• home

    Negotiating Technology Licensing Agreements


    © International Trade Centre, International Trade Forum - Issue 4/2002

    For small companies, it is often cheaper to license existing technology for making better products than to research more efficient technologies themselves.

    by Tamara Nanayakkara

    For small and medium-sized enterprises with limited resources or for individual inventors reluctant to go it alone, licensing technology can mean a "win-win" situation when the terms are negotiated with the interests of all parties in mind.

    Using or adapting existing technologies, new ideas or solutions that have already been generated elsewhere can help companies produce better-quality products or services at a lower cost. It makes good business sense, particularly for small and medium-sized enterprises whose resources are limited, to either buy such technology or negotiate a licence for its use rather than invest in developing a tailor-made solution. Likewise, for a company that has developed a better product or manufacturing process, selling or licensing that knowledge could translate into additional income. Individual inventors, too, lacking the necessary capital and/or commercial know-how, can benefit from entering into agreements with companies to help them commercialize their idea.

    Sell or license?

    When technology is sold or "assigned", the ownership rights for the technology pass from seller to buyer for an agreed price. For a technology owner who has no experience in bringing a product to market, finding a buyer and completing the transaction in one go might be ideal. If, however, he or she prefers to license the technology, then the right to use the technology is passed from the technology owner - known as the licensor - to the licensee. The manner in which the technology will be used, for how long and in what region or area will be determined by the terms negotiated in the licensing agreement. Unlike a sale, the licensor continues to own the technology and could maintain control over manufacture and sales and may license the technology to as many companies as desired.

    A long-term partnership

    Entering into a licensing agreement is to enter into a partnership, a continuing relationship where licensor and licensee work together to maximize their mutual profit. Assuming that the partnership is successful, both parties will profit from the product's success in the market. The most common reasons for a licensor to enter into a licensing agreement are to benefit from the better manufacturing capacity, wider distribution outlets, greater local knowledge and management expertise of the licensee. Therefore, the licensor may, through the licensee, expand into markets more effectively and with greater ease than would have been possible if he had tried to do so on his own. The licensee will benefit from superior technology enabling it to produce better-quality products, or cut costs and improve efficiency.

    Licensing agreements cover as many elements as the parties wish. To achieve a "win-win" deal, it must work for the benefit of both the licensor and licensee and their interests must not compete. Deciding on the payment structure (the royalty rate, time frame and incentives for maximizing profits), geographical area in which the licensee may operate, exclusivity of licensee, rights to improvements to the technology, etc., are among many factors that will be put forward for discussion. A willingness to be flexible and find alternatives in a possible stalemate situation will go a long way in arriving at a mutually satisfying and profitable partnership.

    Tamara Nanayakkara is Senior Programme Officer in the Least-Developed Countries Unit at the World Intellectual Property Organization (WIPO). This article draws from the joint WIPO/ITC publication, Negotiating Technology Licences, to be released in 2003, containing case studies, sample clauses and contracts as well as basic rules and useful tips. For more information about the guide, contact Ms. Nanayakkara at tamara.nanayakkara@wipo.int or Jean-François Bourque, ITC Senior Adviser on Legal Aspects of International Trade, at bourque@intracen.org