Many people call me and tell me that they want to get a patent so that they sell it or license it to make money. If this is you, continue reading.
So, can you make money by patenting and licensing your ideas? Yes, you can make money selling and licensing ideas. However, selling and licensing just an idea without more is difficult. You need something more to be successful. For example, you need a track record of success, proof of market demand, proof of concept, or existing relationships.
The above graph illustrates the probability of success if you were to start a business of selling and licensing ideas.
In theory, this strategy of patenting and licensing ideas to make money is possible. However, life is rarely about theory but whether it is practical. Is it statistically possible? You can make money this way but it is rare to do so.
Before we begin, let me explain what I’m not talking about. I’m not talking about selling or licensing a patent based on a viable business. For example, let’s say that an inventor gets a patent, builds a business out of the patented technology then licenses or sells the patent. People in this situation have two tremendous things going for them. First, they have proof of concept. Their idea works. Second, they have evidence of market demand. They built a business where consumers are buying their patented products.
I’m referring to selling or licensing ideas as a business model in and of itself without more. They have no proof of concept, no proof of market demand, no track record of success, no patent. All they have to offer is just an idea. In this regard, in my opinion, it is statistically unlikely to patent then sell or license only an idea without more to another of any significant value. It may happen, but, in my opinion, this is not the norm.
1. How to sell or license an idea?
The basic strategy is to come up with an idea that you want to sell or license then offer it to someone.
Now, just because you have an idea, that does not mean that you could just offer it to someone. You’d have to protect it before you tell others about the idea. Otherwise, the other person would steal it from you.
They would use it and thank you quietly for it. You’d have to prove that they took your intellectual property rights in court. Was it only an oral contract? Did you come up with the idea? Did the person already have the idea? The chances of successfully suing the person are slim, and the funds required would be significant.
A. Protect the idea with a patent
How do you go about trying to sell or license your idea? You could file a patent application first. The patent application would establish you as the inventor and date of invention for your idea. If another person filed a patent application after you told them the idea, then your patent application would prevent them from getting a patent on your idea. You should file a patent application first before you tell people your idea. Your patent application would stand as a place holder. Moreover, if there is a patent to be had, you would get it. You are the first in line for the patent.
Some gurus point out that you can file a provisional patent application on your own because it only costs $125 per application for the government filing fee. This type of cheap provisional patent application would give you patent pending protection for one year. Moreover, during that one year, you would have perceived ownership of the idea. Even if the provisional patent application you filed is junk, no one would know because the provisional patent application is secret. That is the logic, at least.
A strategy of securing your idea with perceived ownership can fail. This approach is based on hope. You are hoping that other people would respect you so much that they would prefer to work with you then file their patent application. In my opinion, most people would ask to see your provisional patent application before buying the rights to your idea.
Additionally, what happens when they ask you to see your patent application? If it is skimpy, they may leave if they feel as if you lied to them about the strength of your patent protection.
B. Protect the idea with a nondisclosure agreement (NDA)
Another way to tell others about your idea would be to enter into a nondisclosure agreement. Here is an extensive discussion on NDAs: What is an NDA and when to use them?
What NDAs do is limit the other person’s ability to use your idea. The NDA should limit the use of the information to the evaluation of the concept. Moreover, as the title of the document suggests, the other person can’t disclose the idea to others. They can’t even file their own patent application because the patent application would go public and that would be a breach of the NDA.
C. Do both – protect the idea with a patent and NDA
The third way to tell others about your idea is to do both – file a patent application and make the other person enter into a nondisclosure agreement. The reason that you might want to do both is that they both protect different aspects of the process of selling and licensing your idea.
The nondisclosure agreement protects your idea in the sense that it limits what the other person can do with the information you give to them. Also, it is not dependent on your ability to secure a patent which could take years to get. No matter how well written the patent application is, it may not mature into a patent. As such, if the person you shared your idea with steals your idea, you cannot sue that person until the patent application matures into a patent. Now, you should still file a patent application because as indicated above, the benefit of the patent application is that you are first in line for the patent. Moreover, just by being the first to file, you don’t have to file lawsuits over whether you had the idea first, which would cost a lot of money and time.
The benefit of the nondisclosure agreement is that it is not dependent upon whether the patent application matures into a patent. After the person signs the nondisclosure agreement, they need to keep your idea secret.
However, unlike the patent system, if they breach the agreement, you have to spend the time and money to sue them. Based on my experience talking with people, most people won’t sue on a breach of contract unless the likelihood of winning is high and the costs are affordable. Litigation is never a high likelihood of success, and it is not cheap. First, anything can happen during litigation. Most litigators will estimate the chance of winning at 50%-50% because of the unpredictable nature of litigation. Next, you’d have to pay a litigator tens of thousands if not hundreds of thousands of dollars. With odds like these and the high costs involved, simply put, people will not sue another person based on a breach of contract. You should still try to have the other person enter into the nondisclosure agreement because it adds another way to sue them.
Hence, you may want to do both – file the patent application and get the person to sign the nondisclosure agreement.
D. File patent application vs. NDA
Although you should do both, many people won’t enter into a nondisclosure agreement. My advice to my clients is that you should not enter into a nondisclosure agreement unless there is a clear need to do so. The nondisclosure agreement in my point of view is an invitation for litigation. Hence, enter into nondisclosure agreements only after identifying a piece of information that the parties want to disclose but don’t want to because of its confidential nature.
Fortunately, a patent application is not dependent upon the other person. You can do this unilaterally. You should do it before you tell others about your idea.
2. Why it will be difficult to sell or license just an idea without more?
The strategy above sounds simple, but you might wonder why I don’t believe that you can make money as a pure broker of ideas. Remember, I’m not talking about businesses with sales for a patented product. I’m talking about those that sell or license the patent rights along with specialized know-how or personal relationships.
The simple reason that the above strategy won’t work is that no one wants to pay you money for your idea unless they have to. You have to have a broad patent so that they understand that it will be difficult to get around. Specialized know-how or a personal relationship may also help to make the sale or license deal happen.
You can’t always protect your idea with a nondisclosure agreement. The other party must sign it for you to get contractual protection. You also have to spend a lot of money to enforce your contract rights if they breach the contract. Litigation is expensive, and most don’t do anything if someone breaches the contract because they might lose.
Now, here comes the real trouble with trying to protect your idea with a patent. It is the high cost of securing a quality patent.
A. Problem with protecting your idea with a patent
i. Broad patent protection is needed
For the patent to be valuable, it has to have broad protection. As a patent attorney, I regularly conduct design arounds for my clients. I instruct my clients how, in my opinion, they can avoid patent infringement by making a change to the product. The cost of my services to suggest a design around would be significantly cheaper than paying you a sales price or ongoing royalty for your idea. Many clients would rather pay for a design around than pay the patent owner an ongoing royalty.
ii. Quality patent applications have a high cost
As I explained, you have to have something of value to sell or license. To get a high-quality patent, the cost to hire a patent attorney to prepare a patent application is high. The price to secure the patent is even more. Overall, you will be spending about $10,000 to $20,000 to get a patent. You might try to sell or license a patent application. A patent application can be licensed but unlikely. Most clients that try this approach report back to me that most potential buyers and licensees tell them to come back after they get the patent. The problem with trying to sell or license a mere patent application is that they don’t know what they would get. The patent hasn’t been granted yet. Will it be broad enough to justify the sales price or royalty? No one knows until it matures into a patent.
If you don’t get broad patent protection, then you will not be able to sell or license your patent. Do you want to risk the substantial cost to get a patent without any guarantee of payback? Most people won’t risk this amount of money, and I don’t recommend it either.
iii. DIY application is of low quality
Now, you can lower the cost of the patent application by doing it yourself (DIY). However, in my experience, most DIY patent applications either fail or has very narrow protection. For example, during prosecution, the examiner at the patent office will help them to write the claims and give suggestions. However, inventors that rely on the examiner’s advice do so at their peril because examiners are not looking to claim breadth. They are focused on patentability, which is a related topic but not something that the examiner is fighting for you. A patent attorney would fight for the breadth of patent protection, but the cost to retain an attorney is high.
Very rarely, some people can get good patent protection by doing it themselves. But, in my experience, that is rare.
B. Problems with protecting your idea with a nondisclosure agreement
The benefit of the nondisclosure agreement is that it is cheap. It is very cheap compared to the cost of a patent application. However, the downside is that you have to get an agreement from the other person to sign the contract. When clients seek my advice on NDAs, I recommend that they don’t sign nondisclosure agreements unless they really have to get some piece of information. The NDA is an invitation to a lawsuit. Don’t sign it unless there is no way around it.
Many people do sign nondisclosure agreements because they don’t want to pay an attorney to review the contract. However, you may find some that won’t respect the nondisclosure agreement. They may file their own patent application even if the NDA says that they can’t.
A business that sells or licenses ideas and patents is not feasible because of the high cost to get a quality patent. Most would have to hire a patent attorney to get a patent of high quality. But the rate of rejection from potential buyers and licensees would cause you to spend money faster than you would make it. A nondisclosure agreement might be used to tell others about the idea. However, you’d have to spend a lot of money to enforce the nondisclosure agreement which many won’t do.
Should you have any questions or comments, please do not hesitate to contact me.