Licensing of intellectual property is one of the most common ways in which businesses commercially exploit their intellectual property assets. Although this is the most common method but not necessarily the most straightforward. There are various reasons why any business would be interested in licensing intellectual property. Licensing of intellectual property can be done for defensive purposes wherein they control the intellectual property asset to stall copying of the product or services. On the other hand, there are offensive purposes as well for which intellectual property assets are licensed. A company by acquiring a license might want to aggressively frustrate its competitors. The phenomenon of licensing intellectual property assets is a great negotiation leverage, especially when talks are taking place for joint research, mergers, and acquisitions etc. This article will be discussing the nitty-gritties of technology licensing.[i]
Basics of Technology Licensing
Technology licensing takes place only when one of the party is the owner of the intellectual property and the other party is desirous of acquiring the same. The license in simple terms will act as consent which the owner of intellectual property gives to the other party to use their intellectual property asset. Technology licenses are never given in isolation. Normally a business relation is in the making between parties who are exchanging intellectual property assets. This business relation will involve other types of agreements as well. Thus, whenever a technology license is granted all other types of agreements like rights related to new intellectual property created during the subsistence of relationship are also of importance. The most important aspect of the process of gaining a technology license are the technology licensing negotiations. To have a successful round of these types of negotiations it is imperative that parties involved understand what benefits every party will achieve due to the agreement. A unique thing about technology licensing negotiations is that they are very different from negotiations for transfer of physical property. Under technology licensing negotiation both the parties will have some expertise to offer. If one party is offering its intellectual property then the other party will be offering expertise of skilled employees. These negotiations differ also from the perspective that a lot of extensive preparation is required even before the negotiation starts. Since complex matters must be negotiated, parties before approaching each other should define their business objectives, research other parties, prepare essential documents etc. A very important fact to keep in mind is that technology licensing is very different from technology transfers. Technology licensing provides the other party a license for a fixed term to use the know-how for various purposes like manufacturing. The control is still with the creator of the intellectual property. On the other hand, technology transfer would involve selling the intellectual property to a new owner with ownership being shifter from the creator to another party.[ii]
Patents: Intellectual Property Behind Technology Licensing
Largely technology licensing takes place through intellectual property owned in the form of patents. There are different types of patents license which parties can enter if they are desirous of licensing technology. The most common are exclusive licenses and non-exclusive licenses. Under exclusive licence all ownership rights are passed onto the licensee. The licensor only keeps the title rights. The licensee has a lot of control over the use of the patent they are only debarred from further licensing the patent. Under non-exclusive license, patents are granted to more than one party where all the licensees have the right to manufacture the technology. Sometimes licensees are given the right to further license the patent this is called sub-licensing. In the landscape of technology licensing parties sometimes exchange with each other their control of their intellectual property assets, this is called cross-licensing. Sometimes the government allows third parties to use patents even without the will of the patent owners. This type of licensing is called compulsory licensing. Compulsory licensing is rarely used in the technology field, it is more popular in pharmaceutical patents. There are plethora of reasons on why patents licensing is such a lucrative option for businesses. Through licensing patent owners are making their products available in the market. This is beneficial as they are making money without the hassle of investing money. By licensing the technological know-how licensors are free from the burden of incurring manufacturing costs. One of most attractive reason for licensing technology is the prospect of entering foreign market. Rather than individually setting up businesses in the major economies of the world. Licensing provides an alternative to work in collaboration with players who are already working in a particular jurisdiction. As stated earlier the licensing process can be grueling. To attract prospective licensees, licensors should market their invention properly by doing market research, reviewing, and advertising. It is important to protect one’s inventions. Patent owners are always on a lookout for infringers. It is a practice to enter into stick licenses with the infringer. Under this infringing entity is identified and to avoid disputes the owner of patent decides to capitalise on the infringer’s need and makes them their licensee.[iii]
Factors to Incorporate in Technology Licenses
Prior to entering into a technology licensing agreement, licensors must keep certain points in mind. Firstly, it must be decided what type of license will be given. With an exclusive license the sole control will pass to the licensee. Such licenses should be given carefully considering competition regulations. Granting of non-exclusive licence would mean that the there are many licensees, but the control will be in the hands of the licensor. It is very important that there is an understanding between parties of the technology licence that the ownership rights of the licensor are duly acknowledged by the licensee on the products or services they are providing with the use of the licensor’s technological know-how. Another important factor to consider in technology license is the factor of improvements. The agreement should be futuristic in the sense that it should mention the status of rights of both licensor and licensee in case new improvements are made in the technology during the subsistence of the license. The question of payments must be clearly handled in the agreement. Payments can either be given in a lump sum or through royalties or by a combination of both. The license agreement should categorically state that licensee must provide licensor with statements of manufacture, sales etc and that these statements can be checked by an accountant if directed by licensor. The agreement will be considered incomplete if it does not mention the term of the license and the grounds of termination. Provisions for resolution of dispute like whether arbitration will be preferred over litigation must be added in the license agreement. The Agreement should also take note of the situation where parties involved are from different nations then which country’s law will apply and under which court’s jurisdiction will the litigation take place.[iv]
Advantages and Disadvantages of Technology Licensing
Like every phenomenon in the world technology licensing has both pros as well as cons. The most obvious benefit to the licensor is that they become free from the hassle of manufacturing and investing money. They get paid in dividends; they are getting money without spending a penny on necessities. They can enter new and unexplored markets. In a way expanding their world presence and making a prominent name for themselves. Licensors are generating revenue for themselves by outsourcing along with keeping the control of the IP assets in their hands. Licensees benefit by the licensing agreement as it creates opportunities for them. The license allows them to manufacture and market products or services helping them profit. Licensees do not have to themselves develop the technology they can easily license the same and use it to their advantage. If the licensee has been granted an exclusive license it can give them competitive edge over other players in the market. However, where there are so many benefits there are some pitfalls as well. Since licensors are allowing third parties to use their technology there is always a risk of them loosing full or partial control over their patent. Licensors are heavily relying on the licensee’s expertise to manufacture and market the product. Thus, if the licensee does not turn out to be up to the mark this will lead to loopholes in execution of the license. Ultimately this will hamper the name and goodwill of the licensor. The biggest disadvantage for the licensee is that since they are not the creators of the intellectual property assets they are always on the backfoot. With the licensor holding all the controls there are chances that licensees get relegated to the status of secondary party.[v]
Conclusion: Licensing can be an extremely lucrative option when it comes to commercially exploiting intellectual property. Especially when it comes to technological know-how, licensing is the winner among all the options available to owners of intellectual property assets. However as pointed out in the article it is also the most complex form of agreement to achieve. Thus, technology licensing should be carried out in a careful manner because simply put, a lot is at stake.
- IP Asset Management Series, ‘Successful Technology Licensing’, World Intellectual Property Organisation.
- GreyB, https://www.greyb.com/blog/patent-licensing-101/ (last visited on Dec 15,2022).
- Mewburn Ellis, https://www.mewburn.com/law-practice-library/introduction-to-technology-licensing (last visited on Dec 15, 2022).
- NiBusiness Info.Co.UK, https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-licensing-patents (last visited on Dec 15,2022).
Disclaimer: The present article intends to provide general guidance on the subject, and you can also consult us in your specific case.