What it means
Historically, a ruler would issue a written order that was left open so that anyone could read the seal and the text. This was different from a private letter, which was folded and sealed shut.
These open documents, letters patent, were used to confer rights, such as titles of nobility, land grants, trading monopolies and permission to run a business. The most familiar modern use is in intellectual property.
A patent for an invention is, formally, a grant of exclusive rights for a limited period, and in some countries the document is still called letters patent. It gives the owner the right to stop others from making or selling the invention without permission.
Letters patent have also been used to create companies. Before general company laws made incorporation routine, a business might be established by a royal charter or by letters patent that gave it legal existence, a name and certain powers.
In some jurisdictions, including parts of Canada, companies have been incorporated by letters patent, though modern statutes have largely replaced the practice. For a finance professional, the relevance is mostly in due diligence and valuation.
If a company claims to own valuable patents, it matters whether the grant is valid, who holds it, when it expires and whether it has been pledged as security. Patents are intangible assets, and their cost or fair value appears on the balance sheet under accounting rules.
Letters patent also differ from a licence. A licence is permission to use something that someone else owns, whereas letters patent are the original grant of the right itself, which the holder can then sell, assign or license to others for a fee.
The legal detail depends on the country. The term can appear in company histories, in constitutional documents, and in intellectual property portfolios, so it is worth asking a lawyer what a specific set of letters patent actually does in the jurisdiction concerned.
In practice
Real-world examples.
Example
A medical device manufacturer lists its patent portfolio in the notes to its accounts. One of the patents was granted by letters patent and has 12 years left to run. The finance team uses that remaining life to set the period over which the patent's cost is amortised.
Example
An investor buying a small engineering firm asks to see the documents behind the firm's main invention. The seller produces the patent grant, and the investor's lawyer confirms the owner, the term and any licences. This check supports the valuation of the business.
Example
A historian researching an old trading company finds that it was created by letters patent from a government in the nineteenth century. The document sets out its name, its powers and the territory in which it could trade. It shows how corporate existence was once granted by the state rather than through registration.
Case study
Seen in the real world.
Fenwick Optics is a fictional company whose main asset is a patented lens coating. When it applied for a $1,500,000 loan, the bank asked for the patent as security, and its lawyers requested sight of the original grant.
The bank's solicitors asked to see the grant and the patent office record before going further. The review found that the patent had been granted to the founder personally and never assigned to the company. The bank could not take security over an asset that the borrower did not own, and the loan was put on hold.
Fenwick's lawyers arranged a formal assignment from the founder to the company, recorded it with the patent office, and the loan was approved four weeks later. This is an illustrative story, but it shows why the exact holder and wording of the grant matter.
Watch out
Common mistakes.
- Assuming letters patent always mean an invention patent. The form has also been used for titles, charters and company incorporation.
- Assuming a patent lasts forever. Patent protection runs for a limited term set by law, and renewal fees may be needed to keep it in force.
- Ignoring who holds the rights. If a patent is registered in the name of an individual rather than the company, the business may not own what it thinks it owns.
Questions
People also ask.
Why are they called "patent"?
The word comes from the Latin for open. The letter was left unsealed so that anyone could read the grant.
Are letters patent still used today?
In some places the term remains in use for patents and for certain formal appointments or incorporations. Many countries have replaced it with modern statutes and registers.
How are patents shown in accounts?
Purchased patents are usually recorded as intangible assets at cost and amortised over their useful life. Internally developed patents follow stricter rules, and development costs are often expensed.
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