There are others who propose and make royalty contracts with patentees with no other object than that of making the special tools, patterns, dies, etc., for which they charge the patentee an extortionate price.
The best and safest way for the patentee to guard against having his patent tied up is to bind the parties to do certain things in the way of pushing the sales, making the necessary tools at their own expense, and commencing its manufacture within a reasonable time, paying an advance royalty, or annexing some such condition to the agreement by which they will be the loser should they fail to push the inventor's interests.
Unless it cannot be otherwise arranged, the patentee should not transfer his rights merely in consideration of receiving a certain sum on each article sold, as however sterling the character of the manufacturer, there would be no certainty of the sales being pushed. The patentee should endeavor to get the manufacturer to guarantee that[p. 66] the royalties shall amount to at least a certain pre-stipulated sum each year, or within a period of time, and that such sum shall absolutely be paid to him by the manufacturer, irrespective of sales. This insures that the manufacturer will be obliged to push the sales of the article, and do it justice, since if he neglects his duty purposely, or from lack of energy, he is out of pocket, and the patentee is sure of a certain income, with the addition of a possible fortune that unprecedented sales may yield him. However, manufacturers are not always willing to agree to this condition, unless the guaranteed amount is exceedingly reasonable; they will usually simply agree to do their best, and if the sales do not reach a certain figure each year, the patentee shall have the option of cancelling the agreement, and receiving back the patent free and clear.
Royalty licenses can either be exclusive or non-exclusive; that is, with an exclusive contract the manufacturer has the exclusive right to manufacture the article, excluding all others; non-exclusive is simply a shop-right, in consideration of which the manufacturer agrees to pay the patentee or owner of the patent a stipulated price or percentage upon each article made or sold. The license can also be exclusive in a certain section, county, State, or a number of States, as may be agreed upon.[p. 67]
Any number of conditions that may be agreed upon may be annexed to and form a part of the contract, and such an agreement should be drawn up in compliance with the terms and conditions agreed upon by a competent attorney, or one skilled in matters of this kind.
Manufacturing and Forming Companies.
If the patentee has a really good invention, often he cannot do better than to retain the patent and work it himself, in case he has the ability to do so. If he cannot conduct the manufacturing alone, he may be able to secure a partner with just sufficient funds, and equal common sense and business acumen, to add the necessary elements to the firm to achieve success.
In some cases, if the patentee does not wish to retain the whole patent for his own use, an excellent plan is to commence the manufacture of the invention in a suitable locality, and after the business is so far under way as to show progress and profit, then sell out the business with license under the patent. To illustrate: a gentleman in Illinois, having obtained a patent on a farming implement, succeeded in interesting a party in his own neighborhood to join with him in its manufacture, which soon proved successful and remunerative, and in a short time he was able to sell out his interest in the business to his partner, with license under the patent, after which the patentee[p. 68] started its manufacture in a number of places elsewhere, and, at the same time, granting licenses and selling territory in still other sections, where he was unable to work the invention. In this way he made a fair fortune from his invention, realizing about as much from each business established as he could have probably obtained for the entire patent if sold outright at first.
In this manner the patentee, with a valuable patent on an article of general usefulness, could go on and establish its manufacture in any number of places, and sell out with license under the patent. If the first experiment is successful, it is an easy matter to carry the method out in other places, and the business can be readily disposed of anywhere, if it can be shown to be on a paying basis.
To Organize Stock Companies