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Questions to Consider When Licensing |
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Does the Strategy Fit? – When considering a licensing
strategy, a company should look closely at how the licensing program
will fit into the overall business plan of the company. The
most ideal strategy should not only compliment but enhance a
company’s product line while providing an even more attractive
position for the company vis a vis the market in which it
participates. One way of ensuring that interference in this market
is minimized is to only license to other markets or for use in
foreign economies. Another good piece of advice is to use
particularly stringent terms of licensing agreements when dealing
with competitors. Additionally, if a company is attempting to
license a technology that has been standardized, then it may be wise
for it to decide not to compete with its licensees by avoiding the
manufacture and sale of products in the markets where it knows it
has licensed technology. Making a market or territory restriction in
the licensing terms may prove beneficial to both parties as well.
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Can Cross-licensing be Used? – When the prospective
licensee owns intellectual property
of interest to the licensor, cross-licensing is a relatively
low-risk way of enabling both parties to exchange intellectual
property. When such extensive intellectual property portfolios are
involved in an agreement as with large corporations, cross-licensing
becomes particularly attractive as rights to intellectual property
may be exchanged while, often, no royalty payments are involved.
However, in this scenario, terms regarding ownership of improvements
on the cross-licensed technology needs to be clearly stated in the
agreement.
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Does the Licensee have the Appropriate Resources? –
Ensuring that the licensee has the revenue to carry the product
program through is essential for the licensor. After investing the
time and money that it takes to sell a license, a licensor must
expect the investment in the licensee to be a sound and profitable
one that will matriculate as many royalties as possible from the
intellectual property.
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What should the Financial Terms Be? – Both parties should
feel that the financial terms of the agreement suit them. The
licensor should not expect to earn royalties in excess of the value
it can expect a given technology to add to the product of the
licensee. Another aspect of a license agreement that can prove
prohibitive is the requirement of large initial payments especially
of potential licensees who are particularly small and do not have
sufficient cash flow to make such a great investment right off the
bat.
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Are Additional Licenses Required? – The licensor should
attempt to foresee any additional licenses that the product of a
licensee may require for manufacture. At this point, detecting the
benefit of the licensor’s particular technology to the product of
the licensee is particularly essential in determining the royalty
shares of the multiple licensors. Furthermore, both parties should
make a careful analysis of all the licensing costs involved, as the
total cost of the licenses may drive the retail price of the product
up out of the market.
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How Licensing Can Add Value to
Your Business
Licensing technology provides a
low-risk way to capitalize on your
intellectual property assets. Due to the high cost of manufacture and
the comparatively small investment of a licensing program, many of the risks
that a company would otherwise face in exploiting its intellectual property
are transferred to the licensee. Depending upon the exclusivity of the
license, there are varying degrees of risk involved for the licensee and
licensor; however, an effective license strategy will minimize risk for both
parties.
Before a company considers licensing out its technology, however,
it should consider whether
other ways of taking advantage of its property,
such as joint ventures and
strategic alliances with other companies, would
better compliment its economic position. Once licensing is decided upon, the
nature of the company as well as the particular property it wishes to
utilize should be carefully considered before deciding the architecture of
the license.
The Benefits of Licensing Out
By licensing out its technology, a
company may
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generate income from unused portions of its intellectual
property. In addition to making this potential energy kinetic, licenses
enable a company to exploit other markets by allowing the licensee to apply
the existing technology to a different market. When an invention is useful
to several industries, licensing can prove
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profitable to both the licensor
and the potential licensee as experts in separate fields.
Licensing out is not only a good
way for a company to enable its
invention to reap the benefits of other
industries but also a way to capitalize on the potential of foreign markets.
Licensing to firms for production and distribution to different populations
can enable a company to further profit from its technology while protecting
itself from the overhead required to participate in foreign markets.
Licensing out offers the additional
benefit of allowing the licensee to
advertise itself better as well as to
make improvements (which can give the licensee varying degrees of liberty,
thereby making the license more desirable) upon the invention. When a
company detects property infringement, its most economical plan of action is
also to license the property rather than litigate against the infringer.
Before licensing in technology, a
company should ask itself whether the invention is something it can develop
in-house and, if so, whether the time and cost involved are worth the
expected return. When looking at potential technology to license in, the
company should carefully consider whether the property in question fulfills
its production and marketing needs.
The
terms of the license are the most important aspect for the future
licensee, and he must look carefully at these terms, negotiating with the
licensor until issues such as long-term profitability/room for growth as
well as royalties are resolved to suit both parties. The final consideration
for a company to make in acquiring intellectual
property through licensing in is whether the licensor is capable of
fulfilling its obligations to the licensee financially and otherwise and
whether, if additional support may be required later on, the licensor will
have sufficient resources to further enable the licensee’s production.
License Agreement: Main Terms
Long-term vs.
Short-term Agreements: In a
long-term license, the up-front payment is usually relatively small, and the
subsequent royalty payments form the bulk of the financial compensation. Such an
agreement is usually mutually beneficial if the licensee is a
small, cash-poor
company.
In a short-term license, the bulk of
the payment is made in a larger up-front payment. In the most extreme case, this
license may consist of one lump payment to cover past infringement. Such a
license is suitable with an uncooperative or infringing licensee. This type of
agreement is also useful when the licensing company wishes to liquidize its
assets.
Exclusive vs.
Non-Exclusive Agreements: Whenever possible, the parties should attempt to engage in a non-exclusive
license. This provides benefits for both the licensor and the licensee. Firstly,
there is less risk involved for both parties; the licensor is not dependent on
the success of one product, and the lower licensing fee minimizes the risk of
the venture for the licensee. In addition, the licensor retains more control
over the product. Furthermore, the reduced royalty fees reduce the cost of the
product, which can increase the market share. Lastly, licensing to several
companies increases the likelihood that
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improvements on the technology will be
made; these improvements can benefit the licensor and all the licensees.
If the licensee desires an exclusive
license, the licensor should ensure that several criteria are met. Firstly, the
licensor must consider whether an exclusive license is the best way to exploit
the potential of the technology. In addition, substantial research should be
conducted into both the technology and the licensee to ensure that the resulting
product will be clearly superior to its competitors and will be able to garner a
large market share. Finally, the licensor must be persuaded that the licensor
has the
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marketing and production resources to
make the product successful, and
that the licensor is willing to commit these resources. The licensor may also
wish to consider limited period exclusivity.
Improvements on the
Technology: Both parties should
carefully consider the proprietary rights of improvements made to the technology
during the license term. It is beneficial to the licensor gain rights to any
improvements made by the licensee. Likewise, it is beneficial to the licensee to
gain rights to any improvements made by the licensor. Furthermore, if the
license is non-exclusive, the licensee may also be able to incorporate
improvements made by other licensees. The rights to improvements may be included
free of charge with the license, or the license agreement may stipulate a
payment to be made by either party in return for intellectual property rights
for the improvements.
Sublicensing:
Unless the agreement specifically
states otherwise, the licensee is allowed to sublet to other parties. The
licensing party should be aware that it may lose direct control over the
technology if the licensee sublicenses the intellectual property. If
sublicensing is allowed, the terms and conditions should be explicitly stated in
the agreement.
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