Technology Licensing is a contractual arrangement in which the licensor’s Intellectual Property (IP) such as, patents, trademarks, service marks, copyrights, trade secrets, or other intellectual property may be transferred to a licensee for a specified period of time. A Licensing Agreement involves two main parties, namely the licensor (party that owns concerned IP) and a licensee (party that enters into contract to use IP). The consideration in the form of royalty is one of the important clauses to be finalised before executing the license agreement between the parties involved.
Technology Licensing is an essential tool for companies that are smaller in size, or do not have the R&D resources that their competitors possess, to stay relevant in a particular industry. In such cases, licensing helps them to close the gap with their competitors by allowing them to gain access to the resources and innovations that they need[1].
Difference between License and Assignment
Licensing and Assignment are different modes of technology transfer. Assignment is when the assets or IP is permanently transferred by the owner (i.e. assignor) to the buyer of the IP (i.e. assignee), by way of sale or transfer. This results in a one-time payment of consideration or a lump sum payment of royalty for the IP, by the assignee. The assignor transfers all rights, including title over the asset, to the assignee.
Licensing on the other hand involves the owner of the intellectual property (i.e. licensor) permitting the a third party including company or an organisation (i.e. licensee) to use the IP as per the terms of a licensing agreement, while maintaining ownership, resulting in continued earnings in the form of a licensing fee.
Technology Licensing can be done in the following different ways:
- Licensing
- Assignment
- Joint venture (JV)
As mentioned earlier, licensing is an act of providing authorization by the licensor to a third party to use the licensed asset, as per the terms and conditions of the licensing agreement. A License Agreement is important as it enables the patent holder to provide the required permissions for an entity with the resources to bring his ideas to fruition.
An assignment is when the licensor transfers wholly, or in part, their right, title and interest in their technology.
In a JV, a new JV Company is formed and the requisite assets such as the patented technology are either licensed or transferred to this JV. Both companies contribute assets to such a venture, and the company giving the technology is both licensor and licensee in this case.
The licensor agrees to transfer his rights of the patented intellectual property that they developed, for a duration determined by the license agreement. During this time, the licensee is entitled to benefits and has rights to the patent’s interest. A patent license must be in writing to be legitimate, according to Section 68 of the Patent Act[2] . It was in the case of PVR Pictures Ltd. v. Studio 18[3], that the Delhi HC held that term sheet agreement shall not amount to a license agreement. A licence agreement can aid in the development of a mutually beneficial commercial partnership. Unlike, when a patent is sold or transferred to another party, the licensor retains ownership of the patented innovation.
Technology Licensing enables an organisation or any other party to utilise some technology that may otherwise be protected by intellectual property safeguards, such as a patent, copyright, etc.
Why should one license? There are notable benefits of doing so. Firstly, in the case of licensing, there is very little requirement of coordination between the two parties, and is similar to a commercial transaction involving a buyer and a seller. Secondly, the licensees can determine what technologies they want to license before paying for it, saving them money that would have otherwise gone into R&D. Thirdly, the transaction is instantaneous, which gives the company control over the technology much faster than if they were to develop it in-house.
In a Technology Transfer, the assets that get transferred include know how, methods, techniques, products etc, along with registered IP, such as, patent, copyright, design, trademark etc. Payment may be in the form of a lump-sum royalty, a running royalty (depending on volume of production), or a combination of both.
A Technology Transfer (TT) agreement may be:
- Exclusive
- Non-exclusive
Exclusive Licensing: The licensee has an exclusive right to use the IP, as per the terms of the licensing agreement. This agreement is such that even the licensor is not allowed to use the licensed asset for the duration as specified by the license agreement. Exclusive license may be issued on either a territorial basis (for instance, India only) or on a global basis (for the entire world).
Non-Exclusive Licensing: In non-exclusive licensing, the licensor may license out their assets to multiple licensees at the same time. Unlike an exclusive license, all licensees are permitted to use the license as per the terms of the license agreement. The licensors are also free to use the assets that they licensed to others.
There are different kinds of technology licenses. Licenses may be availed to get all the IP rights that are necessary to reproduce, make, use, market, and sell products based on a type of technology (e.g., a license to develop a new software product that is protected copyright or any other form of IP protection). A license may be procured to get the IP rights necessary in order to create and market a product that complies with a certain technical standard or specification.
For example, a group of enterprises have agreed on a technical standard to ensure interoperability of devices and owners of IP essential to practice the standard, pool their IP rights and license it to anyone who wishes to use the standard on reasonable and non-discriminatory terms.
Ericsson and Oppo are two companies who entered into a Global Patent license agreement. This agreement covers a cross licensing agreement covering 2G, 3G and 4G patent portfolios from both the companies. Besides, cross-license, the agreement also includes business cooperation on a number of projects related to 5G such as device testing, customer engagements.
The case of Dunlop India Ltd. v. Forech India Ltd[4] involved a license for making conveyor belts, based on a license agreement between the two parties. In GE Plastics v. Commissioner of Customs, Mumbai[5], a JV with Indian Petrochemicals Corporation Ltd. (IPCL), a technology licensing agreement was in question.
The following are the pros and cons of Technology Licensing:
Pros:
- It enables a company to enter a new market very quickly. Additionally, financial and legal risks are minimised when technology licensing is used.
- Licensing also enables companies to overcome any stringent tax barriers or any other hindrances that would otherwise increase the costs if they opted to develop their own technologies.
- Licensing can also be used for the acquisition of technology from outside the region through arrangements such as cross-licensing agreements/ grant back clauses.
- Licensing also is a major tool for enterprises in developing nations, to make use of comparatively lower licensing rates and to make profits without spending significantly on R&D.
Cons:
- Licensing a technology to an external company results in the weakening of the licensor’s hold over the technology itself.
- Licensing a technology also results in lesser profits as compared to directly leveraging the technology oneself.
Conclusion
Licensing is a useful tool for companies to compete in an effective manner. However, they must be well aware of the pros and cons mentioned above. They must also take special care to use licensing only when they need it, as it may create a recurring dependence on external organisations to develop technologies for them. It may not be an effective strategy, if companies are attempting to differentiate themselves from their competitors in the market space.
In conclusion, if a firm wants to take their rivals head on, and do not have the time or resources to develop their own technology, licensing is the most practical and cost-effective tool they can use to remain competitive.
By: Aditya Datha
Symbiosis Law School, Hyderabad
Contact us at info@origiin.com to avail services in Patent, Trademark, Contracts, Patent Licensing, M&A
Subscribe to our YouTube Channel HERE
Email: info@origiin.com
Whatsapp: +91 7483806607
[1] Solomon Moreira, When Licensing New Tech Is Better Than Building It In-House, Harvard Business Review- https://hbr.org/2020/06/when-licensing-new-tech-is-better-than-building-it-in-house
[2] Patent Act, 1970
[3] [2009 SCC OnLine Del 1878: (2009) 41 PTC 70]
[4] CS (OS) No. 382/2012, Delhi HC
[5] Final Order No. 388/2004- NB(A)
