Licensing IP to Big Corporations: when the elephant fears the mouse
If you’re in independent inventor, you may be interested in licensing your IP to a large corporation. And why not? The larger the licensee, the greater the production and distribution of your product, the greater your royalty check. Cha-ching.
In a previous post, we weighed some of the pros and cons of working with the big corporation. But it’s important when looking to lasso your own contractual cash cow to understand that big companies are often weary of engaging with independent inventors. As much as most companies want and need the new ideas and products that independent inventors provide, there is a real and legitimate concern that dealings with the new inventor may create significant headaches for the company.
Here, we outline 3 primary reasons for this wariness.
1. They’ve heard it all.
First of all, many well-known companies are flooded with new ideas. Often the ideas are not related to any business the company is involved in. Even when the products are related to the company’s core business, the ideas are either too outrageous or too obvious to warrant serious consideration.
An old story that patent lawyers tell involves an agreement between a businessman and a manufacturing company. The man offered to advise the company on a sure-fire way to increase profits in exchange for 15% of the difference. Believing this to be a no-lose situation, the company agreed to the deal.
The businessman delivered his advice. He said this: “Increase your prices.”
The contract was valid and when for unrelated reasons the company eventually did raise its prices, it was forced to pay the businessman his percentage of the increase.
Even the most obvious of ideas can waste a lot of company time and resources.
2. Your idea is a good one…too good.
More complicated is the situation in which good ideas are brought to the attention of the company, but the company discovers that the presented idea has either already been licensed from another inventor or company, or that the idea is currently being internally developed by the company. This creates a bit of a hot potato. The company is often reluctant to explain to the submitting inventor that the proposed product is already currently being considered or developed, and thus risk possible disclosure of important strategic information to the independent inventor. On the other hand, by failing to disclose the existence of ongoing development activities, the company risks later being accused of stealing the idea from the inventor. This is one of the leading reasons that companies with active R&D programs are often less enthusiastic than most about receiving unsolicited product proposals.
3. Cash cow fears getting over-milked.
A third reason that some companies are reluctant to license ideas from others is that the royalty stream paid by the company to the inventor results in an uncompetitive tax on the company’s product. If the product sells well and carries a reasonable margin, the royalty payment is not an issue. The company prices the product in a way that enables it to earn its profit while still making royalty payments to the inventor.
Where problems inevitably develop, however, is when the company finds that it has invested money in creating a market for its product only to find that a new competitor has entered the marketplace with an identical product. This generally happens, for instance, when the inventor fails to secure patent protection for the product. It might be that no patent was ever applied for, or that during the process of applying for the patent, the application was ultimately rejected by the patent office without a patent ever issuing.
With no legal barrier to exclude others from the marketplace, competitors are able to enter and sell the identical product as that licensed to the company. Since the licensing company is paying a royalty on the products that it sells to the licensor/inventor, the company is significantly price-disadvantaged in the marketplace relative to the newcomer.