Only in relatively recent times has intellectual property (IP) been fully recognised as an asset with genuine value. Today, it is readily acknowledged that IP can (and indeed must) be leveraged to support business strategies and generate revenue. This note explores some of the issues around technology licensing; that is, the licensing of IP rights subsisting in an inventive product or process in return for royalty income. The world of technology licensing is usually secretive and it is rare for the details of licences to become public knowledge. The lack of comparative data makes it particularly important for technology owners to have a clear strategy at the outset of a licensing programme to ensure they are exploiting their IP on terms in line with industry norms (or better) and with maximum economic benefit.
Basic Objectives in Licensing
The first question for the inventor or owner of technology is do they want to license their technology at all? The classical model around the exploitation of technology is for the IP owner to develop its own manufacturing and sales strategy which captures the maximum profit and value in the overall chain between R&D development of applications, manufacturing, marketing, sale, installation and ongoing support for end customers. In this model, the IP is held and exploited by the owner, with minimal licensing to third parties.
However, there are difficulties and risks to such an approach. The IP owner may not have the financial resources or skills to manufacture, or to obtain sales in foreign markets where significant investment is required or where it does not have reputation or presence. It may wish to benefit from existing manufacturers or producers, to maximise the value of IP rights which are often limited in their market effectiveness, either because of the limitations of a legal monopoly or the presence of other technological solutions. There may also be product liability risks, technical regulations or competition issues which make licensing a preferred solution.
Finally, there are strategic points. Is the objective of the original developer eventually to develop into being a manufacturer and seller in new markets itself, thereby, using licensing as a temporary stepping stone with a right to take back a greater share of exploitation at a later date? Or would it be better to concentrate its resources on the development of new technologies, and act more as an "ideas incubator", funded by licensing revenue, and leave the risks of exploiting the technology to others?
Some Key Issues
With these basic choices in focus, various questions arise in licensing strategy. Here is a list of 10 key issues to consider:
1. What IP rights are actually to be licensed? Sometimes the IP is heavily patent-based, and thought has to be given to the strength, longevity and geographical scope of the portfolio. On other occasions, copyright, design right and technical know-how and information (itself not actually a form of property) may hold the crucial value. There are very different considerations which will apply depending upon the quality and strength of the IP to be licensed.
2. Is the IP to be licensed for any use or for a specific use? Or is the licence to be confined to a particular product?
3. The territory needs to be defined. What are the commercial trading and political relations between the IP originator's jurisdiction and the target jurisdiction? If owner and licensee both trade within a single geography or geo-political grouping such as the EU, then the question may resolve itself easily. However, agreements between different geo-political structures may be more difficult, and may also be subject to uncertainties (consider for example, how UK/EU deals may change, or how relations with Gulf states, or jurisdictions such as Cuba or Iran, have changed markedly in the last months). There are a host of regulatory import control, currency control and international trade issues to consider, to say nothing of tax arrangements between different states.
4. Is the strategy simply to appoint a licensee, or to develop a strategic partner in the jurisdiction? The degree of integration of the licensee into the IP owner's business is crucial. This has implications in terms of technology licensed, obligations to purchase parts from the owner or its preferred suppliers and issues of quality control to be exercised (or not) over the final product. Entwined with this is the very big issue of branding, which is often not considered carefully enough by companies that are focussed on so-called industrial IP rights. Will the end products have a better reception with customers if they are approved by a local or trusted brand, or is the IP owner's brand strong enough to have an attractive force in the territory? Should there be co-branding in order to develop such a reputation?
5. How long is the relationship planned to last? And would it be better to seek only one partner with exclusivity, or to have a number of competing licensees? If the latter approach is adopted, one needs to be fair between the class of licensees.
6. Methods of revenue recognition can vary enormously. Is there simply to be a royalty payment with suitable minimum thresholds, or "use it or lose it" clauses? Or is the relationship more multi-faceted involving sale of parts to the licensee, licensing of a business system and know how, or licensing of a brand? Will royalties be earned at the point of sale of the product only, or also in relation to maintenance and services performed by the licensee downstream of such a sale?
7. Royalty calculation. It is usually wise to adopt a royalty model which is synchronous with the way that revenue is generated by the licensee. If the product is simply purchased and paid for, then a simple percentage of net sales may be appropriate. But if the customer itself will pay for the product by remitting a proportion of the revenue generated, then more subtle models may be helpful for both owner and licensee.
8. Improvements. Perhaps the product is already perfected, but most products are usually subject to development and innovation to maintain competitive advantage. Are such innovations automatically to be included in the licence, or must further royalties be paid? What about technological developments created by the licensee? Is it sensible to crosslicense such materials for free?
9. Challenges to the IP and issues of infringement. It may be that the underlying IP is subject to a third party challenge to validity. If this occurs, how will the parties deal with an event which is commercially damaging to all interests? What protection can the licensee expect from the IP owner in relation to third party infringements which seek to compete against the licensee's interest? Will these be actively policed by the IP owner and what steps, such as IP insurance, can the IP owner take to ensure that it will be able to finance defensive claims? By contrast, what if a licensee is itself struck by litigation alleging infringement of third party IP? What indemnities should be given, and will the IP owner undertake the conduct of such claims?
10.Disputes and differences. Clearly, the IP owner will want some kind of ability to audit the revenues being claimed by the licensee. But what if a dispute arises over this or another issue? Some matters may be capable of submission to an agreed dispute resolution procedure, whilst others may be better subject to an expert determination. Other matters may be resolved in Court, and where the parties come from very different legal backgrounds, then arbitration may provide a degree of neutrality for both sides compared with the home courts of one of the parties.
Although there are advantages and disadvantages to every strategy, licensing is an efficient way for IP owners to exploit technology that they do not have the desire or resources to exploit themselves, or simply where, for the strategic reasons outlined above, it makes economic sense. Given the strategic complexities, licensors should take legal advice before embarking on a licensing programme to ensure that they are not committing to a course of action which, although potentially lucrative, will also create significant legal and financial risk, and potentially commit the licensor to a course of action which will tie it down in years to come.