Closing an IP Gap Before Licensing a Sensor Patent in Burlington

The situation

Selam was a professional engineer who had spent six years designing calibration systems for industrial sensors before starting her own company. Kostas joined a year later as sales director, and between the two of them they built a business that, by its fifth year, was generating revenue in the high seven figures selling calibration hardware and software directly to manufacturers. Their core product was a patented method for auto-correcting sensor drift in harsh industrial environments, and it worked well enough that a much larger manufacturer, with an in-house division making comparable equipment, approached them about a licensing arrangement rather than trying to build a competing solution from scratch.

The proposal was straightforward on paper. The larger manufacturer, represented in negotiations by its in-house counsel, wanted the right to build the calibration technology into its own product line, paying an upfront licence fee plus an ongoing royalty tied to units sold. For Selam and Kostas, it meant a new, largely passive revenue stream without diverting their small engineering team from the products they already made. But before either side would sign anything, the manufacturer's legal team asked a routine question that turned out not to be routine at all: could the startup confirm it actually owned the patent outright, free and clear of any competing claims?

What the review found

Our firm was brought in to prepare the startup for the licensing negotiation, and the first step, before drafting a single clause of the licence itself, was a chain-of-title review — tracing every step by which ownership of the patent had passed from the people who invented it to the company now claiming to own it. Under Canadian patent law, the starting point is that an invention belongs to the inventor. But that starting point can be displaced without any signed assignment at all — most commonly where the inventor was an employee hired to invent or whose job duties covered the work, or where a contract or the parties' course of dealing points to someone else owning it. The absence of a signed assignment does not settle ownership on its own; it just means the question has to be argued from the facts. Still, to transfer ownership cleanly and put it beyond argument, the assignment should be explicit, in writing, and signed by the person giving up the rights — that is what a buyer, lender, or court will want to see on the record, and it was exactly what the chain-of-title review was checking for.

Selam's own assignment was in order; she had signed it when she incorporated the company and again when a patent application was filed. The problem surfaced in the early prototype work. Before the company existed in its current form, Selam had paid a contract engineer for several months of work refining the drift-correction algorithm that later became the core of the patented method. No written assignment had ever been signed. The contractor had been paid in full for the work at the time, and everyone involved had assumed that payment settled the matter, but payment for services and ownership of resulting intellectual property are two different things under Canadian law. Without a signed assignment, the contractor retained a colourable claim to co-ownership of the invention — enough to cloud the title and, if raised at the wrong moment, enough to derail the licensing deal or expose the eventual licensee to a claim from someone they had never dealt with.

This kind of gap is common in early-stage companies, where the paperwork often lags well behind the pace of the work. It rarely matters until a company tries to sell, license, or raise financing against the asset — at which point the other side's lawyers go looking for exactly this kind of hole.

What we did

1. Traced ownership back to the source. We treated chain of title as its own problem, reviewing every contract, invoice, and employment record tied to the invention's development to identify every contributor and confirm whether their rights had been assigned. Licensing negotiations move quickly once both sides agree on price, and an ownership gap found mid-negotiation is far more expensive to fix than one caught early. The review produced a complete list of contributors and showed exactly where the assignment chain was solid and where it was not.
2. Located and re-engaged the former contractor. The contractor had since moved on to other work and had no ongoing relationship with the startup, but was still reachable. We negotiated a retroactive written assignment, confirming that all rights in the drift-correction algorithm belonged to the company, in exchange for a modest one-time payment of roughly $15,000 — far below what a contested ownership dispute would have cost either side in legal fees and delay.
3. Closed the gap before disclosing it to the counterparty. We advised against raising the issue with the manufacturer's legal team until it was already resolved, and set a short internal deadline for getting the retroactive assignment signed so the fix would be complete well before due diligence documents went out. A disclosed but unresolved title gap invites a counterparty to renegotiate price or walk away, using the uncertainty as leverage; a gap that is closed quietly and confirmed by clean, consistent documentation rarely comes up as an issue at all.
4. Structured the licence with audit rights built in. Because the royalty was based on units the manufacturer sold using the licensed technology, self-reporting alone left Selam and Kostas dependent on the licensee's own books. We negotiated a right to audit the licensee's sales records related to the licensed product, on reasonable notice, once per year, with the licensee bearing the audit's cost if it revealed underreporting past an agreed threshold.
5. Defined the scope of the licence precisely. The agreement limited the licence to a specific field of use and specific product categories rather than the technology as a whole, kept it non-exclusive so the startup could continue licensing or selling the underlying method to other manufacturers in different markets, and set out clear termination rights if the manufacturer stopped paying royalties or breached the confidentiality terms protecting the drift-correction method itself.
6. Built in a step-up royalty and a minimum annual payment. To protect against the manufacturer licensing the technology and then quietly deprioritizing it in favour of its own competing research, we negotiated a minimum annual royalty payable regardless of actual sales volume, with the rate increasing once sales passed an agreed dollar threshold. This gave Selam and Kostas a guaranteed income floor from the first year onward, rather than a royalty depending entirely on how aggressively the manufacturer chose to promote a product line it had not itself invented.

The outcome

The licence closed roughly four months after the first conversation, which is a realistic timeline for a commercial agreement of this size once due diligence, negotiation, and internal approvals on both sides are accounted for. The final terms included an upfront licence fee in the low six figures, a running royalty in the mid single digits as a percentage of net sales on the licensed product line, and the audit right the startup had asked for from the outset. The manufacturer's legal team never raised the ownership question again after the initial due diligence request, because by the time they asked for supporting documentation, the assignment chain was complete and consistent.

For Selam and Kostas, the licence became a new, largely passive revenue stream that did not require expanding their engineering team or diverting attention from their own product line. The audit right proved its worth in the second year of the agreement, when a routine review of the licensee's reporting turned up a minor undercount in the units sold, corrected without dispute once flagged. Because the right existed in the contract and had been exercised as agreed, the correction was a bookkeeping conversation rather than a legal one.

The retroactive assignment from the former contractor, once signed, also strengthened the company's position beyond this single deal. With clean chain of title now on file, the patent became a cleaner asset for any future financing round, acquisition conversation, or additional licensing deal the company might pursue. Selam later said the cleanup felt like paperwork at the time, but it was the reason the manufacturer's due diligence process moved as quickly as it did — there was nothing for their lawyers to keep digging into.

The minimum annual royalty also did what it was designed to do. In the licence's first full year, the manufacturer's rollout of the calibration technology into its product line was slower than either side had projected, and actual unit sales would have produced a royalty payment well below what the startup needed to justify the deal internally. Because the agreement guaranteed a floor regardless of volume, Selam and Kostas still received a predictable payment while the manufacturer worked through its own production ramp-up, and neither side had to renegotiate mid-term.

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