- Technology Licensing: A Cost Effective Way for Small Businesses to Grow
- November 7, 2013 | Author: Andrew L. Ney
- Law Firm: Barley Snyder - Malvern Office
What is technology licensing?
Technology licensing is the buying and selling of rights to use patents and trade secrets and the knowledge relating to the technology embodied in the licensed patents and trade secrets. The seller (licensor) authorizes the buyer (licensee) to make, have made, use, and sell a product covered by the licensed patent and the licensed trade secret and to use a process covered by the licensed patent and licensed trade secret. A technology license is very similar to a real estate rental agreement. The licensee (tenant) has the right to use the licensed technology (rented property) in the same way that the tenant has the right to occupy the rented property.
It should be noted that we use the word license to define these transactions because licensing is the most commonly used form of granting rights to use the technology. The transfer of rights to use the technology can be in the form of an outright sale of all ownership rights and interests to the technology, namely an assignment, which is the technology licensing equivalent to a real estate deed when the real estate is being sold rather than leased.
Why get involved with technology licensing?
Licensors license others to derive income, to exploit new markets for their products or services, to satisfy multiple-source requirements of customers, and to establish or enhance an equity position in a venture. The following are examples. A university research laboratory licenses out its technology to a business to derive income. A business licenses out its technology abroad when it lacks the resources to produce or market its products in a foreign country or to do so would be impractical. A business licenses out its technology to competitors when the customer of its products will not accept the business as the sole source of the products. A business licenses out its technology to a joint venture with another party as its capital contribution to the joint venture.
Licensees license from others to enhance existing product lines, to diversify, and to improve manufacturing methods. The following are examples. A business licenses in technology to offer customers products that are improvements over its existing products, to expand the existing product line or to fill gaps in the existing product line. A business licenses in technology to offer its customers an entirely new product line that often complements its existing product line. A business licenses in technology that improves the way its products are made, resulting in better performance of the products or reduced manufacturing costs.
How does technology licensing work?
The technology licensing process can be started by either the prospective licensor or the prospective licensee looking for someone to deal with. It is most important that whomever starts the process must understand why a collaboration will be mutually beneficial. The prospective partner must be sold on the collaboration. Once the two parties are satisfied that pursuing a collaboration is in their best interests, the deal is negotiated, a contract is signed, and the parties hopefully live happily after.
It is important that a prospective licensee, when seeking a license to diversify, look for only commercially proven technology because a diversification involves entering into a new business with which the licensee has no experience and, therefore, is unable to judge the potential merits of commercially unproven technology as might be available, for example, from a university research laboratory. On the other hand, when a prospective licensee is seeking a license, for example, to expand a product line, both commercially proven technology and commercially unproven technology should be of interest because the prospective licensee, experienced in the business, should be fully able to assess the potential merits of commercially unproven technology.
Unfounded myths about technology licensing.
Two myths about technology licensing should be blown away. First, technology licensing is not limited to high tech. Rather, all levels of technology are likely subject matter of a technology license. One must take up licensing opportunities on a case-by-case basis rather than generalize. Second, technology licensing deals are not done only by large corporations having super sophisticated managements. Rather, start-ups, small and medium size businesses, and large businesses participate in technology licensing.
Importance and widespread use of technology licensing.
Because of a lack of legal reporting requirements in the United States and in most other countries, there are no reliable national or international figures that can adequately report the size of the intellectual property marketplace. Therefore, we cannot quantify the benefits and rewards to licensees of the technology licensing deals that they have entered into. However, based on certain reports made by individual countries to the International Monetary Fund, it is believed that in America alone, annual technology licensing revenue in the mid 2001-2010 decade was around $45 billion, and annual worldwide technology licensing revenue was around $100 billion, and growing fast.
What we know for certain is that the technology licensing way of doing business --- whether to enter a new business or market, or to establish or enhance an equity position, or to contribute to earnings, or to enhance a product line --- has had a significant impact on industry in the past, continues to have a significant impact on industry today, and will have a significant impact on industry in the future. There are over 11,000 members of the Licensing Executives Society International (LESI), with over 4,000 in the United States and Canada alone, busy doing technology licensing deals every day. We can add to these numbers, members of the Association of University Technology Members (AUTM) and individuals not members of either LESI or AUTM.