WHAT TO DO WHEN AN INVENTOR WANTS – by Cliff Ennico

“A couple of friends and I formed a corporation a while back with a noted inventor who lives in our area.
The entire purpose of this company was to bring to market a piece of technology the inventor had created, and for which he holds a U.S. patent.
Because of the difficult economy we’ve had more trouble raising money for this business than we thought, to the point that the inventor has threatened to quit the company because he thinks he can do better elsewhere.
My friends and I have put substantial money into this company. Is there any way we can let the inventor off the hook and still try to bring the product to market? Or is it best to just let him go and write off our losses?”
The first thing you need to do is look at the shareholders’ agreement you and your friends signed with the inventor when you formed the corporation (you did sign one, didn’t you?)
First, look at the section that describes how the company was to be capitalized. This section spells out “who is putting what into the company.” There should be language in this section that specifically requires the inventor to license his patent to the company. If that language is missing, then your corporation technically has no legal rights to the inventor’s patent (these are usually registered in the name of the inventor as an individual) – shame on any attorney who let THAT happen.
If the inventor licensed his patent to the company, you will need to determine the scope of the license. There are four words you should look for:
• “perpetual”
• “unlimited”
• “exclusive”
• “royalty free”
“Perpetual” means that the license continues in perpetuity, regardless of what happens to the inventor. If the inventor dies or withdraws from the company (as he’s threatening to do), the license continues. If the license is not “perpetual,” your corporation’s rights to the technology will terminate when he leaves.
“Unlimited” means that there are no restrictions on what you can do with the inventor’s technology, or where you can operate. If the license is “limited,” you will need to determine what rights the inventor has reserved for himself (for example, your license may be limited to the United States which gives him the right to license the patent overseas).
“Exclusive” means that the inventor cannot license the technology to anyone else as long as the corporation is in existence.
Finally, “royalty free” means that the corporation doesn’t have to pay anything extra for the license (except, of course, for the inventor’s percentage of the corporation’s profits or any other compensation which he receives as an officer or shareholder of the company).
The more of these four words appear in the license language, the better.
If the scope of the license isn’t clear, look to see if the shareholders’ agreement has a “survival” clause. This language, which appears usually in the “miscellaneous” section at the end of the agreement, lists certain provisions that survive the death or departure of a shareholder, among other things. If the license clause is included in the “survival” language, it will be enforceable against the inventor even after he withdraws.
Next, look at the “buy-sell” provisions in the shareholders’ agreement, that determine how and when shareholders can sell their shares either to each other or to third parties. These commonly contain a “right of first refusal” requiring a shareholder to offer his shares to the corporation, or to the remaining shareholders, if he wishes to retire, withdraw or sell his shares to an outside party. If there are such provisions, you may be able to waive them in exchange for a stronger license agreement from the departing inventor.
Finally, see if there is a non-compete clause in the agreement prohibiting shareholders from competing with the corporation after they withdraw. While such language will not take the place of a “perpetual” license, it may give you some leverage to negotiate with the inventor (i.e. you can offer to make the non-compete less restrictive in exchange for being allowed to continue using the technology).
If the shareholders’ agreement isn’t helpful on any of these points, you will need to consider how you will be made whole for the money and time you put into this company.
In practice, most patents are pretty useless to a company without the inventor’s knowledge, expertise, know-how, and active participation in the company’s business. Since your inventor has “gone over to the dark side” and may well work with a competing company, it may be better to try to recoup your losses from him and shut the company down. If the inventor doesn’t have the money to make you whole, and if litigation is not an option, consider releasing the inventor from his obligations to you and your partners in exchange for a percentage of any income he receives if and when he licenses the patent to another company.
Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax and Legal Answer Book” and 15 other books.

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