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In Layman's terms, licensing takes place when one party gives permission to
another to do something
As a strategic business tool, licensing typically entails the grant of
permission by the owner of some intellectual property rights (IPR), we call him
the licensor, to another party whom we call the licensee, to make use of the
rights to derive certain commercial benefits. At all times, the licensor remains
the lawful owner of its IPR, and it is typically compensated in financial terms
by the licensee.
In most cases, the obligations of the parties and their relationship are
governed by a legal agreement. In licensing arrangements where the use of the
IPR has to be clearly explained or instructed, and its parameters clearly
defined, manuals, training programmes and transfer tools are typically used to
achieve these purposes.
Types of Licensing:
Licensing can be a generic term for a few types of IPR-transfer activities:
- General Intellectual Property Licensing, which includes the licensing of
copyrights, trademarks, designs, creative works, etc. Well-known examples
include cartoon characters such as those from Disney which are found in
licensed products such as apparels, watches and even jewellery.
- Business Format Franchising, which involves the transfer of a method of
running a successful business. There is usually heavy emphasis on the
transferor's brand and corporate identity, operating systems and marketing
capabilities. Franchising may also include the licensing of IPR such as
trademarks and patents.
- Technology Licensing, which can be subdivided into three broad categories:
- "Hard Technology" Licensing, which usually involves the transfer of
high-tech know-how that may be patented. Typically, multinational corporations
and R&D firms in the IT, pharmaceutical, telecommunication and electronics
industries are involved in this type of licensing.
- Solution/Software Licensing, which is usually granted by software
developers to resellers, system integrators or end-users.
- Soft Technology Licensing, which usually involves the transfer of process
know-how, operating techniques and methodologies that are proven to be
efficient, cost-effective or essential for achieving specific results. It may
be combined with the licensing of hard technology and/or software. Businesses
that have attempted this type of licensing have come from different industries
such as logistics, real estate management, manufacturing, transportation, etc.
Why License?
Licensing opens up the following possibilities for IPR owners:
- Match promising technology with resources needed to bring it to the
market;
- Accelerate the exploitation of technology or market roll-out of
IP-dependent products;
- Harness the licensor's IPR for wider applications, or develop applications
beyond licensor's expertise;
- Circumvent trade barriers or take advantage of free-trade treaties, by
having one's product (which is manufactured under license) exported from
certain countries.
- As a defensive strategy, particularly in the case of technology licensing.
Once a technology becomes accepted as a standard by being a leader in terms of
market share, newcomers will find it hard to roll-out their own technologies
or products based on those technologies;
- Share or shift risk or liability, where third parties provide the risk
capital and are largely responsible for the commercial application for the IPR;
- Provide companies entering joint ventures with a lever to control their
IPR, especially if they are a minority shareholder. For example, a licensor
has the right to mandate certain operating or technical procedures be strictly
followed whereas a minority shareholder may not.
- Avoid or settle litigation, where the party infringing the IPR could be
forced to purchase the license, and in so doing accelerates the exploitation
of the IPR.
From the perspective of the licensee, it is one of the fastest ways to tap
into established and useful intellectual assets to add value to its products or
services, thereby generating better sales or profits. In spite of the fees
payable to the licensor, it could still be one of the cheapest means to achieve
the same goal, without having to "reinvent the wheel" or pay excessive "tuition
fees" for trying out a new venture.
Factors to Consider when Licensing
There are many factors to be taken into consideration before an IP owner
plunges into licensing. The following are just a few of them:
- Decide which rights out of a bundle of rights are to be licensed, eg.
should the entire business system be franchised, or just the right to a
certain component or product within the business;
- Ensure that the IPR have been adequately protected by law before
licensing;
- Have a clear and fair basis for valuing the IPR;
- Have a clear and fair basis for valuing the IPR;
- Seek proper tax advice when structuring the license deal (whenever
licensing takes place on a cross-border basis, international tax laws and
agreements are of importance);
- Beware of laws in countries which might impact the license, eg. law
governing non-competition or confidentiality of know-how. Otherwise, a
licensor may after a certain number of years find that its licensee is
entitled to make use of the IPR without having to pay for it;
- Be careful when defining license territories, especially to parties that
operate in more than one country, so as to avoid conflict arising from
territory overlap.
In an age where a company's market value is determined more by its intangible
assets (incl. human, customer, structural capital as well as IPR) than its
physical ones as seen from the balance sheet, it makes sense for a business to
consider an expansion route that leverages on its intellectual assets. Licensing
can empower a business to do just that with optimal control, and wider
geographical coverage at a quicker pace. However, thorough preparation and
careful execution are important if one wants to succeed.
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