TECHNOLOGY
LICENSING
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. U.S. 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 U.S.
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 U.S.
firms
to
overcome many of the tariff and nontariff barriers that
frequently
hamper the export of U.S.-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 produced in the United States. 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 United States or third countries in direct
competition
with the licenser or its other licensees. In
many
instances, U.S. licensers may wish to impose
territorial
restrictions on their foreign licensees,
depending
on U.S. or foreign antitrust laws and
the
licensing
laws of the host country. Also, U.S. and
foreign
patent,
trademark, and copyright laws can often be used to
bar
unauthorized sales by foreign licensees, provided that
the
U.S. licenser has valid patent, trademark, or copyright
protection
in the United States or the other countries
involved.
In addition, unauthorized exports to the United
States
by foreign licensees can often be prevented by
filing
unfair import practices complaints under section 337
of
the Tariff Act of 1930 with the U.S. International Trade
Commission
and by recording U.S. trademarks and copyrights
with
the U.S. Customs Service.
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 United States and the
prospective
host country is an important indicator of the
overall
commercial relationship. Prospective U.S.
licensers,
especially of advanced technology, also should
determine
whether they need to obtain an export license
from
the U.S. Department of Commerce.
International
technology licensing agreements, in a few
instances,
can unlawfully restrain trade in violation of
U.S.
or foreign antitrust laws. U.S. antitrust law, as a
general
rule, prohibits international technology licensing
agreements
that unreasonably restrict imports of competing
goods
or technology into the United States or unreasonably
restrain
U.S. domestic competition or exports by U.S.
persons.
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.
Foreign
countries, particularly 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 in the United States before entering
into
such an agreement. In many instances, U.S. 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.
JOINT
VENTURES
There
are a number of business and legal reasons why
unassisted
exporting may not be the best export strategy
for
a U.S. company. In such cases, the firm may wish to
consider
a joint venture with a firm in the host country.
International
joint ventures are used in a wide variety of
manufacturing,
mining, and service industries and are
frequently
undertaken in conjunction with technology
licensing
by the U.S. firm to the joint venture.
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
U.S.
firms to operate through joint ventures. In addition
to
such legal requirements, U.S. 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.
U.S.
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
U.S. or foreign antitrust issues in certain
circumstances,
particularly when the prospective joint
venture
partners are major existing or potential
competitors
in the affected national markets. Firms may
wish
to consider applying for an export trade certificate
of
review from the Department of Commerce (see chapter 4)
or
a business review letter from the Department of Justice
when
significant federal antitrust issues are raised by the
proposed
international joint venture.
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 U.S. counsel experienced in
this
aspect of international trade.
U.S.
firms contemplating international joint ventures also
should
consider retaining experienced counsel in the host
country.
U.S. 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.
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