{"id":33941,"date":"2008-03-26T16:35:41","date_gmt":"2008-03-26T21:35:41","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-legal\/uncategorized\/considerations-in-licensing-new-technology.html"},"modified":"2008-03-26T16:35:41","modified_gmt":"2008-03-26T21:35:41","slug":"considerations-in-licensing-new-technology","status":"publish","type":"corporate","link":"https:\/\/corporate.findlaw.com\/intellectual-property\/considerations-in-licensing-new-technology.html","title":{"rendered":"Considerations In Licensing New Technology"},"content":{"rendered":"
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This review begins with the considerations on selecting a type of intellectualproperty to protect a new technology and follows up with practical considerations inlicensing the intellectual property protecting the technology.<\/p>

With a new technology it is not always clear what type of intellectual property isthe best fit to protect the technology. Accordingly, I’m going to take a couple of minutesto quickly review the relationship between tangible property, intellectual property andrights in the intellectual property. There are four types of intellectual property — patents,copyrights, trade secrets and trademarks. Patents protect the implementation of ideas;copyrights protect the expression of ideas; trade secrets protect confidential information;and trademarks protect the identification of the source of goods or services.<\/p>

In a patent the intellectual property is the patent grant, i.e. U.S. Patent, from theFederal government. New and useful machines, processes, articles of manufacture, andcompositions of matter may be patented. The rights granted by the patent are the rightsto exclude others from making, using or selling the tangible property incorporating theinvention claimed in the patent.<\/p>

In copyrights, the intellectual property is a copyright registration certificate issuedby the Federal government. The tangible property protected includes literary works suchas books and computer programs, performing art works such as movies and recordings,and sculptures. The rights provided by the copyright registration are the rights to excludeothers from reproducing copies of the work, preparing derivative works from the work,distributing, performing or displaying the copyrighted work.<\/p>

In the case of trade secrets, the intellectual property is created by a contract andby a security plan. The contract defines the obligations associated with the confidentialinformation, and the security plan defines how the confidential information is protectedfrom public disclosure. The tangible property associated with trade secrets can beanything that gives a competitive advantage. The rights associated with trade secrets arethe right to use or the right to disclose. Use normally is spelled out with limitations oninternal use and external use and with reference to a specific purpose for the use.<\/p>

In the case of trademarks, the intellectual property is a registration certificateissued by the Federal government. The tangible property associated with a trademarkregistration is the mark, label, or brand name that identifies a source of goods or services.The rights associated with the registration certificate are the right to exclude others fromusing the trademark or copying the trademark.<\/p>

With these types of intellectual property in mind, the question becomes wheredoes the new technology fit? Almost certainly, you can maintain it as a trade secret andlicense it as such, and you can also create a trademark for the goods or services resultingfrom the technology, and license that trademark.<\/p>

Fitting the new technology into protection under the patent laws or the copyrightlaws can be more difficult. As an example, in the late sixties and early seventies therewas a raging debate over whether computer programs could be protected by patentsand\/or copyrights. Many viewed computer programs as nothing more than mathematicalalgorithms and that only the computers that ran the mathematical algorithms could bepatented. Others argued that computer programs performed tangible processes producingtangible results and should be patentable per se, and alternatively, that the code in aprogram was a literary work and should be copyrightable. Over the years both of theselatter two arguments won out. In other words, computer programs became patentable asa new and useful processes, and they became copyrightable as original literary works.<\/p>

Today the boundaries of patent protection and copyright protection are beingstretched by biotechnology and nanotechnology. The legal and moral issues related topatenting life forms or copyrighting bio-information go beyond the bounds of ourpresentation this morning. However, I feel confident in saying that where there iseconomic value, and where great research and development expense needs to beprotected, the U.S. Courts or Congress will find a way. For example, years ago Congressadded asexually-reproduced plants to subject matter that could be patented. Morerecently, Congress added protection similar to copyright protection for Mask Works toprotect the masks used to manufacture integrated circuits. Just find yourself a creativepatent attorney who is willing to push the boundaries of protectable subject matter asdefined in the statutes.<\/p>

Now let us turn to the practical considerations in licensing this technology. I amgoing to briefly review types of licenses, royalty considerations, warranty and indemnityconsiderations, and exit strategies. When I say a type of licenses, I am referring toroyalty-bearing, paid-up, or cross-license agreements.<\/p>

What are the considerations in choosing between a royalty-bearing agreement anda paid-up agreement? If you stand back and look at the business arrangement, you willsoon conclude that if you have a royalty-bearing agreement, you are closely linked toyour licensee's success. In other words, if the licensee makes money, you will receiveroyalties and be successful. If the licensee is not successful, you may receive nothing.On the other hand, in a paid-up license, the licensee has paid you a fixed amount up front.The licensee is taking all the risks of business, and your only concerns are collateral obligations the licensee might have relative to the licensed technology. Thus, in aroyalty-bearing agreement you are speculating on the business just as the licensee is,while in a paid-up arrangement the licensor is not speculating and has already been paidfor the license.<\/p>

One can appreciate that because of the difference in the speculative nature ofthese two types of licenses the paid-up fee is generally a fraction of the total potentialroyalty-bearing license fee. Typically, a paid-up license might return only a fourth of theroyalty that one would expect from a successful royalty-bearing arrangement.<\/p>

Another type of license is a cross license agreement where each party hasintellectual property rights that the other party wishes to license. These agreementsusually include future intellectual property rights for a period of years, say five years, andthere is a balancing payment from one party to the other party to reflect the difference inthe value each party realizes out of the cross-license. After five years, the parties wouldre-negotiate the license with a new-balancing payment based on the business history overthe previous five years.<\/p>

In all of these types of licenses the field and license rights may be selectivelychosen to adjust a royalty upwards or downwards. Note that you don't have to justchange the field to change the scope of the license. You can also change the type ofintellectual property licensed and the rights being licensed under each type of property.If you just adjust the field without adjusting the rights, you have probably licensed toomany rights.<\/p>

Regarding royalties, some considerations in setting a royalty include industrypractice, a level playing field, the relative market exposure, and most favored licenseesituation. First, industry practice may set bounds on the royalty rate. For example, in thetechnical area of computers, a royalty might be set based on the selling price of thecomputer or based on the manufacturing cost of the computer. These royalties generallyrun between 1% and 10%, with the selling-price royalty being on the lower end of thisrange and the manufacturing-cost royalty being on the upper end of this range. On theother hand, in the software industry royalties tend to run much higher as the predominantcost is research and development, and manufacturing cost is relatively low. Thus, a 25%royalty rate is not unheard of for a licensing under a patent to a software invention.<\/p>

One major consideration of a licensor in granting a license at a given royalty rateis to make sure that the licensee does not gain a business advantage. In other words,there needs to be a level playing field relative to the cost of going to market. If thelicensor has spent millions in research and development, then the license rate shouldreflect some of that R&D cost to the licensee so that the licensee cannot undercut theprice of licensor’s products in the market.<\/p>

Market exposure is also another consideration for licensors. If the licensor, forexample, is the largest player in the industry he may have a liability exposure in thefuture much bigger than any potential licensee. For example, assume a licensor's share is 50%-60% of the market, and every other competitor's share is 10% of the market. If thelarge player sets a high royalty as standard in the industry then an infringement by thelarge player on a future intellectual property right of a small competitor in the industrycould cost the large player a very heavy royalty. Accordingly, a licensor with a largemarket share may deliberately set a low license rate in expectation that at some point thecompany will need a license from others in the industry.<\/p>

Lastly, relative to royalty considerations, many licensees will insist on what’sknow as a most favored licensee clause. This clause in a royalty-bearing agreementstates that if at a later date, another licensee is given a lower royalty rate under the sameterms and conditions, then the royalty rate in the present license agreement will also belowered to that rate. Practically speaking, these clauses do not often come into playbecause almost always two separately negotiated royalty-bearing agreements havedifferent terms and conditions. Thus the most favored licensee clause conditions arealmost never satisfied.<\/p>

Now let’s consider indemnification and warranty provisions in license agreementsand what is appropriate when licensing technology. It is not unusual for a licensee torequest an indemnity, or save-harmless clause, from the licensor if the licensee is sued forinfringement as a result of using the licensed intellectual property. However, this is notappropriate. First of all, remember from our initial discussion about the intellectualproperty, the liability attaches to products created by use of the rights, and there is noliability associated with ownership of the intellectual property. Thus, for example, if alicensee under a patent is charged with infringement under a third-party patent, thelicensee is making, using and selling the goods that carry the liability. There is noliability to the patent owner. Further, the patent owner has no generation of revenue tosupport an indemnity clause for this liability attached to the goods. The revenue to coveran infringement of a third-party patent is from the sale of the goods by the licensee. Thelicensee must view this potential risk of patent infringement of a third-party patent as justanother risk of doing business and price the marketed goods accordingly. If the licenseeinsists on an indemnity clause, then the licensor had better raise the royalty ratesignificantly so as to cover any possible future liability.<\/p>

On the other hand, the licensor should be willing to give a warranty that to thebest of the licensor’s knowledge there is no infringement of the licensed intellectualproperty. All the licensor is stating in the warranty is that as of the date of the agreementhe\/she knows of no infringement. This does not mean the licensor has necessarilyconducted an infringement patent study to determine whether there are any additionalthird-party patents under which a license is required to use the invention in this licensedpatent.<\/p>

Other warranties that the licensor should provide include a warranty that there areno restrictions in agreements with others that would prevent the licensor from grantingthe license in the present license agreement. Further, and in the same vane, that thelicensor has the necessary ownership of or a sublicensing right in the intellectual propertyto grant the rights in the license agreement. Finally, in the area of copyrights, particularly for copyrighted software, the licensor should be willing to grant what’s called a warrantyof originality. In copyright law, a work is not an infringement of another’s copyrightsunless it is copied. Thus, when the licensor grants a warranty that the copyrighted workis original with the licensor it is in effect a warranty that there is no infringement of thecopyrights of another.<\/p>

Lastly, there are exit strategies to be considered and more particularly, whatsurvives the termination of the license agreement. As in any contract there should be aplanned termination for such things as breach of the agreement and bankruptcy. Inintellectual property licenses some additional considerations relate to what license rightsand obligations should survive and what to do if there is lesser failure, i.e. did not meetroyalty expectations.<\/p>

If a license is terminated, obligations relating to confidential information shouldsurvive, and obligations associated with a trademark license might survive that relate toproduct maintenance to preserve a reputation as to the quality of goods. With respect to atermination by choice of one of the parties, the licensed rights may survive a sufficientlength of time for the licensee to clear inventory.<\/p>

There need not be a complete termination of the agreement. If businessexpectations are not being met, the nature of the license or the royalty obligation might bechanged by terms of the original agreement. For example, if the licensee has anexclusive license at a high royalty rate to reflect the exclusivity, the continuation of theexclusive license might be dependent on a minimum annual royalty payment to thelicensor. If the minimum annual royalty is not met, the license might automaticallybecome a non-exclusive license with a lower royalty rate.<\/p>

In closing, there are many aspects of intellectual property licensing that we havenot had time to present today. If you are relatively new to intellectual property licensing,I would urge you to seek out a second attorney with many years of experience inlicensing to assist you. His or her review of the first draft of you license agreement maysave your client and you much grief during the negotiation of the agreement and duringthe life of the agreement. The length of negotiations and the cost associated with thenegotiation can be reduced if all parties understand best practices in licensing.<\/p><\/div>","protected":false},"excerpt":{"rendered":"

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