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Licensing and the Dead Horse Clause

by N. Paul Friederichs III

The thrill of the chase culminates - a licensing agreement. But wait...how can this go wrong and what is a dead horse clause anyway? All too often an inventor works long and hard at developing an invention just to have it taken away in the license agreement. The excitement and thrill of success clouds the inventor's critical reading and thinking skills. Ultimately, the inventor gives away his or her prized possession in exchange for little to no present day obligations. I have been asked to rescue three such situations in the past month.

The problem starts at the negotiation table. One negotiating with the inventor will emphasize the willingness to pay royalties, increasing the inventor's excitement and clouding the inventor�s judgment. The optimistic inventor "knows" the product will sell millions of units, making billions of dollars for everyone. The anticipation can become so strong that the inventor is more concerned about making sure the checks are sent to his or her new chateau in the mountains than about requiring the licensee to sell any product!

The inventor does not know the motivation of the licensee in signing the contract. The licensee may see the up front fee, if any, to be small compared to the potential opportunity. The opportunity may simply be collected for consideration at a later date. The licensee may seek to prevent competitors from licensing the invention, while never intending to pursue the invention itself. The license agreement may be a fail-safe, precluding fantastic damages in a patent infringement suit should the company decide to design around the patent. Indeed, the licensee may intend to license the invention and sell the product, but where is the guarantee?

The dead horse clause ensures the licensee's intentions fit the expectation of the inventor. The clause may be nothing more than a minimum sales requirement. The clause may require the performance of other expectations of the inventor. Failure to meet the requirement for a period of time ultimately voids the license agreement. The voiding may occur automatically or at the option of the inventor. The requirements and loss of rights may change over time and in varying degrees. The clause may be worded in many different ways and care must be exercised to capture the right ideas with the proper terms.

The cost for not including a carefully written dead horse clause can be and usually is devastating. The inventor may receive an up front fee, but nothing more for the life of the patent. The inventor cannot recover the rights to the invention for failure to meet his or her expectation, e.g., sales of a particular level, when the license agreement does not require the expectation be met. The licensee often has no desire to give the invention back. The inventor may not receive any royalty payments. The inventor often finds his or her invention stripped away for a one time up-front fee that hardly covers expenses.

The three situations of the missing or poorly drafted dead horse clauses brought to me this past month defined perhaps the inventor's best solution to the dead horse and related travesties. Hire competent legal counsel before signing a license agreement. The cost of losing an invention in the heat of the moment far exceeds the cost of wise counsel. Counsel needs to have experience in licensing matters. This experience leads to an understanding of the various problems that can occur and contract language that avoids those problems. With a properly drafted dead horse clause, the inventor is assured his or her expectations will be met.

About the Author:

N. Paul Friederichs, founder, started practice as a patent attorney in 1992 at a major Minneapolis, Minnesota law firm where he was the highest performing associate. In 1993, he started and developed Friederichs Law Firm with his father. Throughout this time Paul�s experience was heavily weighted toward litigation. He served such clients as Tonka Toys, American Harvest and Boston Medical.

He can be reached at http://www.angenehm.com/

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