An Introduction to Licensing by Terry Enga*
Based on an article by Terry Enga Technology Transfer Licensing - Bringing ideas to market that was published in International Gas Engineering and Management December 2003 Volume 43 Issue 10
Technology transfer licensing can generate huge profits for some intellectual property owners. Realistically, most technology licensing is a more modest affair. Sadly a great deal of potentially valuable technology is never properly commercialised. This introduction tries to give a basic overview of technology licensing by asking six simple questions. It does not try to provide standard licence terms nor cover the content of any particular licence agreement.
An Introduction to Licensing tries to provide a basic insight into some of the questions relating to Technology Transfer Licensing. It does not attempt to write a one size fits all technology transfer licence agreement. It is not specific to a particular type of intellectual property (IP), nor a particular technology or market.
These six simple questions are used here to explore technology licensing.
Why? What? Who? Where? When? and What for?
Why?
Intellectual property (IP) can be valuable. In 2001, American Universities generated nearly US $1.1 billion in gross licence income and their running royalties on product sales made $850 million (Association of University Technology Managers, 2001 AUTM Licensing Survey www.autm.net ). While in the UK, survey results from 125 UK universities for 2002, show there was a significant increase in licensing activity from previous years and an increase in income generated from the licensing of university IP. Licensing activity increased relative to spinout formation as the prevalent route for research commercialisation. 1616 active licence deals were in place of which 635 generated income of some £22.4 million. (Nottingham University Business School, Annual Survey on University Technology Transfer Activities, Financial Year 2002.
http://www.isis-innovation.com/about/news/annualsurvey-nov03.html )
Also, according to Universities UK, university research income from business was 12.3% compared to 10.1% in the US and the research expenditure per spin-out company was £8.6 million in the UK compared to £53.1 million in the US (http://www.universitiesuk.ac.uk/bookshop/downloads/knowledgetransfer.pdf)
Of course some patents are more profitable than others. The Cohen/Boyer Cloning Patent for recombinant DNA cloning or gene splicing, ultimately realised about $300 million in revenues (the George Washington University Law School, Alumni Gallery www.law.gwu.edu/tech/alumgallery.asp )
You own IP. Maybe you have used and proved your technology for the direct benefit of your company’s products and services. However, there may be more value outside your company that is lying untapped. You want to maximise your return on the development you have made. Perhaps, you cannot take on the whole world by yourself and are running out of time (for your patents, or perhaps other technology is overtaking yours). Your company wants to support this technology transfer. You want to raise your profile and you may also want to foster strategic partners.
What?
Your IP could be in patents, trade marks whether registered or unregistered, or copyright, know how, registered design, or unregistered design. It could be for something tangible or a method for doing something. You need to be the owner or have the ownership assigned to you from the creator. The IP needs to be in date, preferably with a reasonable time left to allow for exploitation.
Who?
This should be the person or company you wish to license to. They may be a company able to bring additional technology to add to yours and make a better product. They may have an established market position in a territory or market sector that you are weaker in. They may have greater resources to further develop your IP. There could be further competitive advantages. They could be an infringer of your IP.
Whoever they are, ultimately they need to see as much advantage in licensing your technology as you do and they need to recognise the benefits of working with you in particular. Technology Licensing is very much about relationship building and to last, it must be a Win-Win situation. At this stage you should know if you are offering exclusive rights, sole rights or non-exclusive rights and the laws and directives you need to take into account.
Where?
This could be a different market sector, or territory. It could be an add-on to another product that will gain added value by utilising your IP. It could be overseas, with all the additional factors of custom and culture to contend with.
Where should the payments under this Licence be made? It’s vital that everyone’s contact details are up to date. Big companies have several accounts with the same name and incorrectly banked funds are not always easy to trace.
When?
Is your IP ready for market, or does it need additional development work after the technology has been transferred? This will greatly affect the value of your IP regarding technology transfer and your choice of recipient company.
How often will the parties of the Licence need to meet? This reflects both the level of support you will need to provide during the technology transfer process and your confidence in how the process progresses.
What is the duration of the Licence? This should reflect the time needed to recoup any costs incurred by yourself and the recipient and the length of time left to run on the IP. However, you may not wish to be locked into a licence deal that offers low returns if better prospects develop.
How often will payments be made? This ought to be by mutual agreement.
What for?
OK mostly for money, but occasionally for goods or services in kind. Sometimes for free (where some other benefit accrues e.g. safety or welfare matters). Of course this needs to take account of inflation, exchange rates and the value of the technology being licensed over time. Where money is involved there is potential for conflict, for instance when royalty payments are not made or when either party is in some form of business difficulty.
It is absolutely vital to ensure that you think out the terms and conditions of the licence agreement thoroughly before you proceed. You should take note of every possible contingency however unlikely and examine every way royalties could be levied to determine which method gives you the maximum return. This is of particular importance when the strength and depth of the relationship you have built up with the third party is put to the test and when after the agreement is operative you come to review the nature and extent of the royalty payments you receive. You may find the royalties disappointing after all the work you have put in, but in fact a little extra thought in constructing the agreement might have radically altered the position. An example of how this latter can impact on royalty returns relates to the licence which a third party gave to Procter and Gamble (P and G) for permitting P and G to add stannous fluoride to P and G's fluoride toothpaste. The third party negotiated the licence on the basis of the value of the additive and not on the total value of the toothpaste as they should have done. As the cost of the additive was only a miniscule fraction of the sales price of the toothpaste the third party probably received only 4% or so of what they could have done if the royalties had been paid on the toothpaste (The Scientist 2 [23]:4 Dec 12, 1988). A similar situation may have arisen in relation to anti-knock petrol additives where the licensor charged royalties on the basis of the cost of the cheap additive and not on the price of the much more expensive petrol.
And?
There is always an “And”. These relationships are worth more than money alone or the technology that originally created them. You have created a relationship originally based on mutual benefit around one particular piece of IP or technology. Where do you turn for your next technology licence? Where do you and they look first for technical solutions? In addition by licensing your technology you gather market intelligence, customer feedback and new product ideas across a much wider range than you could obtain on your own. However these relationships formed or developed, whether by stick or carrot, what you put in determines very much what you get out.
The gas industry has a fine record of successful technology licensing and there are many examples of long lasting and mutually beneficial licences. Perhaps the most successful of these has been in the area of No Dig technology where some hundreds of licences have been granted to use patented technology throughout the world. One of these, Swagelining, is a process where a tight fitting polyethylene liner is inserted inside new or existing pipelines to rehabilitate existing pipeline or protect new lines from internal corrosion or abrasion. Swagelining has been applied to well over 1 million meters of oilfield, water, process and gas pressure pipes worldwide by licensed contractors. Further information about Swagelining is on this website.
Are you ready for Technology Transfer?
Technology Transfer - Royalty Reality