Reprinted with permission from New England In-House, a quarterly publication of Lawyers Weekly, Inc.
Today more than ever in-house counsel need to be aware of the broader business context in which a license functions. By understanding the pros and cons of granting or taking a license - and communicating those to your outside counsel - you can work together to create an agreement which will define those rights, obligations and liabilities necessary to create a win-win for both sides.
Lawyers and business executives have very different perspectives on the topic of licensing. Your outside counsel probably focus on what rights, obligations and liabilities are created in your company's license agreements. As in-house counsel, you want to know whether the license will successfully advance your company's business strategy of obtaining a technology or financial profit, or both. Obviously, integrating both sides is critical.
Your company cannot develop its technology transfer strategy without first understanding its direction and market factors, which can generally be divided into four categories:
1. Selling existing products in existing markets;
2. Introducing new products into existing markets;
3. Selling current products in new markets; and
4. Developing new products in new markets.
Once you have settled on an overall business strategy, you can focus on those terms that will promote that strategy. For example, cross-licensing opportunities may be less important under the third strategy listed above than the second strategy. Manufacturing and marketing capability may be critical for the third approach but not important if your pursuing the second strategy. If your strategy is to just continue selling existing products in existing markets, then you may have little need for the technology and marketing capabilities that licensing could supply for fourth category.
Why Grant A License?
Traditional reasons for granting a license could include one or more of the following, depending on your company's situation or changing market conditions.
1. Increase revenue with minimal further investment. Licensing may provide you with a return on your research and development investment without significant additional capital outlays. There may also be tax advantages available to related companies when a parent grants a license to a subsidiary.
2. Penetrate domestic or foreign markets. If your company is blocked from entering a foreign marketplace as a result of market conditions, duties, transportation costs or governmental regulations, a license allows you to quickly enter a market with a culturally aware licensee at a reduced capital requirement. New domestic markets may also be entered via licensing. If your company is unsure how a product will be received, or there is a potential for damaging its good will, a license to a third party may decrease this risk.
3. Avoid legal problems. Depending upon applicable law and the language of your license agreement, you might avoid being responsible for product liability. Where a license is granted to a foreign company, you may also avoid third-party intellectual property infringement suits.
4. Obtain technology to fill "gaps." Gaps in your technology may affect your company's ability to practice its inventions or manufacture or sell a product. A grant back or cross-license can provide a win-win situation for both sides.
5. Increase market presence. Licensing is a fast and inexpensive way to increase your presence in an existing market (economies of scale) or enter a market in a different product area (brand extension.)
6. Test-market a product. If you are unsure whether your company's technology is ready for the marketplace or will perform successfully, or if regulations might delay your product, licensing someone in a foreign country may be quicker and less expense. If successful, your track record will help you navigate through the U.S. regulations, and you may find it easier to raise capital and define markets.
7. Increase good will. Licensing your company's trademark, either in existing or new markets, may improve the recognition and image of its mark. A more popular mark that is associated with a positive product experience will allow you to leverage such good will in other product areas.
8. Evaluate licensee. You may want to grant a license to determine whether your licensee is a candidate for additional licenses or possibly an acquisition (but note this goes both ways.)
Why Not To Grant a License
Even in situations where a license may provide a financial or technology profit, there are at least four significant reasons why your company may decide not to license its technology or trademarks. First, allowing a potential competitor to practice your technology will permit it to learn, either directly or indirectly, the know-how needed to compete with your in the future. Second, since your licensee is assuming the risk and cost associated with manufacturing and promoting your technology, it will want a lion's share of the profits.
Third, if your company licenses technology without having direct manufacturing or marketing experience, follow-up R& D may be flawed and you may be operating with no real market feedback as to the feasibility of the licensed technology. You can correct this problem with an appropriately drafted agreement that provides access to such information. Fourth, if you grant a license to a licensee who performs poorly, there may be a risk of incurring product liability as well as damage to your company's reputation for quality products. The direct overhead costs for personnel to support a licensee in the manufacturing and promotion of a product can be larger than you may think. In addition, the time spent in supporting a licensee may be needed to launch other business strategies.
Should Your Company Take A License?
If your company wants a license from another company, you should first evaluate the following factors:
- IP Disputes. If you are involved in an IP dispute, it may be far less expensive to take a license of a patent or a trademark than it is to stop all sale and promotion activities, and often it is a clear way of avoiding infringement in the first place.
- Update/expand a product line. If your company finds its existing product line is becoming obsolete, or your competition is limiting the size of its market, a license can add the technology and market clout necessary to update and expand the sale of an existing product or introduce a more profitable new product.
- Reduce need for R&D. A license can save you the time and money necessary to perform ongoing research and development.
- Access technical expertise. Licensing your technology allows you to easily tap into additional technical expertise that your company may lack.
- Appear bigger. If you are looking to launch a product in the marketplace or raise needed capital, it may be helpful to rely on the reputation of a licensor, which can provide a "prestige" factor to increase your market perception.
- Increased leverage in marketplace. Licensing your company's trademark, especially in a foreign country, will enhance the sale of its products. Licensing your popular technologies to reputable licensees will add valuable marketing and management assistance not otherwise available.
- Obtain bargain assets. If important technology becomes available through a bankruptcy sale, your company may save considerable money by taking a license in the technology.
Or Should They Not Take A License?
At least six reasons exist for not taking a license.
1. If the technology fails or is not marketable, your company can lose its up-front license fees. If you have bargained for exclusivity with guaranteed or minimum royalties due, additional losses may incur.
2. By taking a license with the "wrong licensor" for the "wrong technology," your company may find itself married to the "wrong person." You may then be less attractive to other potential licensors.
3. If the patented technology you are licensing is narrow and easily designed around, your company will find itself in the position of paying a royalty while your competitors pay nothing.
4. In some cases, the quality of the licensed technology may be too expensive for the marketplace, or, if not too high, the resulting profit margins for the final product (as defined by the marketplace) may be too low to pursue such a product.
5. If you license a technology or trademark that turns out to have a poor reputation in the marketplace, it can damage your core business. It is not a coincidence that the Houston Astros aggressively eliminated Enron from the name of their ball field.
6. Your company is risking disclosure of highly confidential information, including not only the general sales information required to be reported to the licensor, but also highly sensitive technical and business plans unrelated to the license. This risk may outweigh the benefits of a license.
E-Business Licensing
In the new "e-business" world, one of the most appreciable changes in licensing is that the license agreement by itself often does not represent the entire deal. License agreements are now more likely to be part of an overall business arrangement between the licensor and licensee. As a result, there are some special licensing considerations for today's economy.
Equity over royalty. There are many reasons your company might prefer a transfer of equity over a royalty stream or up front payment. If you are a start-up licensee, this arrangement reduces cash flow problems and allows for profitability projections not weighed down by a future royalty stream. As a licensor, an equity relationship can provide tremendous upside should you develop and grow successfully.
Speed to market. In the current business climate, technologies often require exploitation within months to realize profit from the technology. Licensing such technology can put it on the fast track with a licensee ready to implement it.
Business alliances. Industry alliances and informal business associations are becoming important sources for setting standards and for pushing particular technology growth pathways. This is especially important for "platform" technologies where technical compatibility in the marketplace is critical. Today, your company's size alone is no guarantee of success. Licensing and cross-licensing arrangements are two ways to be included in these influential groups and the economic sectors they represent.
Flexible field of use. The pace of technology and changing market conditions requires a careful assessment of the defined field of use in any license agreement. You should seek flexibility in the field of use terms so your company can utilize the technology in fields or product areas that may not seem important at the time.
Licensor protection. Due to the limited resources of many start-up licensees, standard indemnification and warranty clauses may not serve their intended purpose of protecting the licensor.
Edward F. Perlman is a shareholder, co-chair of the trademark practice group and member of the IP transactions practice group at the intellectual property law firm of Wolf, Greenfield & Sacks, P.C. in Boston. He can be reached at Edward.Perlman@WolfGreenfield.com.