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Intellectual Property, Aleck Ncube
ADVANCEMENTS in technology are continuously occurring throughout the world as firms seek to develop new ideas for their products, services and markets. SMEs wishing to expand into the international arena are finding that licensing or transferring their technology provides a low risk and highly profitable alternative to direct export, establishing a foreign branch, subsidiary or joint venture.
A licence is a contract, which authorises the use or exploitation of the subject matter of the licence for a specified purpose and period of time, with all other rights maintained by the owner of the technology. Alternatively these rights may be transferred outright to a new owner.
The decision to license technology to an established firm that can sell their technology or products is often motivated by a desire to penetrate markets, which the licensing company might not otherwise be able to penetrate through export or direct investment.
This is because the licensor does not have the resources to achieve full commercial exploitation of their intellectual property on their own. For instance, a computer software developer might licence a computer manufacturer to distribute the developer’s software to take advantage of the manufacturer’s greater resources for marketing and product distribution. By adding the licensee’s resources for specified business operations to its own, the licensor can serve markets it would otherwise not be able to enter.
For example, IBM selected Microsoft’s MS-DOS operating system software to build the PC-DOS operating system for IBM personal computers enabling Microsoft to obtain the benefit of IBM’s extensive marketing and distribution network.
Licensing risks
Licensing also presents certain risks. There may be loss of control over further exploitation of one’s intellectual property, for instance, under a manufacturing licence the licensor surrenders direct control over the details of the manufacturing process and quality of the products. With regard to a marketing and distribution license, the licensor surrenders control over advertising, promotion, distribution and pricing policies.
Licensing requires confidence and trust in the licensee. The licensor must be satisfied that the licensee has the technical and business ability to commercialise the subject matter of the license. In addition, there is always the risk that the licensed intellectual property will be used or disclosed without authorisation, either wilfully or in advertently.
This risk of “piracy” increases because licensing reduces licensor’s control over the manner in which the intellectual property is exploited and the precautions used to prevent unauthorised use and disclosure. The licensee may market products and services that are similar to but not the same as the subject matter of the licence agreement.
Defining precisely what changes and improvements belong to the licensor and at what point they become a “new product” not covered by the agreement often is the subject of intense negotiations and may provoke disputes over who gets credit for improvements, whether and when royalties are due, and the scope of the licensing long after the agreement is signed.
Since the licensor depends on the licensee’s efforts to generate income from the licensed activities, this revenue and the licensor’s business can be adversely affected if the licensee has other interests, does not have the capability or personnel for effective marketing and distribution or simply makes bad business decisions.
Finally, licensing may create a potential competitor during and after the licensing term or any applicable statutory period. This risk and the others mentioned above can be minimised by a well drafted licence agreement containing restrictions designed to limit the licensee’s sales to certain geographical areas and prevent disclosure to others as well as the careful selection of the prospective licensee.
Subject matter of a license
Licensing agreements may extend to any type of experience or knowledge that may be useful in the invention, manufacture, sale or maintenance of a product in the organisation, provision and marketing of a service.
Such knowledge or experience is commonly referred to as intellectual property and generally involves statutory rights such as patents, trademarks and copyrights or non-statutory rights generally referred to as trade secrets and know-how. Each type of intellectual property provides its own “bundle of rights”, which may be licensed separately or withheld by the agreement.
A patent is a governmental grant, which entitles an inventor to exclude others from exploitation of the invention for a certain period of time, that is, a legal monopoly to manufacture, use and sell his invention. While the underlying concept of a patent is uniformly understood worldwide, variations occur in the kinds of patents issued, the manner in which they are applied for and maintained and the length of time during which they remain in effect. These variations must be considered in any licensing arrangement.
A trademark is any word, name, symbol, device or combination thereof adopted and used by a manufacturer or SME to identify its goods and to distinguish them from those sold by others. Trademark registrations may be renewable indefinitely but failure to use a trademark will usually result in its loss. In most common law jurisdictions trademarks are created by their use, not by registration. In most civil jurisdictions, however, trademarks are similar to patents since ownership itself is determined by registration.
A Copyright entitles an author of literary or artistic works the exclusive right of copying, publishing and selling copies of the works. Its function in licensing generally covers rights in advertising and other literature of the licensor such as manuals, specification sheets and other documentation respecting the technology.
Trade secret and know-how are the most common subject matter of technology transfer agreements. They encompass all knowledge, expertise and information useful in accomplishing the subject matter of the agreement. It may include models, designs, drawings, in tangible form or consist of engineering or technical assistance. Trade secrets and know-how are the most difficult subject matter of licensing agreements.
They are generally not patented and legal protection in most countries is based upon trade secret law, which generally limits enforcement to contractual obligations not to disclose the know-how. In the next write-up, I will focus on what constitutes a licensing agreement.
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