THE RISKS AND THREATS OF LICENSING A PATENT

Licensing a patent can be a powerful way to monetise intellectual property, but the process is not without risk. Both licensors and licensees face potential legal, financial, operational and strategic challenges that must be carefully addressed. Understanding these risks in advance and building appropriate protections into the agreement, can make the difference between a successful partnership and a costly dispute.

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LEGAL RISKS

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One of the most significant risks in patent licensing is the possibility of patent invalidity. If a licensed patent is later found to be invalid, whether because of prior art or a successful challenge by a third party, the licensee may have grounds to terminate the agreement. This not only jeopardises future royalty income for the licensor but can also undermine existing business relationships. Another common legal risk is infringement liability. Licensees may unintentionally infringe on third-party patents while using the licensed technology, exposing both themselves and the licensor to litigation. While indemnification clauses can shift some responsibility, they rarely eliminate the financial burden entirely. Finally, enforcement of rights presents its own challenges. If a third party infringes on the licensed patent, the licensor may face the costly and complex task of pursuing legal action. Even disputes between licensors and licensees can escalate into litigation if the terms of the agreement are not strictly adhered to.

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ECONOMIC RISKS

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From a financial perspective, licensing creates several vulnerabilities. Heavy reliance on one or a small number of licensees exposes licensors to revenue instability if those partners struggle financially or fail to perform. Determining an appropriate royalty rate is another risk, as underpricing can lead to long-term undervaluation of the patent and significant lost revenue. Royalty collection itself can also be problematic. Many agreements rely on self-reporting by licensees, which opens the door to underreporting, whether intentional or accidental. Over-licensing presents an additional challenge, as granting too many licenses can saturate the market, eroding the value of the technology and restricting future opportunities.

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OPERATIONAL AND MANAGEMENT RISKS

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Licensing also brings operational challenges, particularly in the areas of quality control and oversight. If a licensee fails to maintain adequate product quality, the licensor’s brand reputation can suffer, sometimes irreparably. This is particularly damaging in industries where consumer trust is central to brand strength. Managing a licensing programme requires significant resources and expertise, especially when agreements extend across multiple jurisdictions. Without adequate oversight, licensors risk losing visibility and control over how their intellectual property is being used.

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STRATEGIC RISKS

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Licensing may also affect long-term strategic positioning. Granting access to patented technology, especially to competitors, can weaken the licensor’s competitive advantage if the licensee is able to use the technology more effectively or even improve upon it. Exclusive licensing agreements carry additional risks. While they can provide strong partnerships, they also limit the licensor’s ability to exploit the patent elsewhere. If the exclusive licensee fails to commercialise the product effectively, the licensor may lose out on significant opportunities. Another risk lies in the loss of control over innovation direction. Licensees may adapt or modify the technology in ways that diverge from the licensor’s vision, potentially weakening its strategic value.

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FOREIGN LICENSING AND IP RISKS

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Licensing across borders introduces an additional layer of complexity. Intellectual property protection is territorial, and enforcement standards vary greatly between jurisdictions. In countries with weak IP laws or poor enforcement mechanisms, licensors may struggle to prevent infringement or uphold contractual obligations. Cross-border enforcement can be costly and uncertain, while some foreign licensees may even attempt to exploit weaker local regulations to their advantage. International licensing also exposes licensors to currency fluctuations and economic instability, both of which can reduce the real value of royalties.

 

TECHNOLOGY AND MARKET RISKS

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Technology moves quickly, and patents can rapidly lose value if the underlying innovation becomes obsolete. Market dynamics such as shifts in consumer demand, new regulations or disruptive technologies can also undermine the profitability of licensed products. Both licensors and licensees must remain aware that even a strong patent may lose its commercial potential if market conditions change dramatically.

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RELATIONSHIP AND COMPLIANCE RISKS

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The success of a licensing agreement depends heavily on the alignment of interests between licensor and licensee. When goals and expectations diverge - for example, regarding marketing strategy, quality standards or sales priorities - conflicts are likely to emerge. Compliance monitoring is another challenge. Ensuring that licensees report accurately and adhere to all agreed terms requires active oversight, and misreporting or non-compliance can lead to financial losses or legal disputes. Termination of agreements presents further risks, particularly where the licensed technology has already been integrated into products or services. Unwinding such arrangements can be highly disruptive for both parties.

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MITIGATION STRATEGIES

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Although patent licensing carries significant risks, many of these can be managed through preparation and careful structuring of agreements. Thorough due diligence and market analysis are essential before entering into any licensing relationship, helping to assess both the commercial potential of the technology and the reliability of prospective licensees. Protective clauses such as warranties, indemnities, quality standards, audit rights and termination provisions should be included in every agreement to safeguard the licensor’s interests. Ongoing monitoring, supported by regular reporting and audits, helps ensure compliance, while professional legal and financial advice provides a framework that is both secure and flexible.

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SUMMARY

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Patent licensing offers substantial potential for financial return and strategic growth, but only when the risks are fully understood and properly managed. By approaching licensing agreements with foresight, legal precision and strong oversight, licensors and licensees can unlock long-term value while protecting themselves from the pitfalls that have undermined many poorly structured deals.

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