Keeping ahead of the innovation curve is crucial for businesses seeking to grow. Ideally a business will have an R&D function which is able to generate new ideas leading to growth.
However, sometimes external help may be needed to fill a technology gap or open a new market. Licensing technology from a third party can be a much-needed boost.
The technology may sit with an inventor, another company or a university. In order to get access to it you may need to consider negotiating an assignment of the intellectual property or a licence. If you are to take a licence what are the key considerations?
- Is the technology capable of being licensed?
The first issue to consider is whether the technology is protected and therefore capable of being licensed. You do not want to take a license of something that is in fact freely available. Not all intellectual property rights are capable of registration (e.g. trade secrets and copyright), you may therefore need to do some due diligence. Even if the intellectual property is registered you may need to consider how easily someone could slightly adapt it or work around it to achieve the same effect and so defeat your potential advantage.
- Is it worth it?
Will this technology give you sufficient competitive advantage to make a licence worthwhile?
- What is competitive advantage?
This could be novelty or advanced features, access to a new market or client base, or speed to market compared to competitors. Any of these advantages may increase your market share, price, profitability or longevity of the product or service.
- Name the price.
How do you work out what is a fair license fee? Usually the fee will be calculated as a percentage of sales or revenue. It needs to be something that can be checked by means of an audit. The percentage will be negotiated between the parties taking account of the nature of the technology, the bargaining position of the parties and the likely longevity of the competitive advantage it may provide. There are independent consultants who can advise on the appropriate levels of licence fee, often specialising in particular sectors. It could range from a few percent to as much as 20% or more.
It is essential to understand whether you will have an exclusive or non-exclusive licence. If it is exclusive no-one else will have the right to use the technology and you will have the right to enforce rights against third parties. If it is not exclusive this should be reflected in a lower licence fee as it will dilute your competitive advantage.
If the licence relates to registered rights you may seek to tie the term of the licence to the term of the registered right or the next renewal date for it. You need to consider how long you think the technology will give you an advantage as you do not want to be tied into something that has become obsolete.
This will not usually be a consideration if all parties are based in the same jurisdiction – you would choose that jurisdiction. If, however, the parties are in different jurisdictions you may need to try and agree which jurisdiction will apply to the licence agreement or choose a “neutral” one. This will determine what law will apply to the licence and what court will deal with any dispute. Commercially it is often more economic to have the governing law match the jurisdiction. Consider which jurisdiction will be best suited to deal with any dispute either because key parties or witnesses are there, the technology was developed there or that is where the main market is. Ease of enforcement may also be a factor.
It may seem odd to think about how to end a licence before you have even entered into it but it is essential at the outset to consider how you will bring the licence to an end if something goes wrong and who will have what rights at the point of termination. Consider what events may trigger a right on the part of the owner of the technology (the licensor) to terminate the licence and what period of notice may be required. If it centres on default by the licensee, will this be tied to volume or targets and will any penalties be imposed.
Having a checklist of things to consider when contemplating licensing technology can help structure the negotiations so that you can successfully secure a licence and maximise the benefits of the technology, be you the Licensor or the Licensee.