Intellectual Property & Licensing

An Overview Presentation
By Dave Tyrrell, Vertex Intellectual Property Strategies Inc.

1.  Introduction

Often businesses don’t adequately understand the ins and outs of intellectual property. Some areas which are not fully understood include: what intellectual property is, how to protect intellectual property and how to capitalize on this intangible asset. In addition, businesses often don’t have an appreciation of how to incorporate a licensing strategy into their business plan. The licensing discipline and the implications of executing a licensing strategy are not always well understood.

The purpose of this presentation is to provide the audience with:

1.  A understanding of the basics of intellectual property,
2.  An overview of what is involved with the licensing process,
3.  Some insights of the expectations of companies whom are contemplating licensing ventures.

2.  Overview Licensing & Technology Transfer

Licensing is a process that involves the sale and delivery of technology and know-how, the "Intellectual Property Rights”, from its owner, the licensor, to a purchaser, the licensee. The licensor provides the licensee with agreed upon rights to exploit their technology and know-how for which the licensee pays the licensor a royalty. Know-how or business models can be licensed without an accompanying high technology component.

Technology Transfer is the transmission of intellectual property rights, either with or without the concurrent transfer of goods and services.

3. What is Intellectual Property?

In any business, there are tangible assets such as buildings, machinery, office furniture, computers, vehicles and cash. The total value of a successful business is a combination of these tangible values (the identifiable and paid for assets) and an “intangible value” which is often referred to as “goodwill”. Goodwill can consider many factors such as the loyal, competent, trained employees and the market position which the company has developed. Another intangible value which a business possess is its intellectual property. Intellectual property includes patents, trademarks, copyrights, industrial designs, trade secrets and know-how. Each of these aspects will be discussed.

Because intellectual property law is constantly changing and because it varies widely from country to country it is advisable to seek professional counsel before making important intellectual property and licensing business decisions.

A Patent is a grant from the Government which gives an inventor the right to prevent other people from making, using or selling the invention, within the particular country where the patent has issued. To be eligible for a patent, the invention must be novel (first in the world), useful, not obvious to anyone skilled in that particular art and useful. An invention is a new and useful process, machine, product, or composition of matter, or any new and useful improvement of the same. In other words, to be eligible for a patent, you must have a physical embodiment of your idea. Inventions are often patented in many countries when the technologies has global business potential. Systems such as PCT (Patent Cooperation Treaty, which includes China) and EPO (European Patent Office) can be utilized to obtain patents in additional countries. The Chinese patent system has many similarities to the Canadian system.

The value of a patent rests in exclusive positions where the patent holder is able to exclude competitors from utilizing the technology described in the patent. Alternatively the patent holder can license its patent rights to others for a fee, thus creating value.

A Trademark is a word, design, or a combination of them, used by a trader to distinguish his or her goods or services from those of others. Trademarks include brand names, for identifying goods, service marks for identifying services and certification marks for identifying goods of services that meet a certain quality.

A trademark does not have to be registered. However, registration provides important benefits. The owner of a registered trademark is given the exclusive right to the use of the mark across the entire country in which the mark was registered. Registration is the strongest form of protection available. Without a registration protection is available only locally through Common Law and such rights are difficult to defend. A second important benefit of trademark registration is that the Trade Marks Office will not allow subsequent registrations of any trade mark that is confusingly similar.

Industrial Design registration is available in Canada. This is the equivalent to an Industrial Design Patent in the US. Industrial design protection is used to prevent competitors from using the specific shape, or ornamentation or pattern used on a manufactured item. In Canada, such protection applies for 10 years and in the US 14 years of protection is available.

A Copyright allows an author to be the only person who may copy his or her own work, or give permission for someone else to do so. You cannot copyright an idea, but a copyright exists the moment a physical expression in the form of: written text (book, poem, article, report etc.), computer program, musical score, sculpture, or painting; is created. Although it is not necessary to register a copyright, there are benefits from doing so. A certificate of registration can be used in court to establish ownership.

A Trade Secret is an unpatented: formula, process, device, pattern, compilation of information, which is known by a limited number of individuals and provides some form of competitive advantage. Care must be taken by the holders of a trade secret to safeguard its existence through employment contracts and other means. Also, there is a danger in not patenting a trade secret in that another person can independently invent the subject matter of the trade secret and then secure a patent.

Know-How applies to a broader scope or knowledge than trade secrets. Know-How includes a combination of trade secrets and knowledge which is publicly available.

4. Licensing Compared to Other Business Options

Businesses wanting to expand internationally have several potential options to consider:

1.  Produce locally and export,
2.  Expand current operations or set up a subsidiary business in foreign countries,
3.  Find a joint-venture partner to develop a new business in foreign countries,
4.  License the technology and know-how to a company in foreign countries.

Each of these options has major implications on the capital and personnel required, market accessibility and speed to access the marketplace and risks / rewards.

5.  Why Companies License their Technology & Know-How

Before embarking on a licensing business strategy it is essential to assess whether or not licensing is the most desirable business option. The potential for licensing needs to be evaluated and compared to benefits and risks of alternative approaches. When evaluating the merits of a licensing strategy, some factors favouring licensing include situations where it is desirable to:

1.  Reduce the investment needed to access the marketplace,
2.  Accelerate market introduction,
3.  Minimize inventor's potential liability,
4.  Acquire specific capabilities such as manufacturing, sales and distribution or business management,
5.  Limit time commitment,
6.  Access markets otherwise inaccessible due to shipping restrictions or lack of a distribution system. (This is the primary reason that Canadian and North American companies would be interested in licensing Chinese companies).

The key to a successful license arrangement is to establish a strong fit between licensee’s and licensor’s business objectives and capabilities. Suitable licensees will need to be able to integrate their business plan with that of the licensor. In addition they will possess capabilities complementary to the licensor’s capabilities. Some typical licensee strengths which licensors look for include:

1.  Manufacturing capabilities,
2.  Established distribution channels,
3.  Business management skills.

6.  Technology Valuation

When entering a license agreement, one of the most challenging questions to address is: What is the Technology Worth? Some key factors to consider when valuing technology for licensing include:

1.  Fit with licensee's business plan: projected profitable to the licensee, return on investment, volume, pricing, market share, etc.,
2.  Investment required,
3.  Marketability / market potential: size, distinctiveness of the niche, uniqueness, demand for products produced,
4.  What price will the market bear for the products of the technology,
5.  Margin for the business / industry,
6.  Patent aspects: scope of protection provided by licensor, can patents and trade secrets be easily circumvented and the projected cost to enforce patents and trade secrets,
7.  Exclusivity provisions,
8.  Cost for the licensee to develop their own product: time, quality, risk, potential infringements, potential prosecution of non-disclosures.

License payments or fees are generally in the form of an initial payment or a running royalty or a combination of both. The license should be evaluated based on the present value of the initial payment and projected royalty stream. The evaluation should not be done from a cost of investment and technology development perspective.

A rule of thumb often used when setting royalty rates is that the division of profits or the sharing of cost saving between a licensor and a licensee is in the range of 20% to 50% for the licensor, 50% to 80% for the licensee. Royalties rates typically run at 2% to 10% of gross sales. The higher levels generally apply to the newer and highly differentiated technologies where high profit margins can be generated by the licensee. All components of a License Agreement dealt with during the license negotiation process will have an impact on the fee schedule.

7. Components of a License Agreement

Licensing agreements require creativity. Some of the key points to address during the negotiation of a license agreement include:

1.  Scope of intellectual property rights -technology and products of technology to be produce, used, sold, etc.,
2.  Patent, trademarks and copyright rights - what patents / trademarks and which countries,
3.  Field of use and market restrictions,
4.  Territory of use,
5.  Exclusive, non-exclusive or sole,
6.  Terms of payment - must be measurable and must consider tax implications such as foreign country withholding taxes and monetary transfer policies,
7.  Technology transfer procedure process & timing,
8.  Termination provisions.

8. Expectations of North American Licensors

North American companies seeking to expand internationally and embark on a licensing partnership venture, have the following expectations and views:

1.  Business plans of licensor and licensee need to be compatible. Under these circumstances technology licensing can be a valuable option in a strategic / business plan and can prove to be a powerful tool for global business participation.

2.  A Licensor / Licensee relationship is one of a business partnership rather that the traditional supplier / customer relationship. This relationship must focus on WIN - WIN results. License agreements are not for those who operate with a loophole mentality.

3.  In addition to being positioned maximize the value of the licensor’s technology, licensees must be reputable and committed to complying with all of the terms of the license agreement. The licensor needs to have confidence that the royalties which are due from the licensee will be paid and that all other licensee obligations are met.

4.  Licensors need to know that their technology assets are being properly applied and adequately protected. There is a preference to embark on licensing venture in countries where the patent and trademark legislation is strong and where remedy for patent or trademark infringement exists.

5.  Licensors and licensees need to work together where possible to assure business success. Once a technology is licensed, there will lots of follow-up work is required by both parties.

115 Brentwood Rd. N.,
Toronto, Ontario
Canada M8X 2C7
Tel : 416-239-7779
Fax : 416-239-5707

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