Derivative Applications for Patent License Agreements

Successful patent licensing transactions provide 'win-win' outcomes for both the licensor and the licensee; that is, both negotiating parties realize a benefit under the consummated transaction. However, defining mutually agreeable terms and royalty structures can present challenges for licensors and licensees alike, particularly when the commercial potential for the patents under consideration is unproven or unknown at the time of the negotiation. The dilemma of successfully pricing early stage technology is further exacerbated when one or both of the negotiating parties are resource constrained or lack experience in the relevant market. The authors propose that the application of derivative provisions, such as those commonly found in the financial markets, to patent license agreements may mitigate licensing risk and provide attractive alternatives to those interested in altering the inherent tradeoffs of traditional licensing structures.