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Businesses are obliged to constantly adopt new technologies to maintain lucrative, innovative, and responsive manner in today’s global market. Many technology companies choose to collaborate with other businesses to achieve these purposes by utilizing several ways. Particularly, technology licensing is a preferred way to commercialize and exploit intellectual property (“IP”), as it helps the owner to monetize its technology, but still holds the greatest possible control over the IP and related technologies.
Technology licensing mostly requires licensing agreements to be engaged between parties. There are different types of licensing agreements depending on who will grant and use the license, and how long it will be used. “Outbound License” or “Out-Licensing” agreements are the preferred type of licensing agreements since they offer a practical approach for owners of the IP to extract revenue effectively by commercializing the technology.
Basically, out-licensing agreement means companies (owners/sellers of the IP) granting to a third party some or all the rights of the intellectual property rights (“IPR”) of the technology in question, including the right to sell, commercialize, develop, promote, market, use, sell, and offer. Typically, companies may grant out-licenses without the consent of the buyer unless otherwise specified in the licensing agreement. However, parties to an out-licensing agreement often stipulate that, the company shall promptly provide the buyer with executed copies of each executed out-license, provide written notice of an out-licensee’s material breach of its obligations, and provide written notice following the termination of any out-license. Therefore, the buyer is informed during course of the execution of the contract and thus, negotiation process between the company and buyer may be more fruitful. Regardless of notification obligations, it should be emphasized that there are always several different litigation risks. For instance, if license negotiations break down, an out-licensee may commence legal action to invalidate the IP in question.
Unlike out-licensing agreements, a third party or its subsidiary grants to a company an inbound license under in-licensing agreements. By thus, a company granted with an inbound license may often have to face the financial outlay of the in-licensing agreement. As opposed, out-licensing agreements offer companies to facilitate penetration into new markets and distribution channels for the sake of exploiting its IP without facing the financial outlay of a license.
What makes the out-licensing agreements a practical approach?
The most common reason why companies grant out-licenses is because it is the simple way to monetize their technology and they have minimum drawbacks. In other words, out-licensing agreements offer companies a wide range of opportunities. To exemplify; out-licensing agreements may:
– strengthen relationships and consolidate companies’ values with its existing customers and others concerned,
– facilitate penetration into new markets and distribution channels without the need of increase in capital expenditures or ongoing expenses,
– allow a business to rely on the expertise, capacity and skill of an out- licensee to commercialize IP, which is especially valuable when a company lacks the infrastructure, financial resources and know-how to bring a product to market independently;
– provide access to improvements a out-licensee made to its licensed technology without the related research and development costs,
– provide a company with access to new technology or neutralize blocking technology through cross-licensing,
– give a business some control over the technical standards set by national and international standard-setting organizations, which typically require that patentees grant licenses for technology adopted in the standard-setting framework under fair, reasonable and nondiscriminatory terms,
– ameliorate companies’ brand recognition in new markets[1].
As shortly noted above, technology licensing may also have minimum drawbacks in certain situations. For instance, licensing out may often require time-consuming steps including auditing the company’s existing IP, identifying the IP to license out and creating a licensing strategy. In addition, negotiating and drafting license agreements and monitoring the licensed IP may also take time.
There may be other drawbacks regardless of whether a company will grant an outbound license indefinitely or temporarily. These drawbacks are including but not limited to: (i) diminution in the value, (ii) litigation risks, (iii) exploitation of the licensed technology, and (iv) creating a competitor. Accordingly, where the out-licensee becomes to have more effective position in the market, customers of the company may prefer the out-licensee’s product rather than the company. To elaborate, an out-licensing agreement may result in out-licensees becoming competitors in the market and thus, companies may make less in royalties than it foregoes in lost sales to the out-licensees or, even worse, that companies yield market share to out-licensees. Furthermore, if there occurs a diminution in the value, companies that license out IPR must invest resources in quality control measures to ensure that the out-licensee’s use is compatible with brand standards and maintains the quality of the licensed products and technology.
To conclude, technology licensing is becoming an increasingly important transaction category in today’s market. The more importance of licensing out technologies increases, the more management of the IPR in the context of technology licensing becomes significant. Therefore, out-licensing agreements enable companies to monetize their technology, facilitate penetration into new markets, and utilize financial resource of the out-licensees. If companies understand and asses the drawbacks of out-licensing agreements particularly its legal risks, they can easily utilize its benefits and remain their innovative and responsive manner in the market.
Ezgi Ceren Aydoğmuş
[1] Hickey, Barrow & Harris:” The Pros and Cons of Licensing Technology”, 2018 New York.
