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"Technology Transfer" or the Licensing of Intellectual Property Rights

The phrase "technology transfer" is frequently used but not well understood. Generally, the phrase refers to moving technology from one party to another.

Intellectual Property Update

A Publication of the Dorsey & Whitney
Intellectual Property Practice Group

Volume 3, Number 1

Although training, teaching or instruction on virtually any subject can be considered the transfer of technology, typically "technology transfer" involves moving rights of intangible intellectual property protected by a patent, copyright, trade secret or trademark between parties, by granting a license. The licensing of rights in intellectual property is the "technology transfer" discussed in this article.

What is licensing?

Licensing is the process by which the right to use intangible intellectual property is granted by one party to another. The rights in intangible intellectual property that can be licensed include, among other things, the right to use, copy, display, perform, develop, make, manufacture, market, sell or distribute the property being licensed. Because the license does not transfer title, it is not a sale of the intellectual property, and the owner retains those rights in the intellectual property it has not licensed exclusively to another party. The license is a promise by the owner not to sue the party using the intellectual property for infringement or for use without the owner’s permission.

What can be licensed?

Intangible intellectual property has been called "creations of the mind" – examples include inventions, discoveries, business processes, designs, creative expressions in books, music or movies, nonpublic information and trade symbols, to name a few. These "creations of the mind" are protected by intellectual property patents, copyrights and trademarks, or as unpatentable know-how or trade secrets. The owner of the intellectual property protecting these "creations of the mind" can license its rights in that intellectual property for use by another party. Rights in the intellectual property can be licensed on an exclusive or non-exclusive basis, for a specific territory or worldwide, for a defined period of time or perpetually, and for a limited field of use or without use limitations. Common types of intellectual property licenses include patent, know-how or trade secret licenses, copyright or publishing and entertainment licenses, including software licenses, and trademark or merchandising licenses.

Why license?

The owner of a patent, copyright, trade secret or trademark may, itself, use the intellectual property it owns, or may sell the intellectual property outright to a third party. Alternatively, the owner may license rights in the intellectual property to a third party in exchange for the payment of royalties or other license fees. The owner, or "licensor", is said to "license out" rights in the intellectual property it owns and the party obtaining those rights, the "licensee", is said to "license in" the intellectual property rights.

For the licensor and licensee, licensing is typically a revenue producing strategy. Through licensing, the owner is said to "commercialize" the intellectual property by obtaining a right to royalties and other payments in exchange for granting the licensee the right to use the intellectual property. Under the license agreement, the licensee obtains rights in previously unavailable intellectual property which it may use to develop a new product, to perform a copyrighted creative expression or to sell its products using a valuable trademark. Through the licensing process, the licensor and licensee each seek to achieve their business objectives.

What are the advantages and disadvantages of licensing?

Although licensing may be part of a well informed business strategy, it has advantages and disadvantages for both the licensor and licensee.

Advantages

The owner of intangible intellectual property can obtain many advantages from licensing. In contrast to a one time payment for an outright sale of the intellectual property, licensing provides the owner with an ongoing stream of payments through the license fees and royalties paid for use of the intellectual property. If the owner does not have the necessary capital and other resources needed to develop, manufacture and market the technology itself, licensing transfers those costs and obligations on to the licensee. If the license agreement so provides, licensing has the potential additional advantage of producing and returning to the owner improvements of the licensed technology.

The most common advantage of licensing for the licensee is the opportunity to increase profits by using an available technology to bring a new or improved product to market in a timely way. For the licensee, the research time and development costs necessary to create a needed technology can be both expensive and time consuming. Purchasing the technology outright from the owner may not be possible or prohibitively expensive. Licensing may be the only way to obtain use of a needed technology for a new product in a timely and cost effective way. A valuable technology license may also enhance the reputation and goodwill of the licensee, and make it easier for the licensee to obtain financing and other licensing opportunities.

Disadvantages

The principal disadvantage of licensing for the licensor is the loss of control over the technology and the associated risk of exploitation or piracy of the intellectual property. The licensor’s profit opportunity also may be limited by the license fee and royalty structure, and revenue from the licensing arrangement will be dependent on the licensee’s performance. Depending on the sophistication and resources of the licensee, the licensor may face excessive costs in providing support to the licensee, including the costs of training, technical assistance and supervision. Inadequate product quality and legal protection may expose the licensor to product liability risks.

Disadvantages for the licensee include inadequate support from the licensor, where the licensor has insufficient resources or is not sufficiently "invested" in the business success of the licensee. Also, if the technology has been insufficiently tested and encounters problems, the licensee’s costs may increase or its chances of success may be reduced. Limited fields of use or geographic markets in the license agreement may also inhibit the licensee. If all improvements to the technology made by the licensee are granted back to the licensor, the licensee may lose its incentive for expansion.

What are the important terms of the technology license?

In any technology license, clearly defining the technology being licensed is very important. The scope of the license granted is critical to the rights of the parties, including whether the right is exclusive or non-exclusive; the territory and fields of use for which the license is granted; the duration of the license; any sublicensing rights; and rights in any improvements of the technology. Exclusivity and duration of the license may be tied to specific development, sales or revenue milestones. Compensation for the license rights will be important to both parties and may include a variety of forms of license fees, royalties and milestone payments. Record keeping and auditing rights generally go hand-in-hand with compensation. The performance obligations of the licensor and licensee must be clearly defined, as well as the parties’ warranties and any disclaimers with respect to the technology, the licensed rights and the agreement. Indemnities of the parties will be important to liability protection, as will any limitations of liability between the parties. The duration of the license and reasons for termination must be carefully drafted. Confidentiality provisions are also important. The law governing the agreement, whether it can be assigned, and the method and forum for resolving disputes between the parties should be set forth in the license agreement. If the agreement licenses technology into foreign markets, the intellectual property and competition laws of those countries must be taken into consideration, which then may require the advice of local, foreign counsel.

What is important to licensing success?

For a licensing relationship to be successful, the reasons for licensing must be clearly understood and the license agreement carefully drafted to reflect the understanding of the parties. Both the licensor and the licensee must find the right business partner, so that there is a shared vision of success and sufficient trust in the relationship to produce the necessary cooperation between the parties to achieve their business objectives. Given the potential pitfalls in technology transfer, both parties must be flexible and work toward mutually achievable goals. With the right partner and a good license agreement, technology transfer can be highly advantageous for both the licensor and licensee.

ABOUT THE AUTHOR

Rebecca Comstock
Minneapolis
(612) 340-2987
[email protected]

A partner in the Corporate Group, Becky practices in the area of intellectual property licensing and corporate transactions, including corporate partnering, technology licensing and commercial contracts.

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