The Patentee’s Gains from Royalty Differentiation Under Exclusive Territorial Licensing

Royalty differentiation under exclusive territorial grants is a device which a patent owner, given proper conditions, can use to maximize his profits from licensing the patent rights to an invention. The patentee creates exclusive territories by granting only one license per territory, and then sets different royalties for each territory in accordance with the differing price elasticities of demand for the patented end product. Commentators have taken various stands on how the interests of the patentee and the public should be balanced in determining the desirability of permitting such exclusive territorial grants. One analysis purports to show that permitting a patentee to grant more than one exclusive territorial license is unjustifiable because it cannot benefit the patentee. If the patentee reaps no reward, the practice should be per se unlawful because the socially harmful effects of the patent monopoly can be justified only when they are balanced by some benefit to the patentee. Since the state of the law is unsettled, and the policy of permitting royalty differentiation under exclusive territorial licensing is questionable, it is necessary, in anticipation of future judicial decisions or statutory changes, to correctly state and properly consider the interests of the patentee. This note will show that the patentee can derive a substantial benefit from royalty differentiation under exclusive territorial licensing. The patent owner’s interest must therefore be taken into account when judging the merits of the practice.