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WIPO Magazine /May-June 2003 11 What is a License? The word “license” simply means permission – one person grants to another permission to do some- thing. A license agreement is a formal, preferably written docu- ment recording the circumstances under which a promise is legally binding on the person making it. There are at least two essential parties: the licensor, the party who owns the IP and is agreeing to let it be used, and the licensee, the party who receives the right to use the IP in exchange for pay- ment. Therefore, a license agree- ment is a partnership between an IP owner (licensor) and another who is authorized to use such rights (licensee) under certain conditions, usually for monetary compensation in the form of a flat fee or running royalty that is often a percentage or share of the rev- enues gained from use of the invention. Simply put, a license grants the licensee rights in prop- erty without transferring owner- ship of the property. For an IP license to be effective, three basic conditions must be met: the licensor must have owner- ship of the relevant IP or authority from the owner to grant a license; the IP must be protected by law or at least eligible for protection; the license must specify what IP rights it grants to the licensee; the payment or other econom- ic or IP assets to be given in exchange for the license must be clearly stated. There are many different types of IP licenses, such as technology licenses, publishing and enter- tainment licenses and trademark and merchandising licenses. Advantages of licensing for the licensor Many companies have a portfolio of patents, utility models, propri- etary know-how, trademarks and other IP assets that can be licensed. There are many reasons for a company to license out some or all of the IP rights in its portfolio. A company that owns rights in a patent, know-how, or other IP assets, but cannot or does not want to be involved in the manu- facturing of products, could bene- fit from the licensing out of such IP assets and rely on the better manufacturing capacity, wider distribution outlets, greater local knowledge and management expertise of another company (the licensee). Licensing out could also help a company to commer- cialize its IP or expand its current operations into new markets more effectively and with greater ease than on its own. If the licensor’s trademark is also licensed for use in the market along with other IP, then the licensee’s marketing efforts essentially benefit the licensor’s reputation and good- will. In fact, a trademark license agreement is the heart of any mer- chandising program, because it delineates the relationship between the owner of a trade- mark (the licensor) and the pro- ducer of the goods or services to which the mark is to be affixed (the licensee). While the licensor is not involved in the manufactur- ing of the products, he must ensure that the licensee conforms to all conditions concerning maintenance of the quality of the product in relation to which the licensed trademark is used. Similarly, licensors with experi- ence in the field of research and product development may find it more efficient to license out new products rather than take up pro- duction themselves. A company that owns IP rights in a technolo- gy that it cannot afford to manu- facture could consider licensing out the IP rights in that technolo- gy for manufacturing and selling products embodying the technol- ogy in a specific manner for a specific time and region. Thus, the licensor continues to have the IP rights in the technology and has only given a defined right to the use of that technology. An example of such a business mod- el is a “fabless semiconductor” company, where the company uses all its resources essentially for doing research, design and development work. WIPO Magazine /May-June 2003 10 One of the key challenges for businesses today is to remain profitable in a slowing but increasingly global economy. Businesses are under pressure to create new opportunities and new revenue streams from existing assets. They often need new or original innovations or creative expressions to create new prod- ucts, enhance existing products and explore new markets. These crucial innovations and expres- sions, which are increasingly valuable economic assets in today’s economy, need to be pro- tected by means of the tools of the intellectual property system before they are revealed or shared. Only then can a business leverage these economic assets as intellectual property (IP) assets for gaining and retaining competitive advantage. There are four main options open to a business wanting to use IP assets to gain and retain its com- petitive edge; it can: (1) do every- thing in-house to create the need- ed IP in stand-alone mode, (2) create a spin-off or a start-up business to nurture its IP in a focused manner, (3) merge with or acquire another business which has complementary IP or (4) share or team up with others to share IP assets for mutually beneficial results. Most businesses and entrepre- neurs choose to share or team up with others for mutual benefit. This can be done in various ways such as outsourcing, joint ven- tures, consultancy, arms-length licensing or entering into strategic alliances for one or more business purposes. Businesses enter into these types of partnership arrangements as part of their endeavor to do everything legally and ethically possible to improve their bottom line and sustain or increase profits. Many of these sit- uations require formal contractual arrangements that involve “licens- ing in” or “licensing out” of one or more types of IP. Often busi- nesses do both, engaging in “cross licensing,” whereby both parties license IP to each other. While the mechanism of licensing provides enterprises with a wide variety of possibilities for improv- ing their market position, it has its pitfalls and risks. Therefore, from a business perspective, it is important to weigh the advan- tages of licensing against its dis- advantages in comparison with other alternatives for commercial- izing products and services. This article analyzes the main advan- tages and disadvantages of licens- ing, primarily in the context of technology licensing, which gen- erally covers patents, patentable inventions, trade secrets, know- how, confidential information, copyrights in technical material and layout-designs of semicon- ductors. Trademark licensing is included to a lesser extent. 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Page 1: IP LICENSING: REAPING THE BENEFITS

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What is a License?

The word “license” simply meanspermission – one person grants toanother permission to do some-thing. A license agreement is aformal, preferably written docu-ment recording the circumstancesunder which a promise is legallybinding on the person making it.There are at least two essentialparties: the licensor, the partywho owns the IP and is agreeingto let it be used, and the licensee,the party who receives the right touse the IP in exchange for pay-ment. Therefore, a license agree-ment is a partnership between anIP owner (licensor) and anotherwho is authorized to use suchrights (licensee) under certainconditions, usually for monetarycompensation in the form of a flatfee or running royalty that is oftena percentage or share of the rev-enues gained from use of theinvention. Simply put, a licensegrants the licensee rights in prop-erty without transferring owner-ship of the property.

For an IP license to be effective,three basic conditions must bemet:

◗ the licensor must have owner-ship of the relevant IP orauthority from the owner togrant a license;

◗ the IP must be protected by lawor at least eligible for protection;

◗ the license must specify what IPrights it grants to the licensee;

◗ the payment or other econom-ic or IP assets to be given inexchange for the license mustbe clearly stated.

There are many different types ofIP licenses, such as technologylicenses, publishing and enter-tainment licenses and trademarkand merchandising licenses.

Advantages of licensing forthe licensor

Many companies have a portfolioof patents, utility models, propri-etary know-how, trademarks andother IP assets that can belicensed. There are many reasonsfor a company to license outsome or all of the IP rights in itsportfolio.

A company that owns rights in apatent, know-how, or other IPassets, but cannot or does notwant to be involved in the manu-facturing of products, could bene-fit from the licensing out of suchIP assets and rely on the bettermanufacturing capacity, widerdistribution outlets, greater localknowledge and managementexpertise of another company (thelicensee). Licensing out couldalso help a company to commer-cialize its IP or expand its currentoperations into new markets moreeffectively and with greater easethan on its own. If the licensor’strademark is also licensed for usein the market along with other IP,then the licensee’s marketingefforts essentially benefit thelicensor’s reputation and good-

will. In fact, a trademark licenseagreement is the heart of any mer-chandising program, because itdelineates the relationshipbetween the owner of a trade-mark (the licensor) and the pro-ducer of the goods or services towhich the mark is to be affixed(the licensee). While the licensoris not involved in the manufactur-ing of the products, he mustensure that the licensee conformsto all conditions concerningmaintenance of the quality of theproduct in relation to which thelicensed trademark is used.

Similarly, licensors with experi-ence in the field of research andproduct development may find itmore efficient to license out newproducts rather than take up pro-duction themselves. A companythat owns IP rights in a technolo-gy that it cannot afford to manu-facture could consider licensingout the IP rights in that technolo-gy for manufacturing and sellingproducts embodying the technol-ogy in a specific manner for aspecific time and region. Thus,the licensor continues to have theIP rights in the technology andhas only given a defined right tothe use of that technology. Anexample of such a business mod-el is a “fabless semiconductor”company, where the companyuses all its resources essentiallyfor doing research, design anddevelopment work.

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One of the key challenges forbusinesses today is to remainprofitable in a slowing butincreasingly global economy.Businesses are under pressure tocreate new opportunities and newrevenue streams from existingassets. They often need new ororiginal innovations or creativeexpressions to create new prod-ucts, enhance existing productsand explore new markets. Thesecrucial innovations and expres-sions, which are increasingly

valuable economic assets intoday’s economy, need to be pro-tected by means of the tools of theintellectual property systembefore they are revealed orshared. Only then can a businessleverage these economic assets asintellectual property (IP) assets forgaining and retaining competitiveadvantage.

There are four main options opento a business wanting to use IPassets to gain and retain its com-petitive edge; it can: (1) do every-thing in-house to create the need-ed IP in stand-alone mode, (2)create a spin-off or a start-upbusiness to nurture its IP in afocused manner, (3) merge withor acquire another businesswhich has complementary IP or(4) share or team up with othersto share IP assets for mutuallybeneficial results.

Most businesses and entrepre-neurs choose to share or team upwith others for mutual benefit.This can be done in various wayssuch as outsourcing, joint ven-tures, consultancy, arms-lengthlicensing or entering into strategicalliances for one or more businesspurposes. Businesses enter intothese types of partnershiparrangements as part of theirendeavor to do everything legallyand ethically possible to improvetheir bottom line and sustain orincrease profits. Many of these sit-uations require formal contractual

arrangements that involve “licens-ing in” or “licensing out” of oneor more types of IP. Often busi-nesses do both, engaging in“cross licensing,” whereby bothparties license IP to each other.

While the mechanism of licensingprovides enterprises with a widevariety of possibilities for improv-ing their market position, it has itspitfalls and risks. Therefore, froma business perspective, it isimportant to weigh the advan-

tages of licensing against its dis-advantages in comparison withother alternatives for commercial-izing products and services. Thisarticle analyzes the main advan-tages and disadvantages of licens-ing, primarily in the context oftechnology licensing, which gen-erally covers patents, patentableinventions, trade secrets, know-how, confidential information,copyrights in technical materialand layout-designs of semicon-ductors. Trademark licensing isincluded to a lesser extent.

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◗ The licensor depends on theskills, abilities and resources ofthe licensee as a source of rev-enue. This dependence is evengreater in an exclusive licensewhere an ineffective licenseecan mean no royalty revenue forthe licensor. Contractual provi-sions for minimum royalties andother terms can guard againstthis, but it is still a concern.

◗ A license agreement can bedisadvantageous when theproduct or technology is notclearly defined or is not com-plete. In such a case the licensormay be expected to continuedevelopment work at greatexpense to satisfy the licensee.

Specific consideration should bemade when licensing out the rightto use a trademark. The principlefunction of a trademark is to dis-tinguish the goods and services ofone enterprise from those ofanother, thereby often identifyingthe source and making an impliedreference to quality and reputa-tion. This function is to someextent prejudiced if the trademarkowner licenses another enterpriseto use the trademark through atrademark license agreement.Therefore, the trademark owner iswell advised, and often requiredby law, to contractually ensurethat the quality standards aremaintained so that the consumeris not deceived.

Advantages of licensing forthe licensee

There are various ways in which alicense agreement can give thelicensor and licensee the possibili-ty of increasing revenues and pro-fits and enlarging market share:

◗ There is often a rush to bringnew products into the market.A license agreement that givesaccess to technologies andbrands which are alreadyestablished or readily availablecan make it possible for anenterprise to reach the marketon time.

◗ The licensee will benefit fromsuperior technology to pro-duce better quality products,or established trademarks tomarket his products better.

◗ Small companies may not havethe resources to conduct theresearch and development thatis necessary to provide new orsuperior products. A licenseagreement can give an enter-prise access to technicaladvances, which would other-wise be difficult for it to obtain.

◗ A license can also be necessaryfor the maintenance and devel-opment of a market positionthat is already well establishedbut is threatened by a newdesign or new productionmethods. The costs entailed infollowing events and trends canbecome daunting, and quickaccess to new technologythrough a license agreementmay be the best way to over-come this problem. However,

this can increase the productcost and affect the market pricein unpredictable ways.

◗ There may also be licensing-inopportunities which, whenpaired with the company’s cur-rent technology portfolio, cancreate new products, servicesand market opportunities.

Disadvantages of licensingfor the licensee

◗ The licensee may have made afinancial commitment for atechnology that is not “ready” tobe commercially exploited, orthat must be modified to meetthe licensee’s business need;

◗ an IP license may add a layerof expense to a product. It isfine to add new technology,but only if it comes at a costthat the market will bear interms of the price that can becharged. Multiple technologiesadded to a product can resultin a technology-rich productthat is too expensive to bring tomarket.

The licensing of IP may run intoproblems for both licensor andlicensee if government regulatoryagencies consider it to be anti-competitive or collusive innature. And of course licenses arecomplex and, if all material termsare not carefully studied andreviewed by legal counsel, can bedamaging. However, withadvance preparation and legaladvice, IP licenses are an essen-tial business tool that can benefitboth parties.

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Licensing out may be used to gainaccess to new markets that areotherwise inaccessible. By grant-ing the licensee the right to mar-ket and distribute the product, thelicensor can penetrate markets itcould not otherwise hope toserve. The licensee may agree tomake all the adaptations requiredfor entering a foreign market,such as the translation of labelsand instructions; the modificationof goods to conform to local lawsand regulations; and adjustmentsin marketing. Normally, thelicensee will be fully responsiblefor local manufacture, localiza-tion, logistics and distribution.

A license agreement can also provide:

◗ a useful tool to reach a marketfor which the licensor’s ownproduction or marketingresources are insufficient; it issometimes better to find alocal partner than to set up anew establishment in a foreigncountry so as to speed up theentry into a new market, aheadof competitors;

◗ a means for the licensor togain rights in improvements,know-how and related prod-ucts that will be developed bythe licensee during the term ofthe contract; however this can-not always be demanded, as amatter of right, by the licensor;

◗ a means of turning an infringeror competitor into an ally orpartner by avoiding or settlingIP litigation, which may have anuncertain outcome or may becostly and/or time-consuming;

◗ a solution when a product sellsbest only when it is incorporat-ed or sold for use with anotherproduct; or if a number of IPassets, for example patents,owned by different businesses,are required simultaneouslyfor efficient manufacturing orservicing of a product;

◗ some degree of control overinnovations and also over thedirection of evolution of tech-nologies where interoperabili-ty is important; this is often thereason why many companieschoose to work closely in thesetting of technical standardswith national and internationalstandard-setting bodies; thelicensing of patents becomesobligatory when patentedtechnology forms part of anindustry standard.

The licensing out of IP that abusiness owns but does not needin its own business can be anexcellent source of additionalrevenue, which goes straighttoward improving the company’snet worth. This is one of the prin-cipal reasons for performing aperiodical audit of a company’s IPportfolio. A firm may have theresources to exploit its IP throughonly one product, but the IP maybe applicable to other related orunrelated fields of use, productsor services.

Last but not least, a license agree-ment allows the licensor to retainownership of the IP and at the sametime to receive royalty income fromit, in addition to the income fromits own exploitation of it in prod-ucts and services that it sells.

Disadvantages of licensingfor the licensor

The risks of licensing include thefollowing:

◗ The licensor’s own investmentcan sometimes generate betterprofits than operating only, orthrough, a license agreement.

◗ A licensee can become thelicensor’s competitor. Thelicensee may “cannibalize”sales of the licensor, causingthe latter to gain less from roy-alties than it loses from salesthat go to its new competitor.The licensee may be moreeffective or get to the marketfaster than the licensorbecause it may have fewerdevelopment costs or may bemore efficient.

◗ The licensee may suddenly askfor contributions, such as tech-nical assistance, training ofpersonnel, additional technicaldata, etc. All this may simplyprove too expensive for thelicensor. It is important that thelicense agreement clearlydefines the rights and responsi-bilities of the parties, so thatany future disagreements canbe quickly and efficientlyresolved.

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CASE STUDY: Peruvian innovator finds success through the IP system

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Determine the RightStrategy

The merits of licensing intellectu-al property rights are convincing,and licensing should be a vitalcomponent of the business strate-gy of all companies. However, itis still important to consider thevery preliminary question as towhether licensing is the rightstrategy to adopt or not. Eventhough there is much to be gainedfrom a license agreement by bothparties involved, the risks with itcannot be neglected. A licenseagreement can be seen as aninstrument for the distribution ofrisks between the licensor and thelicensee.

For an interesting example of acompany’s approach to patentlicensing, visit the Apath PatentEstate website at(http://www.apath.com/Directory/Licensing/Patent_Estate.asp).

The next article in the IP andBusiness series will deal with theissue of trademarks and domainnames.

José Vidal Martina is living proof that innovation is not just the domainof major corporations or developed countries. From his workshop inLima, Peru, the inventor and entrepreneur succeeded in solving atechnical problem that for years had plagued a number of productionsectors, including glaziers, craftsmen and builders.

Mr. Vidal had already spent years working in the business of semi-pre-cious stones when he began to develop small diamond drill bits formaking perforations in the pieces that he made with his stones. Beforethat he, and many like him, had had to rely on expensive ultrasoundmachines. As there was no economical method or device for makingholes or perforations in materials such as glass, marble, ceramics andgranite, or semi-precious stones, he realized that an enormous marketexisted for such a solution. The machines that did exist were expen-sive and difficult to use, vast contraptions costing thousands of dollarsand impractical for independent craftsmen such as himself.

Mr. Vidal’s first drill bit, made with a diamond, was also very expensive,so he started to look for alternatives. The idea came to him as he wasworking in his shop, looking for a solution to a very specific technicalproblem. Drawing on the knowledge and experience he had gatheredfrom his examination of all the perforating systems then in existence,he succeeded in producing a drill bit capable, in less than a minute, ofmaking holes of various sizes in materials like glass, marble and ceram-ics. A key to the success of the new product, the JVM (Jose VidalMartina) bit with a special guide for specific types of perforations, wasthe idea that it should fit into any common drill, thus making it acces-sible to millions without access to expensive equipment.

His device is now sold for just over eight dollars, not only on thePeruvian market but also in a number of other countries. It is generat-ing substantial profits for those handling its distribution as well asthose able to buy it and access the technology.

What was the secret of his success?

There are a number of explanations, including the inventor-entrepre-neur’s tenacity, enthusiasm and perseverance. There were other fun-damental decisions that helped the process along, however; a key onebeing the decision to seek protection of his invention by patent.

When asked why he became interested in intellectual property pro-tection, Mr. Vidal explains: “There’s no point in my making somethingnew if I don’t protect it. It would be a matter of just days for others tocopy my product, and then my business would no longer make sense.Obviously big companies would be able to make my bits at lowercost, distribute them better and leave me with nothing.”

“I am sure there are manypeople, like me, who at theoutset don’t know the intel-lectual property system andwho guard their inventionslike the proverbial dog in themanger. Just think of thenumber of inventions thatcould benefit society but arelocked up in a workshop sothat others can’t use them!”

With this perception of the waybusiness works, José Vidal decidedthat his only chance of bringing hisproduct to market and enjoyingthe benefits of the time and effortinvested in the creation of the newproduct was to protect his inven-tion with a patent. “If I hadn’tknown about intellectual property,”Mr. Vidal says, “I surely wouldn’t

even have felt inclined to sell my product; I’d have resigned myself tokeeping it under lock and key in the workshop, and earning moneythrough services rendered to people who needed holes made, whichis what I actually did for the glaziers.

Mr. Vidal admits that the process was by no means easy: “I had toinform myself thoroughly on how the system worked, and it wasn’teasy to find people with the knowledge of how to set about having aproduct protected internationally.” Mr. Vidal found that the cost ofprotection could be very high if one decided to have the inventionprotected in a large number of countries. For him it was a strategicdecision, and he chose to have the invention protected in those coun-tries that held the best prospects for manufacturing and selling theproduct. He decided to use the Patent Cooperation Treaty (PCT) sys-tem so that his patent application could be filed in several countries.With international protection, he could confidently show the inventionat international trade fairs with a view to finding distributors to marketit without fear of losing it to third parties.

Mr. Vidal has since licensed another company to manufacture theproduct in some countries, but continues to search for specialized dis-tributors in the field of construction in order to ensure that his productis commercialized worldwide. In his small business, with only sixemployees, he continues to look for ways of improving his products.While the marketing and advertising will be the most difficult stage, heis certain there will be great interest in his product at the fairs heattends. He has no doubt that many small businesses will agree thathis product is more practical and less expensive than the alternativesnow available.

In the meantime, he is already working on several new products forpatent.

(For more information visit http://www.brocasjvm.8m.com/)

For more information on various practi-cal aspects of the IP system of interest tobusiness and industry, please visit thewebsite of the SMEs Division athttp://www.wipo.int/sme/en/case_studies/index.htm.