Patent Licensing Offer Letter

Business-Friendly Resolution & Royalty Negotiation

Patent Licensing Strategy
Licensing as Resolution: Many patent disputes are best resolved through licensing rather than litigation. A license allows the accused infringer to continue operations while the patent owner is compensated. Both parties avoid litigation costs, uncertainty, and business disruption.
When to Lead with Licensing
  • Business relationship: Parties have or want ongoing commercial relationship
  • Industry practice: Patent licensing is common in the industry (e.g., SEP/FRAND)
  • Monetization goal: Patent owner seeks royalty revenue, not exclusion
  • Litigation cost: Enforcement cost exceeds potential damages
  • Large potential licensee base: Seeking to build licensing program
  • Uncertain validity: Patent has potential invalidity risks
When to Lead with Enforcement
  • Direct competitor: You want to exclude, not license competitor
  • Deliberate copying: Infringer acted in bad faith
  • Injunction needed: You need to stop sales, not just collect royalties
  • Establish precedent: Aggressive enforcement deters future infringers
  • Ignored prior outreach: Prior licensing attempts were rebuffed
Licensing Approach Comparison
Approach Tone Pros Cons
Soft Licensing Offer Business development, partnership Preserves relationship; faster response; less confrontational May signal weakness; less urgency; lower initial offers
Demand + License Option Enforcement with offramp Creates urgency; establishes willfulness; maintains leverage May damage relationship; defensive posture from recipient
Post-Demand Licensing Resolution after notice Maximum leverage; recipient understands exposure Slower; more adversarial; may require litigation threat
Key Licensing Negotiation Points
  • Scope: Which patents, which products, which territories?
  • Exclusivity: Exclusive vs. non-exclusive rights?
  • Field of use: Limited to certain applications?
  • Term: Life of patent or shorter duration?
  • Royalty structure: Running royalty, lump sum, or hybrid?
  • Minimum payments: Guaranteed minimums regardless of sales?
  • Sublicensing: Can licensee grant sublicenses?
  • Past infringement: Payment for pre-license sales?
  • Most-favored licensee: Match better terms given to others?
  • Audit rights: Right to verify royalty payments?
FRAND Obligations: If your patent is a Standard-Essential Patent (SEP) committed to a standards body, you may have FRAND (Fair, Reasonable, and Non-Discriminatory) licensing obligations. FRAND terms must be offered to all implementers, and seeking injunctions may be restricted.
Determining Reasonable Royalty Rates
Georgia-Pacific Factors

Courts use the 15 Georgia-Pacific factors to determine reasonable royalty in litigation. These same factors inform licensing negotiations:

# Factor Consideration
1 Prior royalties Royalties received for licensing the patent at issue
2 Comparable licenses Rates paid by licensee for comparable patents
3 Nature of license Exclusive vs. non-exclusive; territorial restrictions
4 Licensor's policy Established policy of not licensing or granting limited licenses
5 Commercial relationship Whether parties are competitors or in different markets
6 Effect on sales Does patented feature drive sales of other products?
7 Duration of patent Remaining life of patent
8 Profitability Established profitability of products using the patent
9 Utility/advantages Utility and advantages of the patented technology
10 Commercial embodiment Nature of the commercial embodiment of the invention
11 Use by infringer Extent to which infringer has used the invention
12 Customary profit Customary portion of profit allocated to invention
13 Apportionment Portion of profit attributable to the invention vs. other factors
14 Expert opinion Opinion of qualified experts
15 Hypothetical negotiation What willing licensor and licensee would agree to
Industry Royalty Rate Benchmarks
Industry Typical Royalty Range Notes
Pharmaceutical 5-20% of net sales High margins; regulatory exclusivity adds value
Medical Devices 3-8% of net sales Complex regulatory environment
Software/Technology 1-5% of net sales Often per-unit fees instead of percentage
Consumer Electronics 1-5% of net sales High volume, low margin products
Automotive 1-3% of component value Complex supply chain; component vs. vehicle basis
Industrial/Manufacturing 2-5% of net sales B2B relationships; often lump sum
SEP/FRAND Patents 0.1-2% of device price Often aggregate cap for all SEPs
Royalty Base Considerations
  • Net sales: Gross revenue minus returns, discounts, shipping
  • Smallest saleable unit: Component containing patented feature, not entire product
  • Entire market value rule: Full product price only if patent drives demand for whole product
  • Apportionment: Allocate royalty to patented feature's contribution
Example Calculation: Product price: $100 Royalty rate: 3% Per-unit royalty: $3.00 If using smallest saleable unit (component = $20): Component price: $20 Royalty rate: 3% Per-unit royalty: $0.60
Lump Sum vs. Running Royalty
Type Pros Cons
Running Royalty Scales with sales; lower initial cost; aligns with revenue Ongoing reporting; audit requirements; uncertainty
Lump Sum Certainty; no reporting; simple administration Large upfront payment; may over/under pay
Hybrid Paid-up for past + running for future; balances risks More complex; negotiations on both terms
Key Patent License Terms
Essential License Agreement Provisions
Provision Description Typical Options
Grant of Rights What rights are conveyed Make, use, sell, offer for sale, import; exclusive or non-exclusive
Licensed Patents Which patents are covered Specific patent numbers; entire portfolio; future patents
Licensed Products Which products/uses are authorized All products; specific products; field of use limitations
Territory Geographic scope Worldwide; specific countries; specific regions
Term Duration of license Life of patents; fixed term; perpetual (for paid-up)
Royalty/Payment Compensation structure Running royalty; lump sum; milestone payments
Minimum Payments Guaranteed minimum compensation Annual minimum regardless of sales; creditable against royalties
Reporting Sales/royalty reporting requirements Quarterly or annual; level of detail; timing
Audit Rights Right to verify royalty payments Annual audit right; who pays; scope of audit
Sublicensing Right to grant sublicenses Permitted/prohibited; with approval; sublicensee obligations
Termination When license can end Breach cure periods; bankruptcy; patent invalidity
Sample Term Sheet
PATENT LICENSE TERM SHEET (Non-Binding Summary of Principal Terms) LICENSOR: [Patent Owner] LICENSEE: [Proposed Licensee] LICENSED PATENTS: - U.S. Patent No. X,XXX,XXX (Title) - U.S. Patent No. Y,YYY,YYY (Title) - Any continuation, divisional, or reissue patents LICENSED PRODUCTS: [Description of products/services covered] TERRITORY: Worldwide / United States only EXCLUSIVE/NON-EXCLUSIVE: Non-exclusive TERM: From Effective Date until expiration of last Licensed Patent ROYALTY: [X]% of Net Sales of Licensed Products OR Lump sum payment of $[Amount] (fully paid-up license) MINIMUM ANNUAL ROYALTY: $[Amount] per year, creditable against earned royalties PAST INFRINGEMENT: One-time payment of $[Amount] covering sales prior to Effective Date REPORTING: Quarterly royalty reports within 30 days of quarter end AUDIT: Annual audit right upon 30 days' notice; Licensor pays unless underpayment exceeds 5% MOST FAVORED LICENSEE: Licensee entitled to terms no less favorable than other licensees PATENT MARKING: Licensee shall mark Licensed Products with patent numbers TERMINATION: - Material breach with 30-day cure period - Licensee challenges validity of Licensed Patents - Licensee bankruptcy GOVERNING LAW: [State] law This Term Sheet is non-binding and for discussion purposes only. A definitive License Agreement will be negotiated in good faith.
Critical Negotiation Issues
  • Release of past claims: Does license cover past infringement? What payment?
  • Future patents: Are subsequently-issued related patents included?
  • Covenant not to sue: Promise not to sue even without formal license grant?
  • Have-made rights: Can licensee have contract manufacturers make products?
  • Validity challenge: Can license be terminated if licensee challenges patent validity?
  • Indemnification: Who bears risk if third party claims arise?
  • Assignment: Can license be transferred in acquisition?
MedImmune Consideration: After MedImmune v. Genentech (2007), licensees can challenge patent validity while continuing to pay royalties under the license. Consider whether license should include termination-on-challenge provision (enforceable in most circuits).
Sample Patent Licensing Offer Letters
Sample 1: Soft Licensing Approach
[Patent Owner] [Address] [Email / Phone] [Date] [Potential Licensee] [Address] Attn: VP Business Development / Licensing Re: Patent Licensing Opportunity – [Technology Area] Dear [Recipient]: I am writing to introduce [Patent Owner] and explore a potential licensing relationship with [Potential Licensee]. ABOUT [PATENT OWNER] [Patent Owner] is a [description of company] that has developed innovative [technology description]. We hold a portfolio of [X] issued U.S. patents covering [technology area], including: • U.S. Patent No. X,XXX,XXX – [Brief title/description] • U.S. Patent No. Y,YYY,YYY – [Brief title/description] These patents represent significant R&D investment and cover fundamental aspects of [technology]. POTENTIAL OVERLAP We have observed that [Potential Licensee]'s [product line] may incorporate technology covered by our patents. Rather than approach this as an adversarial matter, we believe there is an opportunity for a mutually beneficial licensing arrangement. LICENSING PROGRAM [Patent Owner] has established a licensing program for our patent portfolio. We currently have [X] licensees in the [industry], including [notable names if public]. Our licensing terms are commercially reasonable and designed to allow licensees to continue their business operations while fairly compensating [Patent Owner] for use of our innovations. PROPOSED NEXT STEPS We would welcome the opportunity to: 1. Present our patent portfolio and technology in more detail 2. Discuss [Potential Licensee]'s products and technology roadmap (under NDA) 3. Explore licensing terms that would work for both parties Would you be available for an introductory call in the next few weeks? I am happy to work around your schedule. We look forward to the possibility of working with [Potential Licensee]. Best regards, [Name] [Title] [Contact Information]
Sample 2: Post-Demand Licensing Transition
[Patent Owner / Law Firm] [Address] [Date] [Defendant] [Address] Attn: General Counsel Re: U.S. Patent No. [X,XXX,XXX] – Licensing Proposal Dear Counsel: Thank you for your response to our demand letter dated [Date]. We appreciate [Defendant]'s willingness to engage in discussions. As discussed, [Patent Owner] is open to resolving this matter through a license agreement rather than litigation. Below is a framework for discussion: PROPOSED LICENSE TERMS Licensed Patents: - U.S. Patent No. X,XXX,XXX - [Any related patents] Scope: - Non-exclusive, worldwide license - Covering [Defendant]'s [Product Line] products Past Infringement Settlement: - One-time payment of $[Amount] covering sales through [Date] - Based on [X] estimated units sold at [X]% royalty Future Royalty: - [X]% of net sales of Licensed Products - Quarterly reporting and payment - Annual minimum of $[Amount] Term: - Effective upon execution - Continues until expiration of Licensed Patents Additional Terms: - Standard reporting and audit provisions - Patent marking on Licensed Products - Mutual releases of past claims DISCUSSION TIMELINE We propose the following timeline: Week 1-2: Technical meeting to discuss patents and products Week 3-4: Exchange of licensing proposals Week 5-6: Term sheet negotiation Week 7-8: Definitive agreement drafting During these negotiations, [Patent Owner] will not file suit provided [Defendant] engages in good faith. However, this standstill is conditioned on [Defendant] not taking positions inconsistent with good-faith negotiation. Please confirm [Defendant]'s interest in proceeding on this basis. We are available to begin discussions at your convenience. Sincerely, [Attorney Name] Counsel for [Patent Owner]
Sample 3: Portfolio Licensing Offer
[Patent Holding Company / Licensor] [Address] [Date] [Target Company] [Address] Attn: Chief Intellectual Property Officer Re: Portfolio License Opportunity – [Technology Area] Dear [Recipient]: [Licensor] holds one of the foundational patent portfolios in [technology area], consisting of [X] U.S. patents and [X] foreign counterparts. Many of the leading companies in [industry] have taken licenses to this portfolio. PORTFOLIO OVERVIEW Our portfolio includes key patents covering: • [Technology Category 1] – [X] patents • [Technology Category 2] – [X] patents • [Technology Category 3] – [X] patents Representative patents include U.S. Patent Nos. [list several with brief descriptions]. A full portfolio summary is available under NDA. INDUSTRY LICENSING We have licensed this portfolio to [X] companies representing approximately [X]% of the [industry] market, including [notable licensees if public]. Our licensing program is well-established and our terms have been accepted as reasonable by major industry participants. PRODUCT COVERAGE Based on publicly available information, we believe [Target Company]'s [product lines] may be covered by patents in our portfolio. We have prepared a preliminary claim chart mapping [specific product] to our patents, which we would be pleased to share in a technical meeting. LICENSE PROPOSAL We propose a portfolio license on the following general terms: • Non-exclusive, worldwide license to our [technology area] portfolio • Running royalty of [X]% of net sales of Covered Products • Alternatively, fully paid-up license for $[Amount] • License-back of [Target Company]'s patents in [field] for cross-license value • Most-favored-licensee terms PROCESS We suggest: 1. Introductory call to discuss portfolio and [Target Company]'s interest 2. Technical presentation on claim coverage (under NDA) 3. Exchange of licensing proposals 4. Negotiation of definitive license agreement [Licensor] is committed to fair and efficient licensing. We do not seek to disrupt [Target Company]'s business and believe a license is in both parties' interests. Please contact me to schedule an introductory discussion. Regards, [Name] [Title] [Licensor]
Sample 4: Settlement and License Offer (Litigation Context)
[Plaintiff's Counsel] [Law Firm] [Address] [Date] [Defendant's Counsel] [Address] Re: [Patent Owner] v. [Defendant], Case No. [XX-cv-XXXX] – Settlement Proposal Dear Counsel: On behalf of [Patent Owner], I am authorized to propose the following settlement terms to resolve the above-captioned patent infringement litigation. SETTLEMENT PROPOSAL 1. MONETARY TERMS a) Past Damages Payment: $[Amount] payable within 30 days of settlement b) Future Royalty: [X]% of net sales of [Accused Products] through expiration of the asserted patents OR c) Fully Paid-Up License: $[Lump Sum Amount] covering past and all future sales 2. LICENSE GRANT [Patent Owner] shall grant [Defendant] a non-exclusive, non-transferable license under the patents-in-suit to make, use, sell, offer for sale, and import [Accused Products]. 3. SCOPE - Licensed Patents: [List patent numbers] - Licensed Products: [Accused Products] and substantially similar products - Territory: Worldwide (where Patent Owner has corresponding rights) - Term: Life of Licensed Patents 4. RELEASES - Mutual release of all claims arising from the litigation - Covenant not to sue for infringement of Licensed Patents by Licensed Products - Release of attorneys' fees, costs, enhanced damages claims 5. DISMISSAL Upon execution of settlement agreement and receipt of initial payment, parties shall jointly file stipulated dismissal with prejudice. 6. CONFIDENTIALITY Terms of settlement shall remain confidential except as required by law or court order. RESPONSE DEADLINE This offer remains open until [Date – 14 days]. If we do not receive acceptance or substantive counter-proposal, [Patent Owner] will proceed with litigation. We believe this proposal represents a fair resolution that avoids further litigation expense for both parties. Please advise if [Defendant] is interested in discussing these terms or proposing alternatives. Sincerely, [Attorney Name] Counsel for [Patent Owner]
Patent Royalty Calculator

Estimate reasonable royalty rates and license values for patent licensing negotiations. This calculator uses industry benchmarks and the Georgia-Pacific factors framework.

Estimated License Values

Base Royalty Rate: 0%
Annual Royalty Payment: $0
Past Infringement Settlement: $0
Future Running Royalty (total over patent life): $0
Lump Sum Buyout (discounted): $0
Suggested License Value Range: $0
Disclaimer: This calculator provides rough estimates for educational and negotiation planning purposes only. Actual royalty rates depend on the 15 Georgia-Pacific factors, comparable licenses, patent strength, market conditions, and negotiation leverage. FRAND-committed SEPs have additional constraints. Consult a patent attorney or licensing professional for accurate valuations.

📝 Create Your Demand Letter

Generate a professional demand letter, CA court complaint, or arbitration demand