An Economic Analysis of Royalty Terms in Patent Licenses

Efficient exploitation of a patent often requires patentees to license users of their inventions. The courts, on the other hand, have proscribed many forms of license agreements and discouraged patent licensing in general, thereby diminishing the efficacy of the patent system as a stimulus to R & D. This negative attitude is attributable to fears that licensing will be used to protect invalid patents and secure illegitimate extensions of monopoly power. Part I of this Note reviews judicial treatment of certain royalty terms in patent licenses, describing the restraints the courts have imposed on the freedom of patentees to license their patents. Part II criticizes the reasoning and economic analysis behind the judicial restraints on licensing. This Part contends that the danger that royalty terms in patent licenses will be used to protect invalid patents or extend the scope of the patent monopoly has been exaggerated. Part III of this Note, therefore, proposes a new mode of analyzing royalty terms in patent licenses, whereby courts would balance the potential harms of particular royalty terms against their economic benefits