The Benefits of Developing a Licensing Business

Among the many reasons why companies should consider developing a licensing business, the most obvious is to increase profits.  This in turn creates a larger return on a company’s investment in research for new technology.  However, there are other important, but less obvious, reasons why licensing is a smart business strategy. 

            By licensing technology it’s possible to gain improvements on that technology for little or no additional cost.  With the use of a grant-back provision in a license agreement, the licensor can obtain the right to use improvements developed by the licensee.  This can be of great value if the licensor intends to eventually make or use the licensed technology.

            Another benefit is that a company can potentially take market share away from a global competitor in new, untapped markets.  By licensing technology to other shared competitors, a company can decrease one firm’s stronghold on a particular market without having to invest capital.  The company also receives profits on its technology from the licensing fees.     

            Building strong business relationships between the licensor and its licensees, and broadening the skills of company personnel are often overlooked benefits of licensing.  Scientists and engineers will be intimately involved with providing information for technical presentations to potential licensees, or even assisting in making the presentations.  There are numerous benefits to this, including:

• A chance for technical personnel to develop or hone presentation skills;
• Technical personnel involved in the technology transfer expand their normal job specifications; and
• Technical personnel will be exposed to business matters and related decisions, providing them with insight into which technical areas need the most attention.

Implementing the Licensing Program

            To successfully implement a licensing business, senior management must realize that licensing is a business growth opportunity, and recognize that personnel and financial resources will be needed to create a successful program.  Here are some key steps for success: 

1. Utilize the skills of intellectual property professionals, technical and marketing personnel, and appoint a dedicated manager.
2. Support licensing your technology to a competitor if the technology is more profitable than the exclusionary value.
3. View intellectual property as a business tool and not a prized possession.

            The culture of many companies is to keep technology they developed to themselves, even if they are not utilizing it.  This mindset must change for a licensing business to be successful, and must be rooted in management philosophy. Similarly, management should implement a protocol whereby new technology is presumed to remain within the company for a set time period, during which a licensing team would have the burden of showing why the technology should be licensed. Ultimately, after the set time period expires, the presumption would be that the technology should be licensed unless it’s proven the exclusionary value is greater.

Roles of the Licensing Team Members

            From the outset, a company’s intellectual property professionals must always consider the possibility of licensing the technology when they are drafting, filing and prosecuting patents.  They must also be proficient in writing and negotiating license agreements to extract the most value from the technology for the company.  Other key roles for intellectual property professionals in this process include:

• Advising licensors on the freedom to practice the licensed technology without infringing on any valid patents;
• Using the freedom to practice opinion to draft appropriate indemnity, warranty or lack of knowledge provisions of the license agreement; and
• Monitoring patent publications to ensure the company remains at the forefront of technology.

            Success in a licensing business will also depend on dedicated marketing professionals, who must understand the technology since they will seek out and meet with potential licensees.  Above them, a company needs a manager with business experience and preferably a technical background, to evaluate and understand if a technology has more value as an asset to be licensed to third parties, or by using the asset to exclude third parties from competing with the company in a particular market.

Defining Potential Licensees

            When seeking out potential licensees, a licensor should look to competitors, manufacturers of related products and companies looking to enter a particular market.  In all cases, the licensor should seek a licensee of sufficient size and financial strength to reduce the risk of entering into a non-productive license agreement.  Possible risks of licensing that should be fully considered include:

• Whether the licensee can afford to make royalty payments;
• Indemnification liability in allowing the licensee to practice the technology;
• Loss of goodwill in an associated trademark if the licensee is marketing the product under the licensor’s mark; and
• Whether the licensee is the best candidate for bringing the technology to market.

            For a licensing arrangement to work, the opportunity must be profitable for both the licensor and the licensee.  Typically the return to the licensor is 25 percent of the value of the technology to the licensee.  However, returns to the licensor do not necessarily have to be monetary.  Some examples include:

• A licensor may instead opt to acquire an equity interest in the licensee.
• Through the use of grant-back licenses, the licensor can use improvements the licensee makes to the technology.
• A licensor may obtain a cross license to use the licensee’s proprietary technology, giving the licensor additional know-how or other exclusionary or use rights.

Other Points to Consider

            There are many factors and some key questions that should be considered before entering into a licensing agreement:

1. What exactly is being licensed – i.e. what is the technology? 
2. What rights are being granted – the right to make, use, sell, or combinations thereof? 
3. Where is the licensee allowed to exercise the rights granted under the license – in one area, around the world, in one plant, in all plants, etc.? 
4. How long should the license last?
5. What happens in case of a default in payments? 
6. How much help will the licensor provide, and at whose expense will it be provided? 

            For a licensing business to be successful, all of these things need to be addressed for each executed agreement.

Setting the Policy

            For a company just beginning a licensing practice, a set of protocols and practices should be set in place. They should include:

• Determining initial opportunities by brainstorming with senior scientists, engineers and intellectual property professionals;
• Evaluating and ranking the strength of the intellectual opportunity;
• Evaluating the risks of practicing each particular technology by obtaining a freedom to operate opinion, which should be updated throughout the term of the agreement;
• Consulting with business managers, technical and marketing personnel to determine potential licensees once technology and risk have been assessed.  This should be followed on a continual basis to detect new licensing opportunities;
• Completing a marketing plan, including advertisements, public announcements, seminar and sales presentations, and detailed technology presentations.  A proposed licensing agreement should be included; and
• Creating a licensing team, including a dedicated manager, marketing and technical personnel, along with dedicated support services from corporate intellectual property and accounting professionals.

            A successful team will be one that works as a unit, keeping all aspects of the business in mind at all times.

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            Timothy Krogh is an intellectual property attorney at Fay Sharpe (www.FaySharpe.com), and Shaun Fox is a May 2007 JD Candidate at the University of Akron.  Fay Sharpe is a leading Midwest law firm devoted solely to intellectual property law, with IP attorneys, technical consultants, and a worldwide network of intellectual property resources covering biotechnology, chemistry, engineering, physics, computer science and virtually every technology in between.

The authors would like to give special thanks to the following people for providing their insights from their past experiences in the preparation of this article:  Dick Minnich of Fay Sharpe; Jon Wood of Bridgestone Americas Holding, Inc.; and Allen Richmond of Hovey & Williams.

The opinions expressed in this article are solely the current opinions of the authors, and not necessarily those of Fay Sharpe LLP; any of its other attorneys or agents; any of its clients, past, present, and future; and not necessarily the future opinions of the authors.