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Technology licensing is a contractual arrangement in which the licenser’s patents, trademarks, service marks, copyrights, or know-how may be sold or otherwise made available to a licensee for compensation negotiated in advance between the parties. Such compensation, known as royalties, may consist of a lump sum royalty, a running royalty (royalty based on volume of production), or a combination of both. Companies frequently license their patents, trademarks, copyrights, and know-how to a foreign company that then manufactures and sells products based on the technology in a country or group of countries authorized by the licensing agreement.

A technology licensing agreement usually enables a firm to enter a foreign market quickly, yet it poses fewer financial and legal risks than owning and operating a foreign manufacturing facility or participating in an overseas joint venture. Licensing also permits firms to overcome many of the tariff and nontariff barriers that frequently hamper the export of domestic manufactured products. For these reasons, licensing can be a particularly attractive method of exporting for small companies or companies with little international trade experience, although licensing is profitably employed by large and small firms alike. Technology licensing can also be used to acquire foreign technology (e.g., through cross-licensing agreements or grantback clauses granting rights to improvement technology developed by a licensee).

Technology licensing is not limited to the manufacturing sector. Franchising is also an important form of technology licensing used by many service industries. In franchising, the franchisor (licenser) permits the franchisee (licensee) to employ its trademark or service mark in a contractually specified manner for the marketing of goods or services. The franchisor usually continues to support the operation of the franchisee’s business by providing advertising, accounting, training, and related services and in many instances also supplies products needed by the franchisee.

As a form of exporting, technology licensing has certain potential drawbacks. The negative aspects of licensing are that (1) control over the technology is weakened because it has been transferred to an unaffiliated firm and (2) licensing usually produces fewer profits than exporting goods or services. In certain Third World countries, there also may be problems in adequately protecting the licensed technology from unauthorized use by third parties.

In considering the licensing of technology, it is important to remember that foreign licensees may attempt to use the licensed technology to manufacture products that are marketed in the exporters’ market or third countries in direct competition with the licenser or its other licensees. In many instances, licensers may wish to impose territorial restrictions on their foreign licensees, depending on antitrust laws and the licensing laws of the host country. Also, patent, trademark, and copyright laws can often be used to bar unauthorized sales by foreign licensees, provided that the licenser has valid patent, trademark, or copyright protection.

As in all overseas transactions, it is important to investigate not only the prospective licensee but the licensee’s country as well. The government of the host country often must approve the licensing agreement before it goes into effect. Such governments, for example, may prohibit royalty payments that exceed a certain rate or contractual provisions barring the licensee from exporting products manufactured with or embodying the licensed technology to third countries.

The prospective licenser must always take into account the host country’s foreign patent, trademark, and copyright laws; exchange controls; product liability laws; possible countertrading or barter requirements; antitrust and tax laws; and attitudes toward repatriation of royalties and dividends. The existence of a tax treaty or bilateral investment treaty between the licensers’ country and the prospective host country is an important indicator of the overall commercial relationship.

Whether or not a restraint is reasonable is a fact-specific determination that is made after consideration of the availability of competing goods or technology; market shares; barriers to entry; the business justifications for and the duration of contractual restraints; valid patents, trademarks, and copyrights; and certain other factors. The U.S. Department of Justice’s Antitrust Enforcement Guidelines for International Operations (1988) contains useful advice regarding the legality of various types of international transactions, including technology licensing. In those instances in which significant federal antitrust issues are presented, U.S. licensers may wish to consider applying for an export trade certificate of review from the Department of Commerce or requesting a Department of Justice business review letter.

The EC, also have strict antitrust laws that affect technology licensing. The EC has issued detailed regulations governing patent and know-how licensing. These block exemption regulations are entitled “Commission Regulation (EEC) No. 2349/84 of 23 July 1984 on the Application of Article 85(3) of the Treaty [of Rome] to Certain Categories of Patent Licensing Agreements” and “Commission Regulation (EEC) No. 556/89 of 30 November 1988 on the Application of Article 85(3) of the Treaty to Certain Categories of Know-how Licensing Agreements.” These regulations should be carefully considered by anyone currently licensing or contemplating the licensing of technology to the EC.

Because of the potential complexity of international technology licensing agreements, firms should seek qualified legal advice before entering into such an agreement. In many instances licensors should also retain qualified legal counsel in the host country in order to obtain advice on applicable local laws and to receive assistance in securing the foreign government’s approval of the agreement. Sound legal advice and thorough investigation of the prospective licensee and the host country increase the likelihood that the licensing agreement will be a profitable transaction and help decrease or avoid potential problems.

The host country may require that a certain percentage (often 51 percent) of manufacturing or mining operations be owned by nationals of that country, thereby requiring firms to operate through joint ventures. In addition to such legal requirements, firms may find it desirable to enter into a joint venture with a foreign firm to help spread the high costs and risks frequently associated with foreign operations.

Moreover, the local partner may bring to the joint venture its knowledge of the customs and tastes of the people, an established distribution network, and valuable business and political contacts. Having local partners also decreases the foreign status of the firm and may provide some protection against discrimination or expropriation, should conditions change.

There are, of course, possible disadvantages to international joint ventures. A major potential drawback to joint ventures, especially in countries that limit foreign companies to 49 percent or less participation, is the loss of effective managerial control. A loss of effective managerial control can result in reduced profits, increased operating costs, inferior product quality, and exposure to product liability and environmental litigation and fines. Firms that wish to retain effective managerial control will find this issue an important topic in negotiations with the prospective joint venture partner and frequently the host government as well.

Like technology licensing agreements, joint ventures can raise antitrust issues in certain circumstances, particularly when the prospective joint venture partners are major existing or potential competitors in the affected national markets.

Because of the complex legal issues frequently raised by international joint venture agreements, it is very important, before entering into any such agreement, to seek legal advice from qualified counsel experienced in this aspect of international trade.

Firms contemplating international joint ventures also should consider retaining experienced counsel in the host country. Firms can find it very disadvantageous to rely upon their potential joint venture partners to negotiate host government approvals and advise them on legal issues, since their prospective partners’ interests may not always coincide with their own. Qualified foreign counsel can be very helpful in obtaining government approvals and providing ongoing advice regarding the host country’s patent, trademark, copyright, tax, labor, corporate, commercial, antitrust, and exchange control laws.

This International Trade article was written by on 3/1/2005

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