November 1, 2021

Consider Licensing Your Technology to Generate Revenue for Your Business

In the five days prior to publishing this post, I unexpectedly received four requests from startup founders and small business owners as to whether they should license their technology to generate revenue. One such inquiry came from a woman in California who read my blog post about a presentation delivered by Adam Philipp, an attorney who specializes in intellectual property (IP) law firm, on defining IP and how you should protect it. Having co-founded a startup in 2016, the woman was inquiring as to whether she should continue in her attempts to commercialize her technology to enterprise customers, which was not producing the sales as she had projected, or license her technology to licensees. I was quite pleased to receive her question because I think too many business owners miss the opportunity to generate revenue and increase their business' value through the licensing of their technology. Whether it is in my capacity as an founder or business advisor, I have long advocated that if done correctly, technology licensing can bring significant benefits to a business.

Advantages of implementing a licensing model include:
  1. The licensor (inventor-owner) does not have to finance the commercialization process.
  2. The innovation may have a greater chance to implementing a go-to-market strategy faster because a larger, more experienced company is handling the commercialization.
  3. The innovation may reach more markets if the licensee is a large, well-funded enterprise.
  4. The licensor will not have to build and manage a commercialization team.
  5. The licensor will not have execution risk (although if the licensing agreement is based on sharing revenue from the commercialization of the technology by the licensee, execution risk exists for the licensor).
  6. The licensor should be protected from product liability issues if the licensing agreement is properly written.
  7. The licensor retains ownership of the intellectual property.
Below is some criteria to consider when selecting a licensee and drafting a licensing agreement:
  1. Will you offer an exclusive license or a non-exclusive license?
  2. Are you or your licensee responsible for defending your patent? With the high cost of litigation, it is advised that you shift this responsibility to your licensee should your patent be challenged or infringed.
  3. How will royalty payments be determined?
  4. What conditions constitute grounds for early termination of the licensing agreement?
  5. Will you allow for renegotiating the agreement after a period of time has passed?
  6. Does the agreement guarantee a minimum or maximum royalty per contract period? Does the agreement have provisions for assessing penalties for late royalty payments?
  7. What happens if the licensee goes bankrupt or is acquired? Better get that into the contract as well.
"The Pros And Cons Of Licensing Technology" by Toni Hickey, William Barrow and Charles Harris, all three of whom are attorneys, is a resource that I find useful. This paper presents viewpoints from a corporate IP owner as well as a potential licensee, the difficulty of pricing technology for licensing, and tips for companies looking to license in or license out technology such as (1) opportunity cost, (2) due diligence, (3) comprehensive valuation, (4) licensing terms, (5) monitoring of licensees, (6) litigation preparedness, and (7) enforcement terms.

In explaining how licensing can add value to a business, this website says "[l]icensing technology provides a low-risk way to capitalize on your intellectual property assets. Due to the high cost of manufacture and the comparatively small investment of a licensing program, many of the risks that a company would otherwise face in exploiting its intellectual property are transferred to the licensee. Depending upon the exclusivity of the license, there are varying degrees of risk involved for the licensee and licensor; however, an effective license strategy will minimize risk for both parties.

"Before a company considers licensing out its technology, however, it should consider whether other ways of taking advantage of its property, such as joint ventures and strategic alliances with other companies, would better compliment its economic position. Once licensing is decided upon, the nature of the company as well as the particular property it wishes to utilize should be carefully considered before deciding the architecture of the license."

Tom Kulik, a Texas-based IP attorney, authored an article for Above the Law entitled "5 Things To Think About Before Licensing Your Intellectual Property." Similar to the aforementioned paper, Mr. Kulik also recommends performing due diligence. As he explains, "This may seem like an odd point, but it is essential — you need to know your intellectual property assets as much as the potential licensee with which you are dealing. I know, I know — you are probably reading this and saying 'duh,' but you would be stunned to realize how many times a company has made assumptions regarding its intellectual property assets that are, quite simply, incorrect." He further recommends taking "the time to not only understand what is being licensed, but whether and how it can be licensed in the first place."

On the topic of exclusivity, Mr. Kulik writes:
Exclusivity in licensing should only be done after careful consideration has been paid to the potential licensee, the market and the licensor’s other intellectuals property obligations. This may come as a surprise to you, but I have personally dealt with situations where a lack of such care resulted in multiple exclusive licenses needing to be "unwound" by amendments so that the appropriate intellectual property rights were in place. Assuming any grant-back rights, as a general rule exclusivity basically hands a licensee a set of intellectual property rights that cannot be exercised by the licensor for the duration of the license. Tying the hands of the licensor under an exclusive license should be met with appropriate royalties, minimum guarantees and, in some cases, even upfront fees or advances depending upon the nature of the underlying deal. Further, additional responsibilities are placed upon the parties in exclusive licenses (i.e., joinder of the licensor in intellectual property infringement litigation). Sometimes a non-exclusive construct with specific restrictions may work equally well for the parties. In any event, when it comes to exclusivity in intellectual property licenses, always proceed with caution.

For those who are considering patenting their technology, I am often asked: "But isn't it expensive to file a patent application?" It can be a lot less costly that you may think. Mr. Phillp published a post of his firm's blog that says while "[f]iling a US patent application can cost less than $1,000 for a do-it-yourself version, or more than $16,000 for a complex application (such as for software or a complex machine) drafted by a patent lawyer, the US Patent and Trademark Office (USPTO) makes things a little easier for small businesses by providing discounts to those who qualify for small or micro entity status. For example, the basic filing fee for a utility patent application is $320. It’s $160 for a small entity and $80 for a micro entity."

When I was serving as co-founder and chief executive of ROI3, Inc., our primary product was an mobile application to allow Chinese speakers to learn specialized English terminology. One app was focused on English medical terminology (see screenshot on the left) and another app that presented English terms used in aviation settings. Rather than making our apps available for consumers to download on one of the many app stores available in China, ROI3's business model focused on licensing our technology to enterprise customers. We licensed our medical app to Chinese medical schools and research institutions and our aviation app to flight training centers in China. Items my colleagues and I had to consider included exclusivity or non-exclusivity, when license fees were to be paid, auditing mechanisms to insure that the licensee was accurately reporting revenues resulting from the use of our technology, and insuring that our technology was not be used by the licensee in ways not defined in the license agreement.

However, it is no secret that licensing foreign technology in China carries significant risks with preventing IP theft as the most significant one. And while most people think about members of the Chinese People's Liberation Army hacking into the computer systems of American firms, I advise most companies doing business in China that having their Chinese partner or licensee use their technology in ways not mutually agreed upon or explicitly prohibited in a license agreement should be their primary concern. For those readers thinking of licensing their technology in China, the following posts authored by Dan Harris, via the China Law Blog, may be a useful resource:

What advice do you have on how to successfully license your technology?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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