WORLD INTELLECTUAL PROPERTY ORGANIZATION

EXCHANGING VALUE NEGOTIATING TECHNOLOGY LICENSING AGREEMENTS

1. INTRODUCTION - WHY LICENSE?
Ideas, innovations and other expressions of human
creativity are converted into private property and protected
by law through the intellectual property system. As
property, they are tradable assets. Licensing, the right
granted by an owner of such an asset to another to use that
asset while continuing to retain ownership of that asset, is
an important way of creating value with these assets.
Licensing creates an income source, disseminates the
technology to a wider group of users and potential
developers and acts as a catalyst for further development
and commercialization.

Intellectual property refers to creations of the human mind. The legal
system of intellectual property rights converts this innovative and
creative output into property and thus into valuable tradable assets.
Human ingenuity and insight manifest in the form of new and/or
original ideas, inventions, information, creative expressions,
knowledge and other such intangibles that may be embedded in or
relate to the products and services that we so depend on in our daily
lives. Thus, new and improved technology, know-how, confidential
information, software and databases, creative expression in the
making of instruction manuals, books, plays, movies, videotapes,
television productions, music, multimedia, the image, reputation and
goodwill linked to trustworthy names of goods and services, business
identifiers, etc., can be protected by a range of intellectual property
and certain aspects of unfair competition laws. The intellectual
property laws include laws on patents, utility models, trade secrets,
trademarks, geographical indications, industrial designs, topographies
of integrated circuits, non-original databases, new varieties of plants,
and copyright and related rights.

Intellectual property assets can be commercially exploited by their
owner or with the permission of the owner by others. One way for
others to exploit intellectual property is through licensing the
intellectual property from the owner. The word “license” simply means
permission granted by the owner of the intellectual property right to
another to use it on agreed terms and conditions, for a defined
purpose, in a defined territory and for an agreed period of time.
Licensing of intellectual property is often considered in three broad
categories, namely technology licenses, publishing and entertainment
licenses, and trademark and merchandising licenses. These categories
are, however, not watertight compartments. This Manual will not be
dealing with aspects specific to publishing and entertainment licenses
nor to trademark and merchandising licenses. Its focus will be on
negotiating technology licenses, which mainly involve patents and
trade secrets.

.
HOW DO COMPANIES BECOME
AND REMAIN COMPETITIVE?

Only companies that continue to provide better products and services at
a lower price will be competitive, profitable and maintain an edge in a
market economy that is globalized, fast moving and demanding. A better
product may be a new product or it may be a superior product. A superior
product may result, for example, from an improved manufacturing
process that increases cost-effectiveness by reducing production time
and/or using fewer resources. Such a product may be superior by virtue of
its new features, higher quality, lower cost or a combination of these.
How do companies meet this demand for new or better products and
services, and provide these at a competitive price?

1. Intellectual property licensing and technology transfer are important factors in strategic
alliances, joint ventures and so-called turnkey contracts. Technology licenses, which, as indicated above, are one type of intellectual property license, fall within the broad concept of technology transfer. Technology transfer is to transfer existing technology for application by a new user in the same area of application or in a completely new area of application by the same or a new user. It could be effected by an activity as simple as teaching and as commonly as the hiring of skilled workers to the formalizing of contracts including technology licensing contracts. drivers of economic growth: land, labor and capital, are no longer sufficient to provide the necessary competitive advantage that makes the difference between companies that are otherwise very similar to
one another. The answer lies in new or improved technology.
Technology means many things to many people. The Merriam-
Webster’s Dictionary defines technology as “the practical application
of knowledge, the capability given by the practical application of
knowledge or the manner of accomplishing a task especially using
technical processes, methods, or knowledge.” The Encyclopædia
Britannica defines it as “the application of scientific knowledge to the
practical aims of human life or, as it is sometimes phrased, to the
change and manipulation of the human environment.

Technology includes the use of materials, tools, techniques, and sources of power
to make life easier or more pleasant and work more productive.
Whereas science is concerned with how and why things happen,
technology focuses on making things happen.” A popular definition
of technology is that “technology is the practical use of scientific
information.” Therefore, broadly speaking, technology refers to end
products of scientific research and development in the form of
inventions and know-how which are used as tools or processes for
creating new or improved products and services that better serve the
needs of the market. There is often a tendency to equate one patent
with one technology. This is rarely the case nowadays. Increasingly, a
number of patents together are responsible for a technology and a
number of technologies for a product, for example, a camera or a car.
Such technology may be acquired either through research and
development undertaken by the company itself, in cooperation with
others, or by acquiring technology developed by others which may be
on offer in the market.

Further, a company that has come up with a new or better product or
process will do well to know that there may be others searching for
such a solution and it could be a good business option to transfer that
knowledge and earn a bonus from an additional source of income. In
fact, a number of companies have either shifted from manufacturing
of products to licensing of intellectual property in the form of patents
and know-how or have been set up with the sole objective of creating
and licensing intellectual property without manufacturing any
products. In other words, the technology becomes the product. Today,
even the largest companies are no longer doing everything in-house
and depend on outside sources not only for key components and
services but also for technologies. Some other companies just develop
technology and outsource the manufacture of the products to other
companies in their own country or abroad by entering into a licensing
agreement for this purpose.

Given the intangible character of technology, its use by one does not
detract from its use by another. In other words, it can be used
simultaneously by many users for the same or different purposes
without impacting in any way on its quality or functionality. Therefore,
the owner of technology could potentially license the use of his
technology to as many licensees as he wishes, maximizing the earning
potential of his technology constrained only by the terms of the
agreements that he enters into with the potential licensees. In a sense,
one technology could become the basis for a whole range of related
or unrelated products and services made by one or many enterprises in
a potentially large number of locations in one or many countries.

Before embarking on either “licensing-in” technology, which is to
acquire rights to technology developed by another, or “licensing-out”
technology, which is to grant to another the right to use technology
to which one has proprietary rights, through a licensing agreement, it
is important to consider the preliminary question as to whether
licensing is the right strategy to adopt. It may well be that for an
owner of intellectual property, the best strategy is to manufacture and
market the product. If not, however, other options include entering
into an outright sale of the intellectual property rights over a given
technology. Sale of intellectual property rights through assignment
may not be practical because often the buying of intellectual property
alone is not attractive without human capital, a product, a developed
market and/or an established business or revenue stream. Still, sale or
assignment may be an option in some cases.

SELLING VERSUS LICENSING

In selling or buying rights to the intellectual property in technology
(where the legal transaction is called an “assignment”), the ownership
rights for that technology pass from seller to buyer and it is a one-time
activity. The technology is bought or sold for an agreed price. There will
be only a few continuing obligations in the relationship between the
seller (assignor) and the buyer (assignee). Frequently, such transactions
involve a one-time transfer of funds, but financial compensation might
also be entirely or partially deferred and may depend on many factors
or contingencies (such as the success of the commercialization). A
technology owner, who has no experience in bringing a product to
market and who is not interested in being involved in such day-to-day
matters as technology at work, may consider that the ideal solution
would be to find a buyer for the technology and to complete the
whole transaction at one time.

In contrast, a licensing agreement transfers from the licensor to the
licensee the right to use the intellectual property in the technology
and to make, use and sell products embodying the technology, in a
specified manner for a specified time in a specified region. In other
words, the licensor continues to have the proprietary rights over the
technology and has only given a defined right to the use of that
technology.4 The licensor who wishes to concentrate on one
geographic market (e.g. North America) or field of use (e.g. the
market for two-stroke engines) may license to another with greater
capacity or interest in other markets or fields of use. That way, in
contrast to getting nothing from that unfamiliar market, the licensor
will have the possibility of receiving an additional income having
licensed-out his intellectual property.

Furthermore, entering into a licensing agreement is to enter into a
relationship, usually for a certain length of time. It pre-supposes a
continuing interaction where the licensor and licensee work towards
realizing their common goal, which is to effectively use the
technology for their mutual benefit. Assuming that the relationship is
successful, and therefore profitable, it would mean that both the
licensor and licensee would be financially compensated, usually and
primarily in the form of an ongoing incremental income stream on the
basis of the success of the product in the marketplace.
Licensing, therefore, entails very different legal and practical
consequences to those of a sale or assignment. It also serves very
different business purposes. If these purposes are not relevant for the
parties then licensing is not the strategy to adopt.

A company that cannot or does not
want to be involved in the manufacture
of products could benefit from licensing-
out technology by relying on the
better manufacturing capacity, distribution
of outlets, local knowledge and
management and other expertise of one
or more partners.
Licensing-out allows the licensor to
retain ownership of the intellectual
property in the technology and to derive
an economic benefit, usually in the form
of royalty income, from it.
Licensing-out could also help a company
to commercialize its technology or
expand its current operations into new
markets more effectively and with
greater ease than on its own.
Licensing-out may be used to gain
access to new markets, which are otherwise
inaccessible. The licensee may
agree to make all the adaptations
required for entering a foreign market,
such as translation of labels and instructions;
modification of goods so as to
conform with local laws and regulations;
and adjustments in marketing. Normally,
the licensee will be fully responsible for
local manufacture, localization, logistics
and distribution.
A license agreement may also provide a
means for turning an infringer or competitor
into an ally or partner by avoiding
or settling an intellectual property litigation,
which may have an uncertain
outcome or may be costly and/or time
consuming.
Licensing can provide some degree of
control over innovations and also over
the direction and evolution of technologies
where interoperability is important.
For the Licensee
There is often a rush to bring new products
onto the market. A license agreement
that gives access to technologies,
which are already established or readily
available, can make it possible for an
enterprise to reach the market faster
with innovative technology.
A company that may not have the
resources to conduct its own research
and development may, through licensing,
gain access to technical advances
that are necessary to provide new or
superior products.
There are licensing-in opportunities
that, when paired with a company's
current technology portfolio, can create
new products, services and market
opportunities.

The licensor’s own investment can
sometimes generate better profits
than operating through a license
agreement.