Licensing Essay ⋆ Business Essay Examples ⋆ EssayEmpire

Licensing is generally considered a contractual arrangement or transaction in which one organization, called the licensor, permits the use of its intellectual property by another organization, called the licensee, in return for a fee or royalty payment. To grant a license is to permit the use of intellectual property. The term license also refers to the legal document detailing the grant and usage of the license. The British term for license is spelled differently: licence.

The exchange process in licensing involves the sharing of intellectual property. The World Intellectual Property Organization defines intellectual property as the creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce. Intellectual property has two categories: industrial property and copyright. Industrial property includes inventions that are patented, trademarks, industrial designs, etc. Copyright relates to literary and artistic works such as novels, films, music, or architectural designs. Generally, intellectual property includes copyrights, patents, and trademarks but could also refer to specialized creations of the mind such as circuit layout or plant breeding.

Copyrights, patents, and trademarks are actually three different types of creations, each having its own legal framework. Intellectual property is a generalized term commonly used to denote all of these by lumping them together, but care should be taken to differentiate among them as they have separate legal frameworks, connotations, and implications.

Intellectual property draws its legal implications from physical property. Just like physical property can be owned legally and the owner can derive benefit by using that property, intellectual property can also be owned and the owner can derive benefit from his or her effort. When an individual, group, or agency invests in the creation of something new that could have commercial implications, they have a right to exploit the advantages of their efforts. Licensing provides the legal framework for letting the creator of intellectual property possess the exclusive legal right to derive benefit from his efforts and for the user of that intellectual property to pay for its usage. Thus licensing becomes the legal instrument to enable the creator and user of intellectual property to enter into a mutually beneficial arrangement. When anyone uses somebody else’s intellectual property without having a license to use it, then it is illegal because that infringes upon the rights of the creator. However, critics of the concept of intellectual property argue against granting exclusive rights to creators, suggesting that it results in intellectual monopoly and intellectual protectionism leading to harming of public interest at the expense of individual rights. Further, the critics cast doubt on the claim that protection of intellectual rights really benefits the creators.

Licensing becomes especially important in the case of high-technology industries such as information technology, telecommunications, pharmaceuticals, or power generation. There are several reasons for this importance: high technology accounts for a substantial share of economic activity, many low-technology industries such as agriculture turn into high-technology businesses as technology advances, and high technology products are entering into a wide range of businesses. Ownership of technical standards in high-technology industries becomes a source of competitive advantage for companies in those industries. Battles to set and control technical standards in high technology industries are known as format wars.

Companies hope to gain competitive advantage against their rivals by having the ability to develop high-technology products and processes. This can happen only if they have exclusive rights over the high-technology products and processes they create. Licensing provides the legal means of ownership of the intellectual property that goes into creating those high-technology products and processes. By possessing the legal rights of ownership over standards and formats, companies can license them to other companies. The company that helped to pioneer those standards and formats stands to gain economically through the license fees that flow back to it. An example of the use of licensing in high-technology industries is that of Dolby, which used its ownership of the technological standards in noise-reduction technology for the music and film industries. It charged a small licensing fee for letting recording companies use its technology and foregoing such fees on media recorded using Dolby technology. This helped the company keep out rivals who could have developed their own, possibly superior, technology.

Licensing is of special importance to organizations that operate internationally. International licensing is a contractual arrangement in which a foreign organization, the licensee in this case, purchases the rights to utilize another organization’s (the licensor in this case) intellectual property for a negotiated fee or royalty payment. If the intellectual property in this case is the product design, then the licensee can buy the rights to produce that product in its own country. The royalty payment can be negotiated on the basis of the number of products sold in that country.

Organizations contemplating implementation of international strategies think of an option to enter a foreign market. These options are the several modes of entry such as exporting, franchising, joint ventures, strategic alliances, and wholly-owned subsidiaries. Licensing is also considered among the significant modes of international entry and is an important element of the strategies of many international companies.

When used as a mode of entry into foreign markets, licensing involves little cost. This is so because an organization that has already invested in the creation of intellectual property only has to look for more opportunities outside one’s own country to utilize it. If it can license that intellectual property to some other organization and earn revenue, then it is additional income at practically no extra investment. By licensing, an organization extends the usage of its intellectual property without any significant risks.

There are four basic issues in international licensing: (1) specifying the agreement boundaries; (2) determining compensation; (3) establishing rights, privileges, and constraints; and (4) specifying the duration of agreement. When entering into the licensing agreement, the detailed contract should specify these four issues unambiguously. The parties to the contractual agreement should both be clear on the limitations imposed upon them, detailing what they can and cannot do. For instance, if the agreement limits the rights of either the licensee or licensor or both, then they should remain within such limits. The compensation to the licensee under licensing agreements is generally in the form of royalty payments. The royalty is paid in the form of a flat fee, a fixed amount per unit sold, or as a percentage of the sales of the licensed product or service. The licensor and the licensee must be clear about their rights and responsibilities toward the contractual arrangement. This prevents disputes over the terms and conditions of licensing arising later. The time period for which the licensing arrangement is entered into must be specified clearly. This period can be anywhere between a short-term arrangement, say, of one year to a long-term arrangement of even 100 years. The period depends on the time that the licensee thinks is appropriate to amortize its investments and the licensor perceives to be enough for it to learn the technology involved or the perceived benefits to accrue.

Risks And Benefits

There are several benefits of licensing to both the parties involved. The licensee benefits in terms of added revenue streams with relatively little additional investment. They get the opportunity to make and sell products based on their intellectual property in markets that they themselves are unwilling or unable to enter. The licensor does not have to bear the development costs and risks associated with creation of intellectual property and gets to use a tried and tested technology or product. For organizations that lack the technological ability, licensing offers a convenient, less risky way to utilize the intellectual property created by other more capable organizations.

At the same time, there are some drawbacks to licensing. Both parties forego opportunities that they could have used if they were not part of a mutually binding agreement. For instance, if the licensing agreement prevents one company from entering a foreign market so long as it is in an arrangement with some local company, it cannot do so. Similarly, the local company is constrained to use the technology provided and cannot use some other technology or sell some other products of another company at the same time if the agreement prohibits them to do so. Another problem with licensing is that it is based on a written contract. However carefully it may have been drafted, there is always scope for disagreement, especially if there is lack of mutual trust between the licensor and licensee. Often, disagreements may result in costly litigation. To an organization that offers technology through licensing, there is the risk of losing that technology to unscrupulous parties who may not honor the agreement and pass on that technology to others. An opportunistic licensor may also learn the technology and access the confidential information associated with it, and then could terminate the contract to deprive the licensee of further royalty payments. From the strategic viewpoint, a licensee who grants a license to the licensor may not have full control over how the intellectual property is ultimately used. For instance, if the licensee uses inferior quality materials to make products based on the licensor’s technology to augment its profits, then the impact may be felt on the licensor’s reputation and image.

Despite the drawbacks, licensing offers a good way for entry into foreign markets provided steps are taken to reduce the risks of some of the drawbacks. For example, the parties involved in the licensing agreement could enter into a two-way rather than a one-way arrangement. Transfer of technology from the licensor to the licensee can be reciprocated by reverse transfer of technology that is the intellectual property of the licensee, making it a cross-licensing arrangement. This binds both the parties to respect each others’ rights and reduces the risks of facing the drawbacks described above.

Related Terms And Other Uses

There are some terms related to licensing that also need to be understood. Franchising, like licensing, is another mode of entry into foreign markets. Franchising has many similarities to licensing and is often considered a special form of licensing. Franchising involves not only sharing intellectual property but also brand name, business model, and operating system along with support services such as advertising, training, and quality control. The party that grants the franchise is called the franchisor while the party that accepts or solicits it is the franchisee. Franchising is also generally a longer-term commitment compared to licensing. The application of licensing is usually in the transfer of technology for manufacturing industries, while franchising is generally used for a package of facilities and information for service industries. International franchising, quite similar to international licensing, is a popular form of international business activity. There are similar arrangement like legal contracts and royalty payments.

Licensing is used in several different contexts apart from its application to organizations and international business. A very familiar document is the driving license that is legal permission to drive a vehicle. Character and entertainment licensing constitutes the biggest segment of licensing, generating billions of dollars in revenue every year. Popular characters like Mickey Mouse are licensed to users by movie studios and broadcasting services such as Walt Disney. Designer names such as those of apparel manufacturers are licensed in the form of fashion licensing. Professional sports licensing is another fast-growing area where sports events such as the Olympic Games, professional organizations such as the National Basketball Association, and teams market their brand names for usage by businesses. Art licensing is a niche area where licensed artwork and artist-brand properties are licensed, bringing much-needed revenue to museums and artists.

Bibliography:

Richard Christou, International Agency, Distribution and Licensing Agreements (Sweet & Maxwell, 2008);
John D. Daniels, Lee H. Radebaugh, and Daniel P. Sullivan, International Business: Environments and Operations (Prentice Hall, 2009);
Lee Davis, “Licensing Strategies of the New ‘Intellectual Property Vendors,’” California Management Review (v.50/2, 2008);
Marcel Halpern, Susan Progoff, and Ian Feinberg, Understanding the Intellectual Property License, 2007, Intellectual Property Course Handbook Series, no. G-915 (Practising Law Institute, 2007);
Adam Jolly and Jeremy Philpott, The Handbook of European Intellectual Property Management: Developing, Managing and Protecting Your Company’s Intellectual Property (Kogan Page, 2007);
John A. Pearce II and Richard B. Robinson, Strategic Management (McGraw-Hill Irwin, 2009).

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