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Licensing the Technology You Need

To produce a new product or market a new service, chances are you need new technology. Likewise if you launch an e-commerce Web site or simply improve the efficiency of your old operation. These days, new technology is usually synonymous with fancy software. But it can also mean electronic hardware, specialized machines, controls and instruments, biological materials, secret formulas, or proprietary processes.

If your company is like most, it lacks the resources to develop sophisticated new technology needed for innovation and growth. So you'll have to find a company that has developed that technology and:

• Merge with or acquire it,
• Form a joint venture with it, or
• License (or rent) its technology.

Lets look closer at that last option. It may be the easiest and most cost-effective means for your company.

Licensing Leaves You Independent

The advantage of licensing technology is that you remain independent and retain more control over your operation. But you should negotiate a licensing agreement only if you and the licensor trust each other and understand each other's objectives and interests in the licensed technology. This is critical because you will be privy to the licensors trade secrets.

Being a licensee usually involves paying a fee, royalties or both to the licensor. Royalties are based on revenues the licensee derives from the technology's use. Sometimes the licensor might want an equity position in the licensees business in lieu of fees or royalties.

Where To Find It

What should you do if you have a clear idea of what sort of technology you need but its unavailable as off-the-shelf (or downloadable) software? Conduct a search for sources. An Internet search engine is a good place to start. Other sources include major universities, such as Stanford, Ohio State, Johns Hopkins and Massachusetts Institute of Technology; trade and scientific journals; big corporations, such as IBM and Exxon Mobil Chemical; and the U.S. Patent and Trademark Office (www.uspto.gov).

Many of these sources have their own technology-licensing offices with catalogs of software, inventions and gizmos available for licensing -- some already patented and some still in development. Those offices routinely deal with prospective licensees, and some even post their license agreement templates on their Web sites.

You may find that the company whose technology you seek -- especially if it's a high-tech startup -- isn't ready to license its product. In that case, an attorney can help you write a proposal and draft a license agreement from scratch. If the technology you seek is patented, hire a patent attorney.

Disclosure And Confidentiality

Suppose you find a company whose technology you're interested in licensing and express your interest. Before it will discuss the matter further, the company will probably ask you to sign a confidentiality agreement. This agreement binds you to keep confidential whatever you learn later about the technology. Only then will the company feel free to disclose everything you'll need to know to decide whether the technology is really worth your while.

License-Agreement Terms

Negotiations typically start with a discussion of duration (number of years you want the technology), scope (how you intend to use it), exclusivity (who else can use it), and fees and royalties (your cost to use it). All license-agreement terms are negotiable, of course, and a single standard agreement doesn't exist. But most agreements include some or all of these provisions:

Identification. The agreement identifies the licensor, the licensee and the technology being licensed. It may also define critical words or phrases in the agreement -- such as net sales, sublicense and derivative products.

Warranty. This establishes that the licensor owns the technology or has the right to grant a license or both.

Exclusivity. You may negotiate for exclusive rights to the technology or the licensor may retain the right to grant licenses to others.

Scope. You must specify how you will use the technology, whether you will modify or continue to develop it, how you will derive revenue from using it, and in what territories you may sell derivative products or services.

Support. The licensor must tell you all information you require to commercialize and exploit the technology. Some agreements require the licensor to provide ongoing training and support. A royalty-based agreement creates a strong incentive for the licensor to do so.

Licensor rights. The licensor may want to retain the right to use the technology for its own purposes, publish its findings about the technology, or use the technology for educational purposes or further research.

Sublicensing. This provision will state whether you may grant sublicenses to your subsidiaries or affiliates. Often the licensor must approve a sublicense agreement.

Patent application and enforcement. If the technology is not yet patented, the agreement should say which party will be responsible for pursuing an application, if any. If the technology is already patented, one party should be primarily responsible for defending it against infringement -- which may involve suing infringers.

Payments. The agreement should state the fees, royalties or other consideration that you must pay to the licensor; when payments are due; and late-payment penalties. Payments may include:

• A license-documentation fee payable when the agreement is executed,
• Reimbursement of expenses incurred in transferring the technology and related materials to you,
• An annual license reissue or renewal fee,
• A minimum royalty payment in dollars or royalties based on a fixed percentage of net sales (or other form of revenues) derived from commercialization of the technology, beginning after a specified date or event (for example, one year after offering the derivative product or service for sale),
• A portion of the royalties that you earn from sublicensees, and
• Common stock, options or other forms of equity in your company.

Audits and reports. You will probably be required to keep detailed records of your and your sublicenesees sales and net sales and to allow the licensor to examine these records to prove that royalty payments are correct. You may also be required to submit regular progress reports to the licensor.

Termination. This provision specifies the conditions under which either party may terminate the agreement. In some cases, if you don't meet a series of deadlines or milestones -- such as developing a prototype, offering a derivative product or service for sale, or gaining regulatory approval to commercialize the technology -- the licensor may terminate the agreement or specified provisions, such as exclusivity.

Other circumstances that would lead to termination might include your filing for bankruptcy or if both parties agree to call it quits.

Indemnification. Usually you must agree to indemnify the licensor against claims arising from injury, death or property damage resulting from your commercializing the technology. And you in turn can protect yourself by asking the licensor to indemnify you against these same claims.

Confidentiality. You must keep confidential not only the technology but also the license agreement itself. In some cases, you may not use the licensors name in association with the marketing of derivative products and services.

Assemble Your Team

To negotiate a good deal with a licensor, you'll need advice from people who thoroughly understand the technology -- and those who understand your company's long-term strategic plans -- as well as solid legal advice. We would be glad to help you explore the opportunities and obligations of licensing technology.

Negotiate a licensing agreement only if you and the licensor trust each other and understand each other's objectives and interests in the licensed technology.