LICENSING AND FRANCHISING; FUNDAMENTALS Tamara Nanayakkara

Outline Challenge to businesses – how to keep growing in a slowing economy; Importance of finding new ways of generating income Thinking of intellectual property as assets Licensing (and Franchising), strategic use of these assets Negotiating

Economic Growth Traditionally, economic winners were those who had natural resources. Scarce=assumption of finite growth. Resources down or constant, population up. But growth up!?

New Economy Reason the “new economy”. Knowledge making more effective use of resources - 1950 knowledge component in manufactured goods 20%, 1990s 70% Application of knowledge, key to competitiveness

The IP System Provides a legal means for protecting creativity and knowledge; patents, TM, copyrights, design rights etc provide the creator the means to prevent others from using his knowledge/creativity Ensures the continued production of knowledge and its dissemination

IP Assets By providing such protection the IP system gives more than the right to prevent others but in fact creates valuable tradable (intangible) assets.

Licensing Licensing is when an owner of such an intangible asset, transfers the right to use that asset to another, for a price, while retaining ownership of that asset. In practice, the owner of technology protected by patents or trade secrets or both gives another the right to use that technology to manufacture given product(s)

Licensing of IPR Licensing is only relevant where there is an intellectual property right Territorial nature of IPR If the technology (or other kind of expression of human creativity) is not protected by an IPR, it is then not property owned by someone and as such the issue of licensing does not arise.

Why License For the Licensor For the Licensee Simultaneous use by many Expand manufacturing Earn revenue Access to markets Stick licensing Create standard Cross license For the Licensee Stay current in evolving market No in-house R&D, yet access to technologies Expand into new product line Settle dispute Manufacture standardized product Access to patent, know-how, training For the licensor Exploit technology in non competing field As part of the sale of the business Obtain needed technology – cross license Convoyed sales – copier/print ink Access to markets could mean access to low cost labour,

Why Not License For the licensor For the Licensee Create competitor Bad choice of licensee could damage reputation Lose control of proprietary information Administrative cost Legal complications For the Licensee Royalties add cost Secrecy requirements Administrative burdens - audits, reports etc May be obliged to grant back improvements Admin cost – cost of audits etc

Negotiation you don’t get the deal you deserve but you get the deal you negotiate

Preparation - information gathering General information on the relevant market Companies active in that market and their products Existing technologies used by such companies On going R&D about relevant technologies Prevalent licensing practices in the relevant markets and products

Preparation - sources of information Publicly available information of publicly traded companies. Online and subscription database services for the relevant market or products Trade publications, trade and technology exhibitions, fairs and shows Technology licensing offices of research based universities Relevant government departments Professional and business magazines, journals and publications concerning the relevant products and markets Professional and business associations Technology exchanges, Innovation centres Patent information services

Preparation - Patent Information Patent information is the collection of patent documents consisting of patent applications and grants worldwide. For technologies that are patented it is the most useful yet the least utilized it is the most recent, gives the legal status, information on technological activity (possible alternatives) and those involved in such technological activity

Preparation Analyze your strengths and weaknesses Identify your team leader supported by financial, legal and technical people Prepare summary of key issues (Heads of Agreement, Term Sheet)

The Agreement – who, what Parties - who will be bound by it Subject matter - what exactly is being licensed

The Agreement - Extent Exclusive, non exclusive or sole (licensor and licensee can operate in the territory) Sub licenses – must be expressly granted Field of use – technology divided Scope - make, use or sell, offer for sale, import Territory Improvements Field of use Motor- car, plane, boat Sound system – broadcast, theatre, home Scope – license to have made is implied in license to make. Not a sub license. A sub contract

The Agreement - Financial Lump sum - payable on the happening of a particular event Royalties - recurring payments tied to the use of the technology, commonly based on sales. Could go down as production goes up (fixed price per unit or % of sales) Annual minimum royalty - usually where the license is exclusive and the licensor needs to ensure a regular income.

The Agreement Dispute settlement - Increasingly parties opt for alternative dispute resolution procedures, such as arbitration and mediation, or mediation followed by arbitration. Termination - either on the happening of an event such as the expiry of the patent or on termination by one of the parties

The Agreement Clauses to pay attention to - grant back provisions (obliging licensee to give improvements to licensor), post termination use of know how, price and volume fixation by the licensor, tie in clauses (obliging licensee to take other technology that he does not need)

Nothing is cast in stone Everything is negotiable

Aim for win-win outcome Golden Rule Aim for win-win outcome

Trade Mark License A license giving the right to manufacture a particular product using the licensors technology may also include an agreement to use the licensors trademark. It may also be only a trademark license agreement In either case in addition to the general clauses above there may be clauses particularly relevant to trademark license agreements Particularly quality control – products must meet the quality standards set by the licensee, submit samples of products, labels, packaging etc for checking Others – renewals, not to use similar trade marks, not to abuse the reputation of the trademark

Franchise A specialized license where the franchisee is allowed by the franchisor in return for a fee to use a particular business model and is licensed a bundle of IP rights (TM, service marks, patents, trade secrets, copyrighted works…) and supported by training, technical support and mentoring All franchisees are licensees but not all licensees are franchisees The trade secrets include the franchisor’s documentation on operating procedures,technical assistance, marketing set-ups, training systems, management policies, accounting practices or even packaging techniques and all other relevant information that helps a franchisee to run the business.

Both the franchisor and the franchisee share the overall aims and goals of the franchise and work for their mutual benefit

The franchisor maintains and updates the manuals, procedures and practices of the business model and trains and assists the franchisee in its use and implementation The franchisee maintains and promote the franchise and conducts the business as prescribed in the manuals and guidelines, including protecting the IP of the franchise system, and to operate in accordance with territorial or geographical obligations agreed The franchisee has the obligation to pay the agreed fees.

Why enter into a Franchise Why not enter into a Franchise Self employed Lower risk of failure Recognisable image On going support Easier to obtain financing Benefit from franchisors R&D Ready made customer base Why not enter into a Franchise All IPR owned by the Franchisor Payment of fees Obliged to follow the business model Innovations may be assigned back to the Franchisor Depend on the success of the Franchisor Lower risk of failure. The most vulnerable phase for a business is the start-up phase during which the failure rate is high. A franchisee benefits from a system with a proven track record for products and services that have already done well in the marketplace Benefit from brand reputation. The franchisee benefits from the image, reputation and goodwill already attached to the brand,thus the cost of advertising will be significantly lower. In addition,the franchisee may benefit from the collective advertising effort of all franchisees (as well as the franchisor). Collective purchasing power. Franchisees may sometimes benefit from the collective purchasing power of all franchisees, obtaining supplies at a lower cost thus increasing the profit margins. However, it is not uncommon that franchisees are contractually limited to buying their supplies through the sources authorized by the franchisor. Training and technical support. Franchisees often benefit from training and technical support on,for example, how to conduct their business successfully and ensure that it conforms to the standard operating procedures of the franchising system. This may include support on accounting procedures,management of human resources,and marketing and financial administration. Easier to obtain financing. A franchisor may support the request of a franchisee for funding from lending institutions, thus increasing the likelihood of obtaining funds for developing the business. Research and development. As the franchisor develops new or better techniques for the operation of the franchised units, this information is shared with the franchisees. This gives the franchisees access to the results of research and development that they may not be able to afford on their own IP rights. All IP rights relating to the franchising agreement are owned by the franchisor regardless of how much the franchisee has contributed, for example, to increase the value and enhance the reputation of a mark. Payment of franchising fee and royalties. On entering into a franchising relationship the franchisee is required, invariably, to pay an initial fee for the grant of the franchise. Thereafter, royalty fees are to be paid at a rate stipulated in the franchising agreement. For the franchisee, these amounts may represent significant costs that it may not be able to afford or that may limit its ability to obtain sufficient returns on its initial investments. In addition, the permanent liability of making payments often brings with it a feeling that the franchisee does not own the business but is merely renting it. Limited freedom to operate the business. The standard operating procedures generally provide the blueprint of how things must be done by franchising units; therefore the franchisee is very limited in his actions. A franchisor may,for example, limit the franchisee to selling only the products or services that he has approved. Sometimes, the standard operating procedures may prove to be inadequate in international franchises where foreign methods may not be suitable for local circumstances and the overall local business environment. The franchisee is often unable to vary,modify, adapt or improve the system to suit local conditions. Innovations often assigned to the franchisor. If the franchisee develops certain innovations, within the limited freedom to operate, a franchise agreement would generally require the innovation to be contractually assigned to the franchisor so that it may be made available to all other franchisees. Dependence on franchisor’s success. If the franchisor is successful,it is likely - though by no means certain - that the franchisees will also prosper and benefit from the success of the franchisor. However, if the franchisor is not successful or encounters any problem it is more than likely to have a negative effect on the franchisees.

Summary To survive and flourish in the global business environment where competition is acute and product cycles are short, business have to find new ways of being competitive. Identifying IP assets and strategically using and leveraging them is crucial in this environment. Licensing is an efficient way of maximizing IP assets