LICENSING AGREEMENTS



Businesses use licensing agreements to simultaneously protect and exploit intellectual property. Many well-known companies grant or receive licenses. For the business granting use of its intellectual property, be it a brand name, a patent, or a copyright, a license to another company is a mechanism for investing intellectual capital while preserving the ultimate control over it. To the licensee, the agreement is a way to obtain something of value that the licensee may not be able to produce on its own, but the licensee may have expertise or market position to generate revenue that the licensor isn't well equipped to do on its own. Licensees are distinguished, however, from vendors or outside contractors that simply perform a service for the originating company; licensing agreements involve the assignment of certain rights to the intellectual property.

As this simplification suggests, licensing is a symbiotic relationship between companies that are in a sense mismatched with intellectual property. Firms with intellectual assets that are more valuable than their current marketing structure can support look to outside partners to maximize the returns on their assets. An owner of a well-known trademark, for instance, may not possess the manufacturing capacity to produce and distribute all of the merchandise that could be marketed under the trademark. Moreover, it may not be in the company's strategic interest to get involved in various types of manufacturing if those activities are outside its sphere of competency. Meanwhile, other companies may be technically skilled at manufacturing such products, but might lack the name recognition and access to distribution channels that a major brand name enjoys. Through a licensing agreement, each may capitalize on its strengths.

Licensing agreements generally are legal contracts that stipulate the rights and responsibilities of each party. Thus, if a copyright is being licensed, it is usually for a limited purpose and the licensee can't simply use the material as it pleases. The agreement also specifies the financial terms under which the grantor will be compensated for the use of its assets. The finances usually take into account the value of the market for the licensed product, the costs of producing the licensed product, and what the licensor might be losing by not pursuing a different use of its assets. Any number of financial arrangements may be worked out, but requiring a percentage royalty on sales is a common practice. The contract may also require a minimum payment to the licensor. In other words, the licensee typically assumes a greater out-of-pocket expense risk in a licensing agreement, whereas the licensor often risks a greater opportunity cost if the anticipated returns don't pan out.

According to Robert C. Megantz in How to License Technology, alternative strategies to licensing include forming a joint venture, acquiring a company with the needed expertise, developing internal capacity to perform whatever functions would be licensed, and allowing another company to buy and administer the intellectual property rights altogether. Each of these methods carries different risks and potential returns for the business.

Licensing agreements can be divided into three basic categories:

They may be further distinguished as licenses between business partners (loosely defined) versus licenses between property owners and end users. End-user agreements are common in certain types of copyright licensing, notably for software and music. In this scenario, the end user simply pays for the limited right to use the property and usually does not transform or resell the property in any way. Most other types of licenses are part of a business strategy between separate companies, neither of which may be an end user of the licensed property, that will generate new sales from third-party end users. In partner licenses the licensee is expected to resell the property in some form.

COPYRIGHT LICENSING

Copyrights apply primarily to original works of artistic merit such as books, plays, magazine and newspaper articles, musical recordings, photography, paintings, and sculpture. The U.S. Copyright Act of 1976 clearly defined the following exclusive rights of a copyright owner:

  1. The right to make copies of the work.
  2. The right to prepare derivatives (arrangements) of the work.
  3. The right to distribute copies of the work to the public.
  4. The right to perform the work publicly.
  5. The right to display the work publicly.

These rights also suggest some of the ways in which copyrighted material may be licensed. If a publisher owns the copyright to a book, for example, it may assign limited rights to another company to adapt and market the book for another audience. This may be advantageous for producing international editions of books or releasing copyrighted materials in a format other than the copyright holder's specialty, e.g., marketing an electronic version of a print product.

MUSIC.

Musical recordings and scores are fully protected by copyright law, but face unique challenges regarding infringement and licensing. Put simply, there is a wide and varied market for playing and distributing music in many settings, many of which are informal and don't require direct contact with licensors. Most music licensing is a very simple transaction of paying predetermined royalties, and no special negotiations may be necessary. The American Society of Composers, Authors, and Publishers (ASCAP) and Broadcast Music, Inc. are the United States' largest music licensing organizations, together collecting well over $500 million in royalties each year. These organizations distribute licensing royalties to the copyright holders after deducting a handling fee.

Companies that license music include almost any that uses music to enhance its products (such as using music in movies) or business atmosphere (such as playing music in restaurants). Some examples of licensees are television networks, cable channels, movie studios, radio stations, airlines, concert halls, and shopping centers. The royalties for playing copyrighted music—which includes most recorded music currently on the market—vary with the size and type of establishment. Generally, the larger the business and the larger the audience, the higher the rate. Very small businesses, including restaurants under 3,750 square feet, are legally exempt from paying royalties. The controversial Fairness in Music Licensing Act of 1998 came down on the side of small businesses in this respect, reducing the number of firms subject to music licensing requirements.

Enforcing music licenses is particularly problematic because retail musical recordings are readily available and copyright holders often literally must police unauthorized infringements in public places. The sliding royalty scale can also lead to disputes when licensees believe they qualify for a lower rate than the licensing agency requests. Historically, this has sometimes provoked antagonism between music licensors like ASCAP and licensees like restaurants. Recently, however, ASCAP has tried to promote co-operation over confrontation with licensees.

SOFTWARE.

As with music, software presents special problems for copyright holders. By nature it is easily duplicated, but unlike music, software is typically not used in places open to the general public. This poses enormous challenges for enforcing software copyrights, as so-called pirated copies of software applications are believed to account for anywhere from 10 to 40 percent of the software installed on a typical business computer. The problem is possibly more widespread in the consumer market.

As with most copyright holders, software publishers have tried to closely restrict duplication and distribution of their products. As end user agreements, software licenses come in two forms: single user and multi-user site licenses. With a few exceptions, single user licenses allow only one installation of the program for use by one person. Multi-user licenses usually specify a numeric range of permissible installations, such as up to 1,000 simultaneous users, and may restrict the physical space over which the software may be deployed, e.g. within one building. Some software installation programs include anti-piracy protections, but the same features that allow legal reuse of a program, for example, reinstalling the program after a system crash, tend to also permit illegal uses.

License infringements may occur at any of several stages in the software distribution process, and thus end users may not even know when they're using pirated copies. Some retailers and computer services install illegal copies of software on computer systems for sale as a means of attracting customers or boosting their profits by not paying licensing fees. There is also a thriving global black market for software in which illegal copies are transmitted for free or at minimal cost, with none of the proceeds returning to the publisher.

Businesses are generally liable for any illegal software on their computers, however, regardless of its origin. Watch-dog organizations like the Software & Information Industry Association (formerly the Software Publishers Association) conduct surprise audits at businesses to ensure their compliance. Individual software publishers also have methods of identifying piracy, such as through registration verification. When violations are found, large companies may be subject to fines in the hundreds of thousands of dollars.

Part of the solution to software licensing problems, some believe, is for businesses to implement sophisticated resource-tracking systems that monitor the installed base of programs—perhaps in real time—and identify when an unauthorized application has been installed. As of yet, there are few, if any, widely accepted tools for this, but it is an area of development likely to attract support from both software users and publishers.

Aside from the contentious issues surrounding end-user software licenses, partner licensing is also a common practice within the software industry. This occurs when one software developer licenses an application or, more often, an application component for use in conjunction with another developer's software. Most major off-the-shelf software titles include some licensed components. For example, a graphics conversion filter in a word processing application may have been developed by an outside firm and purchased for either exclusive or nonexclusive use in the word processor.

PATENT LICENSING

Patents, legally protected unique product concepts or processes, may be licensed under a variety of circumstances as well. One of the more common reasons is when two businesses claim rights to an invention. When one of them is ultimately determined to have the legitimate claim, the other must either license the patent from the its owner or give up the infringing portion of the work it has done on the competing version. The parties may choose to litigate it in court, or they may evaluate on their own the evidence and costs involved and settle with a licensing agreement. A similar negotiation must occur when a company creates a patentable innovation that is based on someone else's patented product. In order for either company to use the innovation, the innovator must license its idea to the original patent holder, or the original holder must license its patent to the innovator.

As with other kinds of licensing agreements, patent licenses may be used for all sorts of business purposes. Sometimes the patent owner is a start-up inventor who needs an experienced partner to produce and market the invention. For example, in the pharmaceutical and biotechnology industries, it is not uncommon for leading manufacturers to license some of their best-selling drugs from smaller firms, which in turn may derive a great deal of their revenue from licensing out their ideas rather than marketing them on their own. At the same time, larger firms may wish to leverage their valuable patents in markets or applications that are outside their focus or expertise; for this they may choose smaller companies with unique credentials or other large firms with complementary market placement.

The semiconductor industry uses a special kind of engineering drawing known as a mask work to produce integrated circuits on semiconductor chips. Covered in the United States by the Semiconductor Chip Protection Act of 1984, mask works enjoy somewhat of a cross between copyright and patent protection. When they are registered they enjoy extended protection from duplication and competition.

TRADEMARK LICENSING

Trademark and service mark licensing involves selling the rights to use a distinctive, and usually well-known, name and logo in conjunction with a product or service. Real-world cases include:

  1. Walt Disney Company licenses a variety of its cartoon characters to Timex Corporation for use in character-themed watches bearing Timex's name.
  2. The food manufacturer ConAgra, Inc. licenses its popular Healthy Choice brand name to Kellogg Co. for use in a line of breakfast cereals, a product line that is outside ConAgra's own marketing strongholds in refrigerated foods, canned foods, and food ingredients.
  3. Major universities license their athletic team logos to apparel producers in order to satisfy the strong public demand for college sports clothing and accessories and stimulate further interest in—and royalty revenue for—their athletic programs.

As any observer of American culture can attest to, entertainment companies like Disney maintain some of the most exhaustive trademark/copyright licensing programs. Each new character Disney creates in its animated movies is potentially licensed for dozens of merchandising applications such as toy figures, clothing, lunch boxes, and so forth. (Depending on the circumstances, however, with licensed characters it may technically be a copyright that is licensed rather than a trademark.) The process is similar, if less visible, with most kinds of trademark licensing, whether for the consumer market or the industrial market.

Still, trademark licensors must also defend against unauthorized uses of their names and icons. Particularly with apparel, they must contend with an extensive cottage industry of unlicensed apparel producers that use famous names and images to sell caps, T-shirts, and the like, often at a discount to "official" merchandise. Indeed, in some cases, as was true of Anheuser-Busch, it was out of defense against such abuses that companies first hit upon the idea of licensing their names and logos for profit.

Because trademark licensing builds on an already strong brand identity, once obvious precautions are taken against abuses it can represent one of the lowest-risk forms of licensing for both licensor and licensee alike. Care must be taken, of course, to ensure that the licensed uses of the trademark don't tarnish the image they are based on. In many cases, though, the primary and the licensed uses of the trademark can benefit each other, as an advertisement for one is an indirect promotion of the other.

SEE ALSO : Brands and Brand Names ; Copyright ; Patent Law/Patents ; Service Marks

FURTHER READING:

Megantz, Robert C. How to License Technology. New York: John Wiley & Sons, 1996.

Revoyr, Jack. A Primer on Licensing. 2nd ed. Stamford, CT: Kent Press, 1995.



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