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Chapter 6Licensing

Key PointsWhat is Licensing?When is it employed?Licensing related issuesSome Licensing Announcements

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What is Licensing?

Licensing is a contractual arrangement whereby the licensor (selling firm) allows its technology, patents, trademarks, designs, processes, know-how, intellectual property, or other proprietary advantages to be used for a fee by the licensee (buying firm).

It is a strategy for technology transfer.

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What is Licensing?

Franchising is an organizational form where the franchisor of a service, trademarked product, or brand name allows the franchisee to use the same in return for a lump sum payment and/or royalty, while conforming to required standards of quality, service, and so forth.

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When is Licensing employed? Used both in technology intensive and non

technology-intensive industries (eg. Computer software, food, sport teams, publishing)

A licensor lacks the capital knowledge of foreign markets required for exporting or FDI, but wants to earn additional profits with minimal commitment.

Host-country governments restrict imports or FDI, or both; or the risk of nationalization or foreign control is too great.

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When is Licensing employed? A firm wishes to test the potential for future direct

investment.

The technology involved is not central to the licensor’s core business. Generally only peripheral technologies are licensed.

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When is Licensing employed? (contd..) The licensee is unlikely to become a future

competitor.

Rapid pace of technological change such that the licensor can remain technologically superior to the licensee. If the technology may become obsolete quickly, there is pressure to exploit it fully while the opportunity exists.

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When is Licensing employed? (contd..) High prospects of technology “feedback” or

“flowback” (access to future technology developments or advances)

The licensor wishes to exploit its technology in secondary markets that may be too small to justify larger investments; the required economies of scale may not be attainable.

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Licensing Related Issues Risks

Dissipation of proprietary advantage Tarnishing of reputation due to lack of quality Profits may not be maximized

Indirect market involvement Exchange rate risks Limits to foreign license payments

Difficulty in enforcement of license terms

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Licensing Related Issues (contd..) Intellectual Property Rights

IP legislations nonexistent or not enforced “Reluctant Licensing” – attempts to offset

piracy Costs of Licensing

Protection costs License Agreement costs Agreement Maintenance costs

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Licensing Related Issues (contd..) Unattractive markets for Licensing

Governmental regulatory schemes Restrictions imposed on duration and

exclusive rights to territories Foreign exchange controls and tax on royalty

fees

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Elements of License Agreement A clear and correct description of the parties to the

agreement

A preamble or recitals describing the parties, their reasons for entering into the arrangement, and their respective roles.

A list of defined terms for the purposes of the particular contract to simplify this complex document and to eliminate ambiguity.

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Elements of License Agreement A set of schedules, in an exhibit or appendix,

where necessary, to segregate lengthy detailed descriptions of any kind.

Explicit description of the grant that is fundamental to the agreement and the nature of the rights being granted to the licensee.

Description of any geographical limitations on the licensee’s manufacturing, selling, or sublicensing activities.

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Elements of License Agreement (contd..) A description of any exclusive rights to

manufacture and sell that may be granted including rights to sublicense.

The terms relating to the duration of the agreement and its extension or review.

Provisions for the granting of rights to downstream refinements or improvements made by the licensor in the future.

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Elements of License Agreement (contd..) Provisions for “technological flowback”

agreements.

Details regarding the royalties or periodic payments based on the use of licensed rights.

Specification of minimum performance requirements and other protection clauses