Chapter 16

HOW TO CONDUCT THE SALE OF PATENTS--_Continued_

In conducting the sale of patents, the greatest difficulty is most frequently experienced in getting manufacturers or others sufficiently interested to look into the merits and possibilities of the invention. If the inventor can get the parties to actually consent in their own minds to the proposition of taking up the invention, the question of terms and conditions can soon be arranged. Until the parties solicited can see beyond a doubt that there is large profits in it for them, the price of the patent is out of the question; therefore, the first step is to demonstrate its merits and commercial value, and get the parties thoroughly interested.

Patentees should not labor under the impression that because a patent is offered at a very low price that it will be quickly snapped up as a bargain; as before stated, if a patent will not bring in money by manufacturing and selling the article, it is worthless; and its real value is in exact proportion to the amount of profits that can be made from its manufacture.

Should the patentee find that his patent has no commercial value, it is almost useless to spend more time and money in trying to realize anything from it; he had better start again, and endeavor to invent something that has value and can be sold.

[Sidenote: Value of Personal Influence.]

Inventors should use the full extent of their personal influence to spread particulars of their inventions as far as possible, for this indirect work is often a leading factor in creating a favorable impression that frequently results in the adaption of an invention.

However unacquainted he may be in a business way, every patentee can, more or less, in his immediate neighborhood, consult with merchants, friends, and others in the line of his invention, who can post him upon the right parties to submit the patent to, and the best way to see them about it, and perhaps go with him to visit such as might be interested in the invention.

[Sidenote: Personal Solicitation Advisable.]

In nearly every case it is more satisfactory for the patentee to call on the manufacturers or interested parties personally whenever it is possible for him to do so. This brings about a more satisfactory understanding between them. Many inventors, however, prefer opening up communication by correspondence, and after the parties manifest a willingness or desire to look into the invention more closely, then arrange to visit them personally.

Having determined upon a visit, the patentee should endeavor to get a friend known by the parties to go with him to make their acquaintance. If the friend cannot go with the patentee, he will probably give him a note of introduction. It may happen that his friend does not know the parties whom the patentee wishes to see, in that event he may know of someone who does, to whom he can introduce the patentee and who in turn may either go with him or arrange to make him known to the parties solicited. An introduction, of course, is not absolutely necessary, but it invariably has a good effect and is generally worth the effort.

The patentee should be prepared to make a straightforward, business-like presentation of his invention by means of a suitable model or drawings; carefully explaining its merits and advantages, showing as clearly as possible just what the value of the invention is and what can be made out of it, and giving tangible reasons why it would be to the interest of the parties solicited to invest in the patent. If the patentee is dealing with a manufacturer it is well to point out not only the possible advantage he may have by securing the control of the patent, but also the possible loss that his business may suffer by allowing one of his competitors to obtain its control. Many businesses have been hopelessly crippled by an enterprising firm securing control of a good patent and introducing a like article that can be sold cheaper, or one that will do its work in a better and more satisfactory manner.

[Sidenote: Selling Outright.]

Many inventors prefer to sell their patents outright; that is, in consideration of a specified sum of money the patentee assigns his entire interest in the patent, in the same manner that a person would sell a piece of real estate. This is a very good method and one of the quickest ways for the patentee to turn his invention into money, though it must be remembered that to sell a patent outright is usually for a very much smaller sum than could be realized if handled by other methods.

The day for obtaining enormous sums or fortunes from the sale of a patent outright is past; at present to realize any considerable amount, the patentee generally has to share in the risks as well as the profits, unless the invention is very highly developed, and even then he cannot expect to get as much out of an outright assignment as he could by sharing in the success of the invention commercially. If, however, the patentee is content to take the utmost cash his patent will bring him outright, he is assured of a principal or lump sum, free from any chances of the article not selling well when placed upon the market.

Before signing and delivering the assignment, the patentee will, of course, see that he has the consideration, or its equivalent, for which the assignment is made. If the transaction is made through correspondence he should send the assignment duly executed to the purchaser through the bank or express C. O. D. for the amount.

[Sidenote: Assigning an Undivided Interest.]

In a preceding chapter, the dangers and disadvantages of an undivided interest are set forth, and it cannot be considered a wise course under any consideration to part with any undivided interest in the proprietorship of the patent, unless unusually well paid, or there exists an agreement of copartnership between the patentee and the assignee. By such an assignment, no matter how small, the patentee loses control of his patent.

[Sidenote: Dividing a Patent into Different Classes of Rights.]

Many patents, from the nature of the invention, can be subdivided into different classes of rights, and each class sold or granted separately as the patentee may choose. Thus, the patentee of a tire, or other appliances for a bicycle, could license one party to make the same for bicycles and another for automobiles. In like manner a car-coupler could be divided between those who build railway equipments and those who build street-cars, and so on.

Goodyear, the inventor of the process of vulcanizing rubber, divided his patent up into many different rights, licensing one company for manufacturing rubber combs, licensing another for hose pipes, another for shoes, another for clothing, and a number of other different rights, for which each company or partner paid a tariff. Lyall, inventor of the continuous loom, also divided his patent into many different rights; one company weaving carpets, another corsets, another bags, another sheeting, etc.

In every case where the invention covers articles not in the same line of manufacture, the patentee should not fail to divide the rights into different classes, granting each party only such rights as they may be interested in. In this way the patentee can quite often double or treble the receipts from his invention.

The patentee may, if he desires, have his machines built and require the purchasers to pay him a regular annual rental on each machine, or a tariff upon the goods produced, in addition to the price of the machine. Companies are sometimes organized to manufacture an invention, and employ travelling men to place the article on annual rental instead of selling.

[Sidenote: Selling by Territorial Rights.]

Another method is to sell State and county rights. This consists of a license whereby the patentee, in consideration of a certain sum of money paid him, grants unto another person or persons the exclusive right to make and sell the invention, and to authorize others to make and sell the same, within a specified territory, during the life of the patent. This plan of disposing of a patent has often been highly profitable, but it must be said that these territorial sales have been conducted in such a manner in the past, as to bring the whole system of selling patent rights into disrepute, and in recent years patentees have found some difficulty in making sales in this way, unless the device is of unusual great novelty and attraction to householders or the general public.

Occasionally, however, there are patents issued for meritorious inventions that are susceptible of this mode of procedure, and which can be disposed of to the greatest advantage by territorial grants. Such inventions as household novelties possessing great merit and utility have been most successfully placed upon this plan, but it must be remembered that the value of the system rests upon its capabilities of effecting sales of the manufactured article to a vast proportion of the people.

In selling territorial rights it is a mistake to begin with the small places with the idea of working the business up and effecting larger sales on the basis of the smaller ones; it is better to shove the sales, as much as possible in the start, and after the more valuable portion of the territory is disposed of, proceed with the balance until it ceases to be profitable.

Experience teaches that it is usually advisable to accept any reasonable offer made for a small right, even if it does not come up to the patentee's estimate of its value, as he has plenty of other territory left, and may lose much time and money in finding another in the same territory willing to pay more; besides, the purchaser of such a right may, by his energy and good judgment, advertise the invention in such a way as to greatly benefit the patentee in making further sales.

Some patentees employ good and reliable special agents to travel and dispose of the patent rights; others advertise for and appoint State agents to sell their respective county rights. In either case these agents expect to make money by the operation, and require a liberal proportion of the proceeds for their remuneration; generally speaking, they will require about one-third the selling price, unless the patentee can show that the rights will sell readily, in which case the rating can be made lower.

[Sidenote: Granting Licenses.]

The patentee may also sell licenses under his patent; that is, in consideration of a certain sum, the patentee licenses a manufacturer to make the invention at his own place of business; it being a personal privilege and is not transferable unless its terms so state.

Unless there are a great many manufacturers in the line of industry to which the patent relates, and unless the invention has real merit so that it will be readily adapted by the manufacturers, the patentee cannot hope to realize any considerable amount from selling shop-rights alone. As a general thing, patents for mechanical inventions can be disposed of to better advantage by other means, or by selling shop-rights in connection with other methods; for example, if the patentee was selling his patent by territorial grants, he might grant shop-rights in such territory as he has not sold; or if he is placing the patent upon non-exclusive royalty contracts, he could grant shop-rights in such portions of the territory as he does not contemplate using otherwise.

Some inventions, such as methods or processes, as a general rule, have to ultimately be sold by licenses. Such patents can be employed most profitably by selling licenses, county and State rights; thus, in the case of a method of constructing fences, the patentee could sell State and county rights to parties, who in turn could grant farm rights, etc.

[Sidenote: Placing upon Royalty.]

The license and royalty plan is perhaps the best and most popular method with inventors for realizing from their inventions. This, in effect, involves a contract between the patentee and the manufacturer, by which the latter in consideration of a license to manufacture the article covered by the patent, agrees to pay the patentee a certain specified sum as royalty for each article manufactured or sold bearing the patented improvement.

Placing a patent on royalty is ordinarily taking chances, but if the patentee has full confidence in his article selling well, he should by all means take royalty in preference to selling the patent in its entirety. Many valuable patents are sold by their owners for from $1,000 to $10,000, which yield the purchasers, when the article is on the market and selling well, as much as $25,000 annually in profits. This calls to the author's mind a patent for which at the outset was doubtfully offered $3,000, but before the negotiations terminated, the patentee succeeded in placing it upon an exclusive royalty basis. The royalties paid to the patentee during the first four years amounted to over $50,000, and the manufacturers subsequently made an offer of $100,000, for the patent.

In making royalty contracts with parties, the patentee should investigate the standing, rating, and capabilities of the manufacturer, and, above all, should be certain that the parties have the right motive in view, and that the contract is so drawn that it will fully protect his own interests. Many patentees have been caught by manufacturers offering large royalties for the sole purpose of gaining possession of the patent, that they might pigeon-hole it, in order to keep the article out of the market, so that the sale of some similar article in which they are interested would not be interfered with by the introduction of a similar or better article, such as the patent anticipates.

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 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.

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.

[Sidenote: 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 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.

[Sidenote: To Organize Stock Companies]

In recent years many inventors have been quite successful in organizing stock companies on the basis of their patents. This is considered one of the best ways for handling patents for large and promising inventions, and it is a method that any patentee, with ordinary business ability, should be able to carry out successfully, providing his invention is of sufficient merit and importance to form a suitable basis for a successful stock company.

Many stock companies are incorporated under the laws of New Jersey, but it is believed the State of West Virginia is also very favorable to corporations. The entire expense for incorporating a company under the laws of the latter State should not exceed $150. The company can be incorporated for any amount; large or small, one hundred dollars or five millions, cost and fees being the same. The incorporators need not be residents of the State. No annual statements required. The meetings of the directors can be held at any place, and need not be held in the State where the charter is granted.

Before applying for a charter for a corporation or stock company, the patentee should mention his plan to some of his friends and get five persons who will promise to subscribe for one or more shares of the stock and act as incorporators of the company.

Next he should secure the services of a reliable attorney, familiar with corporation laws, to prepare the necessary articles of incorporation and legal papers. The attorney will advise the patentee how to proceed properly in organizing his company, and as to the securing of the stock certificates, subscription blanks, seal, etc. These, including the attorney's fee, should not cost the patentee more than $50.

It is well to have some stationery printed with the proposed name of the company and business displayed thereon; and also a prospectus published, setting forth the invention and the plans of the company for introducing it, etc.

Quite often the patentee can find enough idle capital in his immediate neighborhood to float a good portion of the stock. Capital is more easily secured by the formation of a stock company than by any other means, as people can subscribe for small or large amounts, and they often prove good investments.

In soliciting subscriptions for stock, it is desirable to get as many prominent and influential men to buy one or more shares at first to head the list--their names will be a great aid in making further sales. Ordinarily the promoter only collects ten per cent, of the amount subscribed, the balance being subject to the call of the board of directors.

After it is ascertained that the shares or stock are being rapidly subscribed for and selling fully up to expectation, the patentee can have the incorporators sign the charter application and have the attorney file it with the proper State authorities. This will cost the patentee about $100 more, for State tax, attorney fees, etc.

When sufficient stock has been subscribed for, a meeting of the stockholders should be called to elect directors, and to transact such other business as may be deemed necessary in regard to locating and building the plant and getting the company in shape.

The patentee should receive about one-half the capital stock in consideration of his transferring his rights and franchises to the corporation, the remainder of the stock is sold for the benefit of the company to create a working capital. The patentee may sell a portion of his stock, if he desires, but should also retain a good portion of it to show his own confidence in the business.

After the meeting of the stockholders, the direction of the business will probably be taken out of the hands of the inventor, and the control will lie in the board of directors of the company. As a rule it is better that the inventor does not take an active part in the management of the company's affairs, unless he is specially fitted for the position.

If the company is provided with ample capital, and if the business manager is a competent man, there is little chance of failure if the invention has real merit.

[Sidenote: Trading as a Last Resort.]

Patentees are sometimes offered securities or other property in trade for a patent. It is not deemed a wise course by most inventors to consider any proposition for a trade, especially in the early life of a patent. Only as a last resort, after failing to realize from a patent by any other means, is it advisable to trade a patent; and, before finally agreeing upon a trade, the patentee should have a reputable attorney to look fully into the value and title of the property offered. He should also insist upon receiving an abstract of title, or a title guarantee from a reliable title insurance company.

Unless known to himself, the patentee should never engage the services of an attorney or broker recommended by the parties offering the trade to look into the value and title of the property. Inventors should be on the lookout for a set of sharpers who make a business of offering worthless securities and property in exchange for patents.