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To embark on a technology licensing program requires that an organisation, whether it be a company, a university or an individual, has some form of intellectual property that will preclude potential copiers from merely copying the technology. If there is no such intellectual property then the potential licensee will find it cheaper to copy and not to pay the originator of the technology a fee. Even if they were to pay the technology owner a fee, the licensee could find themselves in competition with a copyist who has a lower cost structure because the copyist is not paying a royalty to the originator of the technology. (The decision in Puxu v. Parkdale reinforces the view that copying is totally OK in the eyes of the law if there is no intellectual property protection in place).
The intellectual property may be confidential know-how, it may be patent, trade mark, copyright or design rights, or it may be one of the newer forms of intellectual property such as Plant Breeders Rights or Circuit Layout Protection. Whichever form the intellectual property takes, a first step in the development of a licensing program is to review the intellectual property and to see just how strong it is, how relevant it is and how enforceable it is.
To determine the strength of the intellectual property one must consider the following issues;-
The relevance of the intellectual property relates to two issues. The first is the extent that the subject matter of the intellectual property provides a significant advantage to the holder of that property in the market place. If a patent is directed to a product for which there is no market then, obviously it has no value no matter how much money has been spent on procuring that patent. The second issue of relevance is whether the intellectual property obtained is appropriate for the nature of the innovation. A registered design is not, for instance, effective in protecting a principle of construction; similarly manufacturing know-how may be better protected by keeping it confidential rather than by getting a patent which necessarily requires that the information be published.
The enforceability issue relates not to the question of the capacity of the owner of the intellectual property to litigate but rather to the question of whether it will be possible to detect infringement if it does occur. If it is not possible to tell whether some patented process has been used to produce a known product it may make the enforcement of the patent very difficult in practice.
Once it is clear that the intellectual property position has reasonable strength then I believe that the next issue is to consider how the risk/reward balance of the innovation can be improved. The concept of the risk/reward balance follows from a consideration of the normal behaviour of a prudent investor. The investor wants to know how much interest, dividend or other return will be received for any investment. On the other hand the investor wants to know how risky is the investment; "how likely am I to loose my shirt?" is a common question in high risk enterprises like venture capital investment.
You may not think of your licensee as being an "investor" in your technology, however this is truly what the licensee is. The licensee will invest time and effort in considering the innovation in the first place. Secondly there will be the time, money and effort invested in taking the technology into the licensee’s organisation. In some cases this is an extremely expensive exercise, particularly if regulatory approval has to be obtained, trials and adaptation for a new market undertaken or tooling installed. Thirdly there is the time, money and effort to be expended on marketing the innovation. Last, but by no means least, there is the consideration to be paid to the licensor for the grant of the licence. So if the licensee is investing in your innovation it is not surprising that the licensee wants to be sure that he or she will do better investing that time, money and effort on your technology rather than on some other project.
Let’s look firstly at what the innovator may do to decrease the perceived risks associated with the innovation. This will depend largely upon the stage to which the technology has been brought. If it is already in production and selling in one country then the risks will relate to whether the production can be moved to another country and whether the market will exist in that other country. If the technology is totally unproven then the first concerns will be whether the invention works at all, whether there is a market at all and if the answer to both of these questions is in the affirmative, then can it be made and sold profitably.
In my experience these issues may be addressed in one or both of two ways. Firstly try and second guess what will be the most likely negative response that you will get from a potential licensee. The second is to go out and talk to experts in the field and try and find out what their concerns are. Once the major issues have been identified the next question is how can you prove, as cheaply as possible, that that concern is unfounded. The innovator who can best master these issues is the one most likely to succeed in the commercialisation of his innovation.
The other side of the equation is how to raise in the mind of a possible licensee the perception of the size of the possible reward that can be reaped from the technology. Here one of the major problems is the extravagant claims that have been made by every innovator who has gone before! The truth is that successful innovation is very difficult. In part this is because of the inherent conservatism of mankind. Machiavelli made a sage observation on this point in The Prince when he said :-
"...and it ought to be remembered that there is nothing more difficult to bring to hand, more perilous to conduct or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions and lukewarm defenders in those who may do well under the new."
There is also the fact that a new product or process must satisfy a myriad conditions to be successful. Failure to satisfy even one of these requirements may well be enough to prevent the product or process from being successful. I suggest that very careful collection of market information and analysis can be very helpful in raising the perception of the possible reward from an innovation. A second way is to engender peer support for the innovation. Again it is necessary to exert ingenuity in this endeavour. No two situations are the same, however, in my experience, the same principles apply over and over again.
Let me give you an example of one way in which these principles were applied. An Australian medical group developed an intra-vascular prosthetic device. They were able to make these devices by hand and got ethics committee approval from the hospital with which they were associated to place these devices into patients who were inoperative with the conventional technology. A provisional patent application was then filed in respect of the device. The initial couple of operations were successful. The medicos then presented their work to a couple of major vascular conferences where it was well received. As is often the case, the major companies in the field were represented at those conferences and were clearly influenced by the enthusiastic reception that the work got from other vascular surgeons. This response showed that the people at the forefront of the field thought there was a need, and that this device could satisfy that need.
An "option" agreement was signed with one interested company that gave the company a year to consider the device and to decide if they wanted to enter into negotiations to take a licence for the technology. During this year the Australian surgeons successfully placed a number of devices and were able to show at an international conference that their success rate of some 98% compared favourably with the next best technology on the horizon which was also presented at this conference and had a success rate of about 40%. This evidence, given in a public forum, and subject to peer scrutiny, showed that the Australian innovation was robust, successful and ahead of any competitive technology. It also showed that one possible risk, that is being overtaken by a better technology was unlikely in the short to medium term.
I would interpose here the observation that the option arrangement allowed the company to perform their own investigations and research, leading to their being more comfortable with the technology and with the size of the possible market. As a part of their obligations under the option agreement they funded research conducted by the Australian surgeons during this period.
Information was collected as to the market opportunity presented by the device that had been developed. An interesting part of this information gathering was a quantification of the likely size of the population who were likely to need this device. As it happened this device was most likely to be placed in men over 50. We were able to show that in all likelihood the size of this market would grow by some 73% over the life of our intellectual property.
Having now reduced the perception of risk and raised the perception of the market size, and therefore the possible reward, we were ready to negotiate a long term licence arrangement. The outcome of the negotiations showed that the efforts made had not been wasted!
If on considering the position of any given innovation you are of the opinion that the risk/reward balance if not right or could be dramatically improved by a bit of research or market development, then it might be better to hold off the licensing program until that has been done. I will consider this issue in the next section of this article.
Before one can commence the process of finding a licensee or negotiating a licence it is appropriate to develop a strategy for the licensing process. This strategy should seek to find an arrangement that will maximise the risk/reward balance (there’s that term again!). This time however we are concerned for the position of the licensor. It is of the essence of the licensing process that there are a large number of ways in which the deal can be structured, and of these ways there are likely to be a small group which are likely to get the best outcome for the licensor.
The first issue that should be addressed is whether licensing is, in fact, the best way of commercialising this technology. In some circumstances one might be better off manufacturing the product or service within an existing organisation, or within a spin-off company. In other cases one might be better off selling the technology outright. There are no hard and fast rules and much will depend upon the financial and organisational position of the licensor. Obviously it is much harder for a University to commence initial manufacture than it is for a manufacturing company. Similarly a good innovation in a manufacturing company which is already fully committed with other projects would have to be licensed out for lack of in-house resources. In my opinion small incremental improvements in technology may be better sold rather that being licensed where self manufacture is not an option. A strategy may involve commencing with one approach and then changing to another when the circumstances are appropriate. One might, for instance, raise "angel funds" or bring in a venture capitalist to take the technology forward by self manufacture initially, only to get the risk/reward balance correct and to then engage in a major licensing program.
Once a decision has been made that licensing is the correct approach then consideration has to be given to the general terms and conditions that you will require in your licence. Some of the considerations are as follows:-
The basis on which the licence is granted will be influenced by the nature of the industry into which the technology is being introduced, the effort required to get the technology into the market place, the degree of exclusivity that the intellectual property grants and the life cycle of the technology. If, for instance there are many small players in a fragmented market, the intellectual property position is weak and the product is fully developed, then a strategy of non exclusive sale may be appropriate. On the other hand if there are a small number of players in a global market with a product that needs a lot of development, then it will probably be necessary to grant exclusive rights to a single licensee.
After deciding on the level of exclusivity the licensee should be offered, one then has to consider the related issue of whether the licensee should be offered the right to grant sub-licences. It has been held that in the absence of a specific authority in a licence the licensee does not have the right to grant sub-licences. In the situation where confidential know-how forms a large part of the know-how it would be unwise to give the licensee a right to grant sub licences. It would also be unusual to grant a right to sub-licence to a non-exclusive licensee as by doing so the licensor would be setting up a competitor in the business of granting licenses for the innovation. One can, however, think of circumstances where the granting a right to sub-licence to a non-exclusive licensee may be appropriate.
The issues of field, territory and exclusivity cannot be considered in isolation. It is in my view desirable to have at least two strings to your licensing bow if at all possible. Thus if it is not possible to grant non-exclusive licences then it is desirable to be able to have a number of licensees through territory or field segregation. The advantage of this policy was shown when I was involved in licensing an alternative fuel technology and we managed to convert offers of exclusive world wide licences from two different companies into a pair of side by side licenses with an undertaking not to grant any more licences. When one company pulled out we still had an operational licensee, without whom the client may well have gone out of business.
The licence strategy may be based on a presumption that the market conditions may change with time and that the level of exclusivity should change in step with those conditions. If it is envisaged that after a few years the licensee will be under intense competition from much larger players who need to infringe the IP rights, then a strategy of going from an exclusive licence to a non exclusive one after a few years may make sense. This will allow the initial licensee to recoup it’s investment in the technology and establish a good position in the market place during the period of exclusivity. On the other hand by being able to issue additional licences later in the project the licensor reduces the risk that his IP will be challenged in court. This is because it will be cheaper for the potential infringer to pay a royalty rather than to incur the legal expenses and uncertainty of an infringement action.
The extent that the licensor will support the licensee with know-how and improvement inventions is an important factor in the strategy. This depends not only on the nature of the technology itself but also on the nature of the parties, particularly the financial strength of the licensor. It is costly to provide back up support for licensees when the provision of such back up may well be in a foreign country. It is also difficult for a small company to spare its prime people for prolonged periods as this may cause the company’s other cash flow to dry up.
The flip side of the provision of improvement inventions to the licensee is the extent to which the licensor will get access to the improvement inventions generated by the licensee. It is well recognised that every licensee is a potential competitor in the future. The greater the access that the licensor has to the licensee’s improvements the better placed will the licensor be to counter this potential competitor. Such access may be crucial if the strategy involves the creation of a licensing "club" in which the improvements of all licensees are available to all other licensees. Such a strategy has worked well in a number of cases, one being the zinc/aluminium cladding technology developed by Bethlehelm Steel and now owned by BHP. This technology is licensed to a large number of licensees around the world who are obliged to licence improvements back to the other club members. The club is coordinated through an organisation called Interzac which runs regular conferences for licensees and oversees the exchange of developments between licensees.
A crucial issue to be considered at this time is a view on the quantum of consideration that should be sought in exchange for the grant of the licence. This is not the time or place to give a detailed analysis of the way in which the valuation of technology can be approached. The consideration is typically divided into:-
The consideration has to represent a reasonable division of the total return that is available to the parties from the use of the technology. If both parties cannot benefit from the licence it will fail. If you are interested in exploring these issues further visit our web site at www.scp.com.au and find out about the "chocolate cake model" and the "25% rule"!
It is desirable to give to each part of the strategy a priority so that if the strategy has to be compromised during negotiations it is clear which parts can be changed first. There are at the end of the list those conditions which are "deal breakers" and on which no compromise can be made at all. These issues need to be clearly articulated so that a consistent message can be given throughout the negotiation process and by all the participants on your side as to what the desired outcomes from the negotiations are.
While it may not strictly be seen as a part of strategy development the issue of who is to carry out the licensing function for the licensor is an important issue. It is frequently found that the original innovator is not the right person to carry out this function. There is no doubt in my mind that having access to an experienced licensing executive to assist in the process can be invaluable. I often find that by a little lateral thinking among the provisions commonly used in the licensing field it is possible to find an outcome that satisfies all parties. In producing such constructive suggestions during the negotiations one can save a lot of time which would otherwise be spent haggling. Even more importantly it gives to the negotiations a feeling that the licensor is working to maximise the outcomes for everyone and not just himself. This can generate a level of goodwill that can assist the negotiations when there is an unavoidable disagreement on an issue. There typically needs to be a team comprising at least the technical innovator and a business person.
There are a number of other issues that need to be addressed in developing the licensing strategy. These include termination provisions, best endeavours and the protection of intellectual property. These are issues that are often treated as "boiler plate’ that is taken from a precedent and not thought about. This is clearly the wrong approach however there is not the space here to discuss these issues in full. I hope that I have at least given you enough issues that need to be considered to convince you that it is essential to develop a licensing strategy before the actual selection of licensing partners commences. Without such a strategy in place discussions with potential licensees are like sailing a rudderless ship, it can be done but it requires very deft handling of the sails. It is quite likely that you will be taken by the wind ( and there is quite a lot of "wind" in licensing discussions!) along a course that is not optimal, which may lead to a grounding, capsize or being boarded by pirates.
Once the strategy is in place it is then necessary to endeavour to implement it. The strategy may need to be revised and fine tuned as this process proceeds, however if the strategy has been realistically developed with an eye to what may be achieved in practice then it is hoped that it may be implemented without a total re-write.
The ideal licensee will be the company who fits into the strategy and has the resources and culture able to implement the commercialisation of the licensed innovation. An old friend of mine and a wily licensing executive was in a fortunate position that he had a string of companies coming to his employer seeking licences to build machinery to their designs. My friend would ask them "what would you do if we gave you the licence that you are requesting?". The potential licensees would suggest factories here and there, numbers of sales offices, number of employees, marketing expenditure and the like. All of these offers ended up in a performance clause in the final licence agreement, often to the outrage of the licensee. The technique of getting the licensee to make offers is a good one if one is reasonably sure that they are keenly interested, on the other hand if they are not keenly interested then you probably don’t want them as a licensee. An approach that builds on this idea that I have used successfully is to have the proposed licensee submit a business plan before concluding the licence negotiations (and preferably before they even start). Few companies of any size would embark on a major new technology without a business plan. If you are to have a good outcome to the licence it is not unreasonable that the potential licensee be prepared to share it with the licensor.
The best licensee will have a direct strategic fit with the technology. This may be because it has a directly competitive technology, though this may be dangerous because the potential licensee may only be seeking a licence to be able to bury the innovation for a few years. It is typically more beneficial if the potential licensee sees the technology as a way of expanding its presence in an existing market or addressing additional needs of an existing customer base. In this way the licensee is complementing its product range rather than replacing a part of it.
The licensee has to have the physical resources such as manpower, capital and so on to be able to give effect to the licence. In addition it has to have a cultural flexibility to take in and commercialise ideas from outside the company. It is instructive in talking to potential licensees to find out what other innovations they have taken in and commercialised. Having done it before should not be a prerequisite for a licensee, however it greatly reduces the risk that the licensee is going into the deal with no real idea of the effort involved in getting a new technology off the ground. It is often said, and rightly so in my opinion, that one needs a product champion in the licensee company to carry it forward. I have found that it is desirable to have both a product champion at the technical or commercial "coal face" and a product mentor at board level. I have been involved in a couple of commercialisation exercises where the licensee company decided to change its commercial strategy and abandon our technology for corporate reasons that had nothing to do with our technology as such. In one case a drop in the oil price lead an oil major to decide that it did not need to be involved with alternative fuel technologies; in another a drop in the price of plastics, and the resultant expectation of a drop in the profit, lead an international plastics company to decide to close it’s building products division. In each case we might have stood a better chance of the licence being persevered with if we had had a mentor at board level.
It is rare in my experience for a licence to be concluded quickly between parties who are strangers to one another. There seems to be a compelling need for the parties to get to know one another before the deal gets settled. This has two implications. The first is that the process is going to take time and you had better have the resources to carry you through the process or you may as well not start. The second is that it is a good idea to get known to potential licensees as early as possible. This may be by way of seeking to get technical involvement from them before even raising the prospect of them becoming a licensee. Alternatively it may be through attendance at international conferences in a field and meeting representatives of the corporate players in the field. It could be through getting research grants and spending part of that money having the company carry out trials or testing. The more that can be done to get known by the key personnel in the potential licensee at an early stage the better. Obviously one is seeking to make a favourable impression on the potential licensee and one must ensure that the contacts are going to foster that.
There are a number of ways in which one can find out who the players are in any given market, however it can be quite difficult to get accurate information on the sizes of their respective market shares and their respective strengths and weaknesses. This is best done by discussion with people in the industry of interest. There are often consultants in an industry who can be helpful. There is now also a lot of information on the Internet that is of assistance.
Once a suitable prospective licensee has been located it is then necessary to sell them on the technology. If you have already done some work to get the risk/reward balance weighted in favour of reward and if you have got a rapport with the right people in the company it should not be difficult to get to first base which is an opportunity to meet with the appropriate people in the company and give them a presentation. If you do not already have a rapport with the company then it helps greatly to come with some form of introduction from someone who is respected by the company.
The actual presentation is critical as it needs to be focused on the potential licensee’s needs. A significant part of the preparation for the presentation should be on analysing why the innovation might be attractive to the company and what their major reservations might be. It is then possible to skew the presentation towards showing how the innovation meets the companies needs and that the possible negatives do not exist or are not relevant or are actually a positive. Time will be at a premium at such a meeting and it is necessary to get the attention of the company in the first few minutes. I have called this the generation of a "Gee Whiz" response. Once the attention has been captured it is then necessary to turn into practical realism mode so that your presentation will be believed and not seen as so much hyperbole of the sort so often coming from innovators. This latter effort may be the subject of later meetings and will build upon the impact of the initial presentation.
I favour the preparation of a draft heads of agreement prior to the negotiations for use as an aide memoire by the licensor representatives. In this way they can ensure that all relevant issues are covered in the negotiations. There is nothing worse than to be landed with instructions to draft a licence agreement which has been negotiated between businessmen who neglected to even discuss some major issues. Unless handled sensitively (and I have often seen just this situation handled very insensitively by general lawyers) it can appear that the party responsible for documenting the deal is seeking to use the situation to the disadvantage of the other party.
From the foregoing I believe that it can be seen that preparation is the key to getting an appropriate licensee on board. There is the preparation of the intellectual property position, the preparation of the technology to get the risk/reward balance in order. There is the preparation of a licensing strategy that will allow both parties to the licence to come away with a fair share of the profit that is available from the exploitation of the innovation. There is the preparation that goes into finding suitable licensing partners, assessing their needs and presenting the innovation to them in the right light.
The second characteristic that I would emphasise is creativity. One needs to be creative in the way in which one addresses each of the vast number of hurdles that litter the path of the innovator. The raising of funds, the conduct of research, the adaptation of existing materials and machines, the utilisation of existing resources, the drafting and prosecution of intellectual property applications, the structuring of approaches to potential licensees, all of these issues and many more require a creative approach. In licensing, perhaps more that in other commercialisation routes the need for creativity is essential. This creativity requires people who are creative in all of the fields involved, be these technical, financial, business, tax, or legal.
The third characteristic that is required is flexibility. One needs to have a plan but not to be so stuck on it that there cannot be a rapid rethink if that becomes necessary due to changed circumstances.