SIC 6794
PATENT OWNERS AND LESSORS



This classification includes establishments primarily engaged in owning or leasing franchises, patents, and copyrights that they in turn license others to use.

NAICS Code(s)

533110 (Owners and Lessors of Other Non-Financial Assets)

The patent owners and lessors industry deals with the sale of intangible rights in property. This business has often become controversial, as it is sometimes difficult to determine who created the property, and thus who is entitled to transfer rights in it. Another problem has been making a distinction between similar examples of intangible property, like two similar songs or books, for instance.

This industry covers three forms of intangible property: copyright, franchise, and patent. Copyright generally refers to literary or artistic products of an intangible nature; franchise deals with the trademark and goodwill of a business enterprise; and patents concern products and industrial processes.

In general, licensing entails granting permission to perform a specified activity. In the case of this industry, it constitutes permission to use someone else's intellectual property. Copyright, patents, rights in music, and performance rights are all aspects of intellectual property. Rights in these forms of intangible property are protected by law to a similar extent as rights in real property. These licenses are personal to the licensee and thus are not transferable or assignable except by express agreement. They are also generally revocable at any time.

Franchising entails granting rights to operate a business of a uniform type to a franchisee by permission of the franchiser. In general, the franchiser grants an individual, the franchisee, the right to operate a business under its name. In exchange for a substantial portion of the individual business' revenues and support from the franchiser, the franchisee pays an up-front fee and a portion of revenues and agrees to use specified products and procedures in the operation of the business. According to the U.S. Department of Commerce, 40 percent of all retail sales are from franchise businesses. Predictions place that figure up to more than 50 percent by the turn of the twenty-first century. In 1995, there were 540,000 franchise businesses in the United States, employing more than 8 million people. The franchise industry generated $758 billion in sales in 1995 alone.

The major components of the patent owners and lessors industry include: copyright buying and licensing; franchise selling and licensing; music licensing to radio stations; sheet and record music royalties; patent buying and licensing; and performance rights licensing. Each of the various entities that constitute this industry have different organizations and structures.

Copyright Buying and Licensing. Under copyright law, the writer or originator of literary or artistic productions receive sole and exclusive privilege of the making and sale of copies for a prescribed statutory period. This right could be bought, sold, and licensed, just as any other rights in property. For example, the rights to copy and sell the recording of a song could be sold by the writer to another party. This party might license the rights to the song to a third party, allowing this party to produce and sell copies of the recording in a specified area, such as another country.

Franchise Selling or Licensing. Under a franchising arrangement, the franchisee receives the exclusive right to use brand names, trademarks, patents, as well as the right to engage in the manufacture, sale, or provision of products or services owned by the franchiser in a specified area for a fee. After the business begins operation, the franchiser continues to provide support in the form of supplies, advertising, and managerial aid in exchange for an operational fee based on the franchisee's revenue. This relationship allows the franchiser to expand its operation quickly without directly investing large amounts of capital. It also allows the franchisee to start a business under the sponsorship of an established firm, capitalizing on its business goodwill, product line, and operating ideas and methods.

This form of enterprise first became popular in the 1960s and was especially important in the growth of the fast food industry. In 1998, McDonald's Corporation had the greatest total annual sales at $12.4 billion and the second largest number of units at 25,000 — 80 percent of which are franchised. TRICON Global Restaurants, which owns KFC (formerly Kentucky Fried Chicken), Pizza Hut, and Taco Bell, was second in sales at $8.4 billion and first in number of units at 29,700 combined.

The 1980s and 1990s saw a proliferation of the types of industries utilizing the franchise structure. Some examples include video rental outlets, private postal services, early childhood education facilities, and health food stores. Despite this trend toward a wider range of franchised business, most of the market has still been in fast food.

Music Licensing to Radio Stations. The owner of a copyright in music has the exclusive right to perform the work. However, it would be very difficult for an individual owner to police and enforce this right against the numerous radio stations, nightclubs, and other music sources in the United States. Similarly, it would be very difficult for an individual radio station to negotiate directly with the several hundred copyright owners whose works they use each day. These difficulties have been overcome by performing rights societies, which act as clearinghouses for performance rights on behalf of many copyright owners. Thus, the individual stations could buy a blanket license for all of the music represented by a given society for a fixed fee. The society then pays the music creators.

The three most important societies in the United States were the American Society of Composers, Authors, and Publishers (ASCAP); Broadcast Music, Inc. (BMI); and SESAC, Inc., formerly the Society of European Stage Authors and Composers. These organizations together represented more than 90,000 writers and 50,000 publishers in 1999.

Sheet and Record Music Royalties. A royalty describes the payment made to the holder of the right to use patented or copyrighted property. Royalties are calculated as a percentage of income arising from the commercialization of the owner's rights or property. For each copy of printed or recorded music sold, the copyright owner receives a fixed percentage of the revenues.

Patent Buying and Licensing. A patent entails granting an individual the privilege of exclusive rights to make and sell an invention for a term of years. The difference between a patent and a copyright is that the former protected the right to exploit a particular process or design in making a physical product and was usually industrial in nature. The latter pertains to ideas and purely intangible creations of the mind and is usually artistic in nature.

As with other property rights, patents can be sold or licensed. For example, an inventor could patent the design of a transmission system and then sell the right to produce the system to a major automobile manufacturer. The manufacturer could in turn allow one of its suppliers to produce the system for a limited time or for limited purposes by granting it a license. Just as patent rights could be bought, sold, and licensed, they could also be leased — given for use for a fixed period for a fixed sum. In 1998, the United States granted 260,889 total patents. Of that amount, 93 percent were utility patents (those for the invention of a new or improved item).

Performance Rights Publishing and Licensing. Certain performances of copyrighted material are exempt from copyright protection. For example, performance of copyrighted work without any commercial purpose and without the payment of any fee—as long as there is no admission charge or such revenues are donated for educational, religious, or charitable purposes—are exempt. All other performances require permission of the creator. This permission is obtained by requesting a license—the right to perform the work for certain purposes and with certain restrictions. Similarly, printed material could not be copied and used by any party, except the creator, unless a license is granted allowing the use of the material for specified purposes.

Copyright and patent were well-established concepts, tracing their history to the common law of Great Britain. The explosive development of technology and popular culture in the mid 1900s led to the increased importance of this field. Franchising was relatively new, but flowed logically from the concepts of intangible property embodied in copyright and patent. This field grew steadily beginning in the 1960s and was significant in the development of certain consumer-related industries, especially fast food.

Further Reading

About ASCAP. The American Society of Composers, Authors, and Publishers, 1999. Available from http://www.ascap.com .

Hoover's Company Capsules. Hoover's Online: The Business Network, 1999. Available from http://www.hoovers.com .

U.S. Patent Statistics. U.S. Patent and Trademark Office, 1999. Available from http://www.uspto.gov .

Wright, John W., ed. The Universal Almanac. Andrews & McNeel, 1997.

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