

3. Execution and Monitoring

The signing (execution) of the licensing agreement is usually accompanied by an advance payment and an exchange of information or technology. For example, upon executing a licensing agreement, an inventor may receive an advance payment and have to provide the specific methods of efficiently manufacturing the invention.

The execution of a licensing agreement is the climax, but not the end of the licensing process. It may also be the beginning of a services or consulting agreement between you and the licensee. For example, you may be hired to supervise the making of the initial molds or manufacturing prototypes. Service agreements are covered in Chapter 15. Plus, as a licensor you have to monitor your payments and the performance of the licensee. Chapter 17 offers information on post-signing activities.

Avoiding Conflicts Among Multiple Agreements

As an inventor, you may enter into various agreements, each of which may have an impact on your ability to license in the future. Before you license your invention, review your current signed commitments to make sure that none of them conflict with your ability to license. The easiest way to manage this review is to create and maintain a record of all signed documents. For the most part, you should be concerned with documents that affect your ownership, financial interest or control over the rights to your invention.

1. Agreements That Can Impact Licensing

When examining other agreements, first determine what kind of agreement it is. The name of the document will probably help you classify it (although titles are not always conclusive proof). If you are not sure of the type of document, the first or second paragraph often describes the document's purpose. If you are still not sure, try comparing the document's provisions with the provisions of the sample agreements in this book.

Below is a brief description of some common documents an inventor may execute and the effect they may have on the inventor's ability to license an invention.

a. Co-ownership or Joint Inventor Agreements

These agreements are executed between the owners -- usually the creators -- of an invention. They establish the rights and obligations of each party in respect to the invention.

Impact on Licensing: A co-ownership agreement may establish which owner has the right to enter into licensing agreements and may require a mutual decision when it's time to decide upon a licensee. See Chapter 4 for more information.

b. Corporate and Stock Agreements

Have you created a corporation to exploit your invention? Corporate agreements are executed as part of the state incorporation process. Stock agreements formalize sales of corporate stock to investors.

Impact on Licensing: Corporate and stock agreements establish who makes decisions about licensing or whether such decisions require a vote of the board of directors (the group that is elected by stockholders to make the important corporate decisions). See Chapter 4 for more information.

c. Employment Agreements

Employment agreements define your employment obligations and responsibilities.

Impact on Licensing: An employment agreement may limit your rights to inventions created during your employment. See Chapter 3 for more information.

d. Loan Agreements

A loan agreement is an agreement to lend money, services or supplies in exchange for a promise of repayment, usually with interest.

Impact on Licensing: If a loan agreement uses your legal rights to an invention as collateral to secure repayment of the loan, it may prevent you from licensing the invention. See Chapter 4 for more information.

e. Nondisclosure Agreements

A nondisclosure agreement is an agreement to keep confidential certain information identified in the agreement.

Impact on Licensing: An improperly drafted nondisclosure agreement may mean that you have lost the right to consider your invention a trade secret -- which could, in turn, impact your ability to license the invention if the licensee considers trade secret protection an important part of the transaction. See Chapter 7 for more information.

f. Option Agreements

An option agreement gives one party the right to enter into a license (or other type of agreement) at a later date.

Impact on Licensing: An option agreement may establish terms to be used in a license, and may prevent you from licensing to anyone other than the option owner. See Chapter 11 for more information.

g. Evaluation Agreements

An evaluation agreement is a mixture of a nondisclosure and an option agreement. With an evaluation agreement, a company acquires the right to evaluate an invention and then, if they desire, to enter into a license agreement.

Impact on Licensing: An evaluation agreement with one company may prevent you from signing a licensing agreement with a different company. See Chapter 11 for more information.

h. Outsourcing or Manufacturing Agreements

An outsourcing or manufacturing agreement authorizes a company to manufacture -- but not necessarily sell -- goods embodying your invention.

Impact on Licensing: Your failure to include a confidentiality provision in an outsourcing or manufacturing agreement may result in the loss of trade secret rights which could have an impact on your ability to license. See Chapter 7 for more information.

i. Partnership Agreements

A partnership agreement is an agreement in which two or more persons join together in an enterprise. The partnership agreement establishes the contributions, liabilities and shares of profit for each contributing partner.

Impact on Licensing: Your partnership agreement may define which partner can execute a license, and it may require participation by all partners in the negotiation process. See Chapter 4.

j. Representation Agreements

A representation agreement (sometimes referred to as a rep agreement or an agency agreement) is an arrangement with an agent or representative who will attempt to license your invention for you. In return, an agent usually seeks a portion of the profits or royalties.

Impact on Licensing: A rep agreement may require you to pay the rep percentages for a license which the rep did not even negotiate. See Chapter 5 for more information.

2. Keeping Track of Agreements

After you identify your agreements, make sure you have copies for your records. Then list each agreement along with any appropriate dates for activity (for example, due dates for loan payments) on a worksheet (we provide a sample below). If you believe that one of these agreements will have an impact on your ability to license, it is important to identify these potential obstacles now, before the licensing process begins.

We suggest you use the following worksheet to keep track of each agreement. Some agreements terminate by a certain event or date. Some agreements can be renewed on a specific date. You should review your agreements for the relevant information and plug it in your worksheet. You should keep your worksheets and other important documents -- including the copies of the agreements themselves -- in a special notebook. We discuss recordkeeping in Section G below.

Challenges to Your Ownership

Is anyone likely to challenge your claim to ownership of your invention? Of course if someone has already asserted an ownership claim, then the answer to this question is yes. But even if there has been no actual assertion, an informal conversation may have alerted you to this possibility. The ownership issue may have been raised in several different contexts:

  1. Someone you worked with believes that he or she is entitled to be considered one of the inventors.
  2. Another inventor has already alerted you to his or her belief that your invention infringes a previous invention that is protected by a patent or some other intellectual property device.
  3. You know about an active (in-force) patent which describes an invention very similar to yours.

1. Types of Ownership Challenges

The first type of claim ("I worked for/with you, or you worked for/with me, and I own part or all of that invention") usually occurs when a former employer, employee or co-worker claims rights to your invention. If you are not familiar with principles such as joint ownership, joint authorship, work for hire, or shop right rules, then you should read Chapters 3 and 4.

The second and third types of potential challenges to your rights are based on a doctrine known as patent infringement. Patent infringement claims are usually brought by an inventor who believes your invention is the same as his (that is, "I created this invention first and you ripped me off"). Under patent law, an infringement may be exactly the same invention or it may be a similar or "equivalent" invention.

2. Dealing with Ownership Challenges

You may have difficulty licensing your invention in any of these situations. Since a potential licensee will want to make sure that you own the rights you are licensing, the agreement will inevitably contain a warranty clause which guarantees that you do, in fact, have the right to license. Many licensees will also insist on an indemnity clause, which basically holds you financially responsible for damages suffered by the licensee if your warranty proves false. If you don't have ownership rights or if those rights are challenged in a lawsuit, you may have to pay to defend yourself and the licensee.

What do you do if there is an ownership issue? You'll need to determine if the challenge is valid. Do you really own your invention to the extent you thought you did? If you don't, you will have to settle the dispute. If the challenge is bogus, you can disregard it. Either way, you should consult with an intellectual property attorney experienced in your type of intellectual property because you will most likely need an expert legal opinion regarding the validity of the challenge. See Chapter 2 for more information about types of intellectual property.

When Others Infringe Your Invention

If you think that someone may have ripped off your invention, review your rights under intellectual property laws. You may not have been "ripped off" in a legal sense. If you are unsure, you will need to consult with an intellectual property attorney (see Chapter 18, Help Beyond This Book). If you have been ripped off, you must determine whether you can handle the dispute yourself or whether you need an attorney. Dealing with infringers is especially important if your licensing agreement requires you to defend the invention against thieves. See Chapter 2 for more information about intellectual property laws.

Disclosing Information About Your Invention

If you invented something new and exciting, then you have a natural desire to share your discovery. Unfortunately, sharing your invention without proper precautions may cost you your legal rights. That's because one method of protecting your invention is trade secret law. A trade secret is confidential information which gives you a competitive advantage over other inventors or their licensees. Trade secrets are valuable because they are not known to the public. Trade secret laws will protect your invention so long as you do not disclose information about it indiscriminately. Unrestricted disclosures about an invention protected by trade secret will usually terminate the protection.

Trade secret protection isn't a concern for all inventions, however. An invention that has received a patent does not need trade secret protection. Disclosures about a patented invention will not affect your patent rights. However, as explained below, if you have applied for a patent that has not yet been issued, the only protection you might have is trade secret protection. In that situation, you should not disclose confidential information about your invention. Finally, if you have trade secrets that complement the patent but are not part of the patent (for example, an efficient way to construct the invention), you must treat these with confidentiality, as well.

Summing up, there are four major concerns regarding disclosing information about your invention:

  1. If you have not applied for a patent, the disclosure may trigger the time period in which a patent application can be filed (see Chapter 2);
  2. A disclosure may affect your claim of trade secret rights;
  3. A disclosure may affect your ability to compete because the information could become available to makers of similar or related inventions; and
  4. A disclosure may affect your ability to contract because a company may not want to enter into an agreement if the information is available to competitors.

If you have made disclosures regarding your invention to anyone, you should determine how trade secret law might affect your situation. If you disclosed information about your invention in printed materials such as journals, financial agreements (such as loan documents) or advertisements, you will also need to determine if the timing or disclosure will impact your ability to obtain patent protection (see Chapter 2). If you entered into a disclosure or confidentiality agreement, you should compare its provisions with those in the sample agreements in Chapter 7.

Again, beware that your patent rights will be lost if you file your application more than one year after public disclosure of the invention. This may include publications in journals or even on the World Wide Web.

Keeping Your Records

There is a Chinese proverb that says the palest ink is better than the best memory. This is certainly true in law and science, where a written document is the best way to authenticate facts. Although agreements and scientific claims can be based upon oral conversations or implied by the actions of the parties, as a general rule: GET IT IN WRITING! The best legal and scientific protection is documentation. This rule is repeated throughout this book and should be immediately applied in the following ways.

1. Keep an Inventor's Notebook

Every inventor should keep a notebook documenting the creative process. This notebook is necessary to record the steps involved in creating the work and to deflect claims by others that they are the true inventors. If you seek a patent, or are sued by a patent holder, the notebook may assist you in proving the dates of your invention. It may also assist in your claims for tax deductions. To help you start and maintain your notebook, Nolo offers a guide for inventors, The Inventor's Notebook, by Fred Grissom and attorney David Pressman (see Chapter 18, Help Beyond This Book).

2. Use Disclosure Agreements

If someone wants to learn technical details about your invention, review Chapter 7 to determine if a written disclosure agreement or similar document is necessary. It probably is. Information about your invention should be disclosed only on a need-to-know basis and under a guarantee of secrecy. This includes disclosures to co-workers, contractors, suppliers and persons who evaluate your work.

3. Maintain a Business Notebook and Files

Poor recordkeeping is a roadblock to success. You must maintain a central depository such as a notebook or binder of files for all paperwork. Besides maintaining your signed agreements and other records, you should document business discussions, including phone calls and business-related conversations. Your file should have a section for contacts, a log of meetings and phone calls, a method of tracking money and a listing of business documents. This is also a good place to store registration certificates or any proofs of ownership.

For purposes of documenting phone conversations, it is not legal in some states (such as California) to record a telephone conversation without the consent of all parties to the conversation.

4. Insist on Written Agreements

If you are in a discussion regarding licensing, even if you are positive about the deal, you should preface your comments with a disclaimer such as, "This sounds fine, but I can't commit until I see a written agreement." Make it a part of your business vocabulary and avoid taking actions that are contrary. For example, don't claim you need a written agreement and then subsequently permit someone to invest money or begin production of your invention without something in writing. Similarly, don't contract for design of a prototype or model without a signed contractor's or outsourcing agreement. Even a one-page signed summary of the contract terms is better than nothing at all. See Chapter 10 for information about Letters of Intent and contract summary sheets.

No False Hopes! Reviewing Your Invention's Commercial Potential

For many inventors, the process of pitching an invention is heartbreaking and fruitless. After thousands of hours of invention and hundreds more attempting to license it, an inventor may sadly conclude that there is no market for this product.

One way to avoid this problem is to make an effort to determine how marketable your product is before attempting licensing or even beginning the patent process. Two or three out of every 100 new inventions succeed in the marketplace. What good is investing thousands of dollars and weeks of work into the patent or licensing process without some expectation of a return? Although there is no foolproof method of determining commercial potential, there are a few ways to figure your odds of success and to act accordingly.

1. The SBA's Four Tests for Commercial Potential

The U.S. Small Business Administration (SBA) poses four tests for an invention to pass to show that it will have commercial potential. These are:

  • Is it original, or has someone else already come up with it? You may be surprised to learn that someone else has already thought up something similar to your invention and that the invention has already been rejected in the marketplace. You can get a rough notion of whether your invention has already been tried by checking trade directories, Internet services, or performing an abstract search of the Patent and Trademark Office at its website -- all of which are free and explained in Chapter 18.

  • Is there a likely distributor? As you will learn (or may have already learned), very large companies are generally not interested in unsolicited ideas from outsiders. It is difficult to penetrate these companies and convince them to take a chance on manufacturing and distributing your product. Smaller or mid-sized companies may be more receptive, but they will still view your invention from a bottom-line mentality. Their approach will be, "What's the cost to make it and what is the likely return?" If the profit margin is small, it will be difficult to convince anyone to take a chance. As an alternative, you may consider forming your own company and manufacturing your invention yourself. This tactic -- known as creating a venture -- is risky (see sidebar in Section C).

  • Is it a money maker? This is the question that is most difficult to answer. Below we suggest some methods of testing the marketability of your invention.

  • Does your invention qualify for legal protection? Unless you have some legally protectible invention, you won't be able to stop others from copying it. Without legal protection you can rely only on the forces of strong marketing to gain a position in the marketplace.

2. The Innovation Center Factors for Commercial Potential

In the 1970s, the University of Oregon's Innovation Center developed a list of 33 areas and factors that should be considered when determining the commercial potential of an invention. These factors are:

  • Legality: will there be legal problems commercializing your invention?
  • Safety: are there safety issues (for example, a potential for consumer injuries) that may scare away licensing companies?
  • Environmental impact: will your invention have a positive or negative effect on the environment and how will this affect the commercial potential?
  • Societal impact: will your invention have a positive or negative effect on society and how will this affect the commercial potential?
  • Potential market: who will buy your invention?
  • Product life cycle: does your invention's usefulness diminish over time?
  • Usage learning: how long does it take to learn how to use your invention?
  • Product visibility: will your product have a distinctiveness so as to stand out in the marketplace?
  • Service: will your product provide a valuable service?
  • Durability: how sturdy is your invention? Will it require frequent maintenance?
  • New competition: what is the likelihood of new competitors appearing once your invention is commercialized?
  • Functional feasibility: how workable are the functional aspects of your invention?
  • Production feasibility: how practicable is it to produce your invention for sale?
  • Stability of demand: will the demand for your invention die off?
  • Consumer/user compatibility: will consumers find that your invention is compatible with their needs or lifestyle?
  • Marketing research: what does marketing research indicate?
  • Distribution: how can your invention reach consumers? What types of distribution are available?
  • Perceived function: what do you perceive as the invention's primary function? Will consumers perceive this as its function as well?
  • Existing competition: what competition exists now?
  • Potential sales: have you any way of estimating the potential sales?
  • Development status: in what stage of development is your invention?
  • Investment costs: what type of startup expenses do you anticipate in order to manufacture the device?
  • Trend of demand: what do consumer trends indicate for the demand for your invention?
  • Product line potential: is there a potential to expand your invention into a line of products?
  • Need: is there a need for your invention?
  • Promotion: what type of promotion is needed to sell your invention?
  • Appearance: does your invention's appearance add to its commercial appeal?
  • Price: is your invention affordable to the relevant market?
  • Protection: what forms of legal protection are available for your invention?
  • Payback period: how long will it take to receive a payback on your invention?
  • Profitability: what is the margin between the cost and the sale price?
  • Product interdependence: is your invention dependent on or related to another device or product?
  • Research and development: is further research and development necessary before you sell the invention?

It may be difficult for you to assess each factor, particularly at the beginning of the invention process. In addition, the importance of each factor may vary. However, it becomes obvious when you view all of the factors cumulatively that the brilliance of your invention may pale under the light of commercial scrutiny. For example, an invention that has fluctuating demand, an unfeasible production system and a slow payback period will be very difficult to license.

3. The Pressman Factors for Commercial Potential

In his book, Patent It Yourself (Nolo), attorney David Pressman provides excellent explanations for 55 positive and negative factors which can help you determine whether your invention has commercial potential -- in other words, whether someone will be interested in licensing or buying your invention.

One factor is an easy starting point: cost. How much will it cost to make your invention? How much will the parts cost? How much will the assembly of the parts cost? How much will the packaging cost?

Other factors that may be equally important include:

  • Competition: are opposing products firmly entrenched? Is the field crowded with competition? Is the market too small to merit the promotional effort?
  • Ease of use: how easy is it to obtain results from your device?
  • Demand: is there a need for your device?

    As to the final factor -- demand -- you may wish to pursue your own research with family and friends, as described below.

    The Bag of Parts Analysis
    One successful toy representative explained that when presented with a prospective toy idea, the first thing he does is isolate the parts and imagine the parts were in a bag. How much would this bag of parts cost? He then multiplies the cost of the parts by five to get an idea of the retail price (referred to as the "price point"). Finally he compares the potential retail price with the competition. If the price point is above the range of competing toy items, the rep will not handle the toy. No matter how brilliant the toy idea, the rep believes that it will be too difficult to convince companies and stores to handle an item that is not priced competitively. The same is true for most industries. The buying public is price conscious and will forego a brilliant invention if its price is prohibitive.

    4. Testing the Waters Yourself

    One of the simplest methods of determining marketability is to conduct your own personal market research. In his book, Patent It Yourself, Mr. Pressman provides methodology for performing focus group research. This is a system in which you present your invention to groups of people and get their responses. Conducting such a market survey may reveal whether potential consumers will have any interest in the device.

    This type of research requires organization. You will need to prepare your presentation. If you don't have a prototype, you'll need to find some way of showing or describing your creation so that the viewers can evaluate it. You will also need to pinpoint the right questions to ask (for example, Would you buy it? What is the most you would pay?) and to be able to compile the responses. Even if the research convinces you not to proceed, this method is excellent practice for making presentations to licensees or potential business partners.

    Since you might be disclosing certain information that should be maintained as a trade secret, you may need to take precautions. Rather than have each guest sign a nondisclosure agreement (an unfriendly method of getting opinions), Mr. Pressman suggests a log book or a page in the inventor's notebook that evaluators can sign which states something such as:

    The undersigned have seen and understood Joan Smith's confidential invention known as [insert the name of your invention -- for example, "the Purple Plunger"] on the dates indicated below.

    Although this is not as protective as a disclosure agreement, it puts the evaluator on notice that the invention is confidential.

    Testing Your Idea on Friends or Family. Using friends or family for opinions can create uncomfortable situations. You may be offended by their comments. They may be hesitant to tell you the truth. Here are four tips to help deal with this issue:

    • Create an atmosphere where your viewers are comfortable expressing their opinions.
    • Avoid taking criticism personally. It's hard, but it will help you in business.
    • Do not interrupt or argue when others are making criticisms.
    • Don't disclose your invention to someone if you don't trust them.

    5. Getting an Expert Opinion

    The opinions of a test group may be helpful, but they may not be sufficient. Perhaps they are not the intended consumers of the item or perhaps they lack the proper industry perspective to determine potential success. You may need an expert opinion.

    Who counts as an expert? Generally, anyone involved in the chain of distribution is an expert to a certain degree, from inventor to manufacturer to supplier to distributor to salesperson to consumer. If you have an auto accessories product, for example, you might solicit the opinion of a mechanic, a driver, the owner of an accessories store or even a gas station attendant. Being an expert doesn't require a college education, only experience, knowledge or expertise in the appropriate marketplace.

    Local inventor groups may provide expert assistance for evaluation or they may lead you to organizations that assess marketability. Objective evaluations are performed by some companies, often for a fee. For more information, check the resources in Chapter 18, Help Beyond This Book.

    Note: You will need a prototype (or some model or mock-up) of your invention in order to obtain an expert evaluation. For information about prototypes and presentations, see Chapter 11.

    Beware of Scam Invention Marketing Firms! If you have contacted an invention marketing firm and their so?called experts told you that your invention will be a success and sell millions, then you're in trouble! Hopefully you haven't paid any money for this opinion. If you have, you should not pay any more. Although there are legitimate companies that will evaluate your product's commercial potential, the majority of the invention marketing firms are scam operations. If you are not sure what an invention marketing firm is, or if you are considering making a payment to a company that proposes to help you patent your invention or get you a licensing deal, review Chapter 5 before proceeding.

    6. What If There Is No Commercial Potential?

    Trying to market a new product is like gambling, and as in any game of chance, you have to know when to quit. This may be the most difficult decision for an inventor to face. Because of this, you must have a realistic view and avoid the false hopes that come with the excitement of inventing. It is important to remember that the invention only embodies one aspect of your creative ability and if you were able to create one invention, there is more intellectual property in your brain waiting to be mined. Don't be discouraged! You can still achieve your goal of commercial success, but perhaps with a different invention. Remember: It is the ability to invent, not the invention itself, that is rewarded.

  • What People are Saying About This

    Greg S. Weber
    "I found License Your Invention to be thorough, accurate and well presented... This book is a tremendous asset for an inventor with the desire and inclination to 'do it yourself.' As an intellectual property attorney specializing in licensing transactions, I have enjoyed paging through this book and brushing up on a variety of issues, and yes, even learning a thing or two!" -- Creatimve Media Law Group.

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