1. LICENSING AND FRANCHISING; FUNDAMENTALS
Tamara Nanayakkara

2. 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

3. 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!?

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

5. 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

6. 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.

7. 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)

8. 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.

9. 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,

10. 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

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

12. 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

13. 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

14. 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

15. 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)

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

17. 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

18. 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.

19. 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

20. 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)

21. Nothing is cast in stone
Everything is negotiable

22. Aim for win-win outcome
Golden Rule
Aim for win-win outcome

23. 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

24. 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.

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

26. 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.

27. 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.

28. 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