It is a universal truth, seldom acknowledged, that it is far easier to take a good idea and develop it than to come up with the idea in the first place. In today’s business environment, successful companies must have the policies and strategies in place to harness, exploit and protect their technology assets swiftly and cost-efficiently to secure and maintain competitive advantage. As part of this process, companies are increasingly looking for revenue streams that do not impact on their ownership of those assets, and licensing agreements can satisfy this need.
Under a licensing agreement, the owner of the technology retains ownership and gives a defined right to a licensee to use that technology. This has to be profitable for both licensor and licensee. Licensing can promote a more effective transfer of technology, exploit and generate synergies, and foster entrepreneurship and business development, bringing opportunities for individual wealth creation and in turn national economic growth.
With advances in technology, marketing and the scale of consumer awareness, most ideas and products have a relatively limited shelf-life and businesses cannot afford the time to grow themselves organically; the speed of product development is now three times what it was 20 years ago. A licensing agreement is an excellent way of introducing a new product or entering a new market quickly and cheaply, by allowing those with local knowledge and skills to adapt the product to the vagaries of a local market. Such a course has less financial and legal risk attached to it than say starting up a foreign manufacturing plant, acquiring an existing company or entering into a joint venture or other partnership arrangement, and testing the local market, and avoids many of the delays inherent in those processes. Licensing is therefore a particularly attractive strategy for small and medium-sized businesses, who need to exploit their ideas or products rapidly, before a market is saturated or competitors catch up, but may lack the capital to do so.
For a licensee there are also substantial benefits. It gets to use the licensor’s technology without the R&D spend, but it can bring its knowledge of the market and customer base to the negotiating table which it can use to exploit the technology in ways the licensor had never thought of. Technology which has become obsolete in one market may well be exploitable and therefore licensable in another.
For many companies, whether as licensor or licensee, a licensing agreement provides a legitimate means of overcoming import and export controls and for this reason is a tool often used by US companies aiming at European markets. Even internal licensing between inter-group R&D and marketing and sales companies may offer tax and other advantages.
Technology licensing is not confined to the manufacturing sector; many of the more service orientated industries are increasingly making use of the opportunities available through franchising arrangements - allowing the licensee to attach its trade or service marks or designs to a particular product or service.
Whether licensing high end technology or in the life sciences sector the licensor will be keen to protect its potentially valuable IP rights to the maximum extent possible contractually, and the licensee will need to be sufficiently incentivised to make it worth his while to develop markets for the technology. An effective licensing strategy must recognise both the common as well as the conflicting needs and desires of both licensor and licensee and strike the right balance between the two. It must also recognise the practical and legal restrictions which both parties will be under, and especially the impact of< competition rules.
One of the main obstacles to achieving business aims in technology licensing in Europe has traditionally been competition law concerns - there has always been an uneasy relationship between the two. In the past EU competition policies have generally imposed more limits than the US on the commercialisation and licensing of IP rights. However recent changes to the Technology Transfer Block Exemption (TTBE) and related guidelines have brought Europe more in line with US philosophy and antitrust laws and represent a significant shift in the approach taken by the European Commission to technology licensing, broadening coverage to patents, know-how, design right and software copyright licensing. The new policy is based more on an assessment of market economics than analytical legal approach. These changes have brought additional opportunities and responsibilities and it is therefore essential to understand and cater for the impact of the new rules as part of an effective licensing strategy whether offensively or defensively.
As of November 1, 2005, the new rules apply to all licence agreements, whether new or pre-existing. The rules have applied to all agreements entered into since May 1, 2004 but provided for a transition period within which licences already in force at that date had to be brought into compliance. That period expired on October 31, 2005. After this date all agreements must comply with the TTBE and those companies which have not yet reviewed and amended their agreements in light of the new regime could find themselves significantly exposed to loss of revenue if an agreement was found to be ineffective.
Perhaps somewhat surprisingly, the commission is now getting business to do their own dirty work. One of the major changes is that the initial assessment of anti-competitive behaviour now falls onto companies themselves; the notification procedure no longer exists. So the first time that parties to a licensing agreement may know that they have fallen foul of the new competition rules is when their licence is challenged before the courts or competition authorities. Indeed, the rules now entitle those affected to bring a civil action for damages as well as the more usual action to have the licence declared invalid. Given the importance of compliance with the new rules, some key features are outlined below:
- Competitors and non-competitors
The rules differ slightly for license agreements between parties who are classed as competitors and between those classed as non-competitors. The rules for agreements between competitors are more stringent, as those agreements are thought to pose more of a risk than agreements between non-competitors. The status of a company as a competitor or non-competitor is to be assessed by reference to relevant technologies and/or relevant product markets; while this is not always easy to judge, where an undertaking owns patented technology but requires a license from another undertaking to exploit that technology the two will not be considered competitors.
- Market Share Test
Licence agreements between competitors will fall within the exemption if the parties have a combined market share not greater than 20 percent of relevant technology and/or product markets; for agreements between non-competitors the combined market share must be not greater than 30 percent.
- Hardcore Restrictions
The licence agreement must not include certain types of restrictions if it is to fall within the TTBE. For licences between competitors, these can include price restrictions, restrictions on output or sales, restrictions on field of use and restrictions on a party’s exploitation of its own technology. For licences between non-competitors, these can include price restrictions, restriction on sales territory; restrictions on sales to end users; and restrictions on carrying out R&D.
Certain types of provisions will fall outside the TTBE automatically - a requirement on the licensee to assign or exclusively licence back severable improvements or new applications of the technology; no-challenge clauses; and output restrictions in a non-reciprocal agreement between competitors.
The recent and prospective increases in membership of the EU may also have an impact on whether licences now fall within the TTBE. Existing pricing strategies may cause problems if the prices already charged in the existing countries are higher than in some of the new member states. It may be harder for companies in a dominant market position to justify such price differentials if the company is accused of anti-competitive practices.
Properly understood and properly crafted, licensing agreements can be a very effective and successful way of exploiting and protecting technology rights for limited capital expenditure or commitment. But companies need to be fully aware of the competition angle associated with licensing in Europe and the new TTBE particularly given that the transition period expired on October 31, 2005. As the revenue obtained from technology licensing increases, and with the main non-US licensing markets being in Europe and Asia, so does the need to protect the underlying IP. Most companies will have some form of protection and licensing compliance program in place but given the rapid recent growth and no likelihood of this slowing down it might just be time to undertake that long overdue review.
This article first appeared in the November/December 2005 issue of European CEO.