LICENSING AND FRANCHISING; FUNDAMENTALS

Tamara Nanayakkara

Outline

Challenge to businesses – how to keep growing in a slowing economy; Importance of finding new ways of generating income

Thinking of intellectual property as assets Licensing (and Franchising), strategic use

of these assets Negotiating

Economic Growth

Traditionally, economic winners were those who had natural resources.Scarce=assumption of finite growth.

Resources down or constant, population up. But growth up!?

New Economy

Reason the “new economy”. Knowledge making more effective use of resources - 1950 knowledge component in manufactured goods 20%, 1990s 70%

Application of knowledge, key to competitiveness

The IP System

Provides a legal means for protecting creativity and knowledge; patents, TM, copyrights, design rights etc provide the creator the means to prevent others from using his knowledge/creativity

Ensures the continued production of knowledge and its dissemination

IP Assets

By providing such protection the IP system gives more than the right to prevent others but in fact creates valuable tradable (intangible) assets.

Licensing

Licensing is when an owner of such an intangible asset, transfers the right to use that asset to another, for a price, while retaining ownership of that asset.

In practice, the owner of technology protected by patents or trade secrets or both gives another the right to use that technology to manufacture given product(s)

Licensing of IPR

Licensing is only relevant where there is an intellectual property right

Territorial nature of IPR If the technology (or other kind of

expression of human creativity) is not protected by an IPR, it is then not property owned by someone and as such the issue of licensing does not arise.

Why License For the Licensor

Simultaneous use by many

Expand manufacturing

Earn revenue Access to markets Stick licensing Create standard Cross license

For the Licensee Stay current in evolving

market No in-house R&D, yet

access to technologies Expand into new product

line Settle dispute Manufacture standardized

product Access to patent, know-

how, training

Why Not License

For the licensor Create competitor Bad choice of licensee

could damage reputation

Lose control of proprietary information

Administrative cost Legal complications

For the Licensee Royalties add cost Secrecy requirements Administrative burdens

- audits, reports etc May be obliged to

grant back improvements

Negotiationyou don’t get the deal you

deserve but you get the deal you negotiate

Preparation - information gathering

General information on the relevant market Companies active in that market and their

products Existing technologies used by such companies On going R&D about relevant technologies Prevalent licensing practices in the relevant

markets and products

Preparation - sources of information

Publicly available information of publicly traded companies.

Online and subscription database services for the relevant market or products

Trade publications, trade and technology exhibitions, fairs and shows

Technology licensing offices of research based universities

Relevant government departments

Professional and business magazines, journals and publications concerning the relevant products and markets

Professional and business associations

Technology exchanges, Innovation centres Patent information services

Preparation - Patent Information

Patent information is the collection of patent documents consisting of patent applications and grants worldwide.

For technologies that are patented it is the most useful yet the least utilized it is the most recent, gives the legal status,

information on technological activity (possible alternatives) and those involved in such technological activity

Preparation

Analyze your strengths and weaknesses

Identify your team leader supported by financial, legal and

technical people Prepare summary of key issues

(Heads of Agreement, Term Sheet)

The Agreement – who, what Parties - who will be bound by it Subject matter - what exactly is being

licensed

The Agreement - Extent

Exclusive, non exclusive or sole (licensor and licensee can operate in the territory)

Sub licenses – must be expressly granted Field of use – technology divided Scope - make, use or sell, offer for sale, import Territory Improvements

The Agreement - Financial

Lump sum - payable on the happening of a particular event

Royalties - recurring payments tied to the use of the technology, commonly based on sales. Could go down as production goes up (fixed price per unit or % of sales)

Annual minimum royalty - usually where the license is exclusive and the licensor needs to ensure a regular income.

The Agreement

Dispute settlement - Increasingly parties opt for alternative dispute resolution procedures, such as arbitration and mediation, or mediation followed by arbitration.

Termination - either on the happening of an event such as the expiry of the patent or on termination by one of the parties

The Agreement

Clauses to pay attention to - grant back provisions (obliging licensee to give improvements to licensor), post termination use of know how, price and volume fixation by the licensor, tie in clauses (obliging licensee to take other technology that he does not need)

Nothing is cast in stoneEverything is negotiable

Golden Rule

Aim for win-win outcome

Trade Mark License A license giving the right to manufacture a particular

product using the licensors technology may also include an agreement to use the licensors trademark. It may also be only a trademark license agreement

In either case in addition to the general clauses above there may be clauses particularly relevant to trademark license agreements

Particularly quality control – products must meet the quality standards set by the licensee, submit samples of products, labels, packaging etc for checking

Franchise A specialized license where the franchisee is

allowed by the franchisor in return for a fee to use a particular business model and is licensed a bundle of IP rights (TM, service marks, patents, trade secrets, copyrighted works…) and supported by training, technical support and mentoring

All franchisees are licensees but not all licensees are franchisees

Both the franchisor and the franchisee share the overall aims and goals of the franchise and work for their mutual benefit

The franchisor maintains and updates the manuals, procedures and practices of the business model and trains and assists the franchisee in its use and implementation

The franchisee maintains and promote the franchise and conducts the business as prescribed in the manuals and guidelines, including protecting the IP of the franchise system, and to operate in accordance with territorial or geographical obligations agreed

The franchisee has the obligation to pay the agreed fees.

Why enter into a Franchise Self employed Lower risk of failure

Recognisable image On going support Easier to obtain financing Benefit from franchisors R&D Ready made customer base

Why not enter into a Franchise All IPR owned by the

Franchisor Payment of fees Obliged to follow the

business model Innovations may be

assigned back to the Franchisor

Depend on the success of the Franchisor

Summary To survive and flourish in the global business

environment where competition is acute and product cycles are short, business have to find new ways of being competitive.

Identifying IP assets and strategically using and leveraging them is crucial in this environment.

Licensing is an efficient way of maximizing IP assets