WIPOD – Intellectual Property Matters: Transcript of Classroom Conversations – Episode 6

IP Licensing Basics for SMEs

Karen Lee: Welcome to Intellectual Property Matters. In this WIPO podcast, we explore the fascinating world of creativity, innovation and intellectual property. Let's listen, learn, and get inspired.

Natalie Humsi: Hello, everyone. Welcome to today's episode of Classroom Conversations, a WIPO Academy series, and I am joined today by Mr. Theo Stamatiadis, Executive Counsel for IP at General Electric. Theo is the WIPO Academy’s go-to expert and lecturer on all matters related to intellectual property licensing.

So today we’ll break down all the basic knowledge nuggets that any entrepreneur or small and medium-sized enterprise needs to know about intellectual property (IP) licensing. Welcome Theo, and it's a pleasure to have you here today. Just to start off maybe you can say a few words on what really is a license agreement and why should an entrepreneur know about it?

Theo Stamatiadis: Thank you for having me. To your first question, what is a license agreement and why would an entrepreneur want to know about licenses? You can think of a license as a permission to use certain intellectual property. Intellectual property is property. The owner has the exclusive right to do or prevent others from doing certain things.

So to bring an example, if you are the owner of a patent, you have certain exclusive rights to make use of and practice the invention, that is protected by the patent. You can use the license as an instrument to allow others to exercise these exclusive rights to do with the patent what you would be doing as an owner. So, a license agreement is a permission and it will take different forms depending a little bit on what IP is being licensed and what is the purpose for which we license the intellectual property. So if you think about patents, trademarks, copyrights, franchising agreements, they all have an element of IP licensing. So different IP rights, different forms of licensing, and different business targets and relationships will also trigger a different type of licensing. So that is kind of how we look at it at a high level.

Natalie Humsi: In what context can these license agreements happen? So maybe, at what stages, an entrepreneur would need to know about this?

Theo Stamatiadis: See we have license agreements happening in different contexts. Let me bring some examples for our audience to understand this a little bit better. If you have a research and development project together with another company or with an academic institution, what happens in that context is that the two entities are going to give to one another information and access to their respective know-how, patents, IP, etc. in order to conduct a research effort and bring a new product or a new development to the marketplace for instance. There you have an exchange of a license. This permission that the two entities give to one another to use the respective know-how and intellectual property in order to develop something new is IP licensing.

So R&D, research and development, is one good example of that. Of course, you have commercial licensing. So you know, maybe I have a technology again that protects certain products or that enables certain products, another company wants to use that technology and incorporate my technology in their product, I am giving them a permission to do so, so I am granting them a license. You have licensing in the context of mergers and acquisitions, when companies buy other companies, often they acquire a license to use certain technologies that these companies were using before being bought. So really licensing can happen in many different contexts.

Let me give you another example, which I happen to see a lot in my working life. Often companies will have a technology that they use in their products, but it may happen that this technology has other applications. A material that is crucial for the development of a business can be relevant to another business in an entirely different sector. So this is also a way to actually monetize your intellectual property in an example that a colleague discussed a few years ago, and a very successful example of that, they had a material in components that were used in the aeronautical industry, and then a company had an interest in using that in laptop computers, in laptops basically. So those materials were working really well because of their durability and weight and all of that for the laptop company. So they used the materials that were used in the aeronautics through a license to enable the use of the same materials in an entirely different field. In this way, it's an additional way of monetizing the technology.

Natalie Humsi: For someone who doesn't know that much when they start a negotiation process for licensing, who would be the one starting this process? Who would be negotiating? Who would be at the table? And what are key elements in a license agreement, that someone should know about and should keep in mind when negotiating?

Theo Stamatiadis: One needs to think that the license agreements are complex legal documents obviously and also relationships because they involve not only legal aspects but also technical aspects when you're dealing with technology or marketing / business aspects when you deal with trademarks for example. So there's a detailed technical and/or business side to it.

And then there's also a key financial aspect and we might talk a little bit about this later, but you know, how do you calculate your royalties? How do you have your reporting and all of these things? So, you know, they're complex contracts and often they’re long-term relationships. So if you think about a franchising agreement, if you think about copyright licensing, technology licensing for sure, often these contracts go on for like 10, 15, 20 years. So a long period of time.

So the negotiation of such a contract requires a multidisciplinary team, you're going to need your lawyer of course, who's going to be drafting the contract and making sure that everything is well put into place, but you're going to need your business people to weigh in. You're going to need the technical people to make sure that the technical annexes and the descriptions of the products and all of that of the technology are correctly done. So I would say that depending on the type of licensing, you will probably need more than one person in the negotiation or at least supporting the negotiation to make sure that you get it right.

Now, to the second part of your question, what are the key elements of a license agreement? Again, obviously these will vary depending on the type of license and the type of business or research context that you are in. But, I would say fundamentally, when you think about licensing, you should be thinking mainly of four things. You should be thinking about number one, the IP, the intellectual property that is being licensed, whatever that is… patents, trademarks, copyright, know-how etc.

Number two, you should be thinking of the scope of the license. What are you licensing to someone and for what purpose? So then you will be thinking about whether the license needs to be exclusive or non-exclusive, you will be thinking what should be the territory of the license and you would be thinking potentially a field of use. When we think about territory, remember IP rights are territorial rights. If you have a patent in several territories, say, a few countries in Europe, China, Japan, South Korea, Brazil, United States… you may have a patent in several countries. You may choose to give a license to an entity with whom you cooperate in some of these countries but not all of them. This means that the license territory should be limited to the countries for which you want the business relationship to develop. It is the same for the field of use. Back to the example I mentioned before, if I am using certain materials and technology in the aeronautics space, but then I want to license that for use in making laptop computers. So then the field of use would be limited to the specific products, the laptops or whatever else is there, where the technology should be used by my licensee.

And then another important element here is that you would have to think about whether the license should be exclusive or non-exclusive. If it is exclusive, it means that your licensee, the entity that receives the license is the only licensee within a determined territory or field of use. If it is non-exclusive, it means that the licensor can grant such licenses to other companies.

That was our second element, right? So we said number one, what is the IP that is being licensed? Number two, very importantly, what is the scope and the limitations of the license, of the permission to use IP that is being granted? Number three, obviously, a very important element will be the duration of the license. For how long will the licensee have this permission to use the intellectual property that is being licensed?

And finally, not surprisingly payments are going to be important. So the licensor will more often than not, except perhaps in the research and development cases where there aren’t always payments associated with a license, but in a commercial context, when a licensor gives this permission to the licensee to use certain intellectual property, it does so in exchange of a payment. So the payment is the fourth big element here.

More often than not, the payment for the license, the payment for this permission to use IP will be connected to how much the licensee uses it. And that is where we have the concept of royalties. Often the remuneration, the payment back to the licensor, will depend on for instance how many sales does the licensee make. You license a technology, you incorporate that technology in the product, every time you sell that product, you pay part of your revenue basically back to the licensor. The reason why this is so important is because it is important to understand that the licensing relationship is, or needs to be, a win-win relationship and contract.

If the licensee is making money, then the licensor will make money too. If the licensee is not successful in using the technology or selling products incorporating the technology, if you prefer, then sometimes the licensor will not be making money either, because again the licensor’s compensation remuneration for the license is very often expressed as a percentage of the revenue that the licensee makes and this is what we call royalties.

Natalie Humsi: Is there a way to figure out the price of royalties, and how pricing works, and royalty reporting so that people can keep track of that?

Theo Stamatiadis: Yeah that's a great question, and one that comes up very often. People many times go to a lawyer, or come to me, or my colleagues and say how much should I charge for a technology. It's kind of hard to give a straight answer to that and say well it should be that much money or that percentage of the royalties. It will again depend on how the relationship is structured.

But there are some rules if you want, or certain guidance that people use in order to come up with a price, with a valuation of what the license should cost basically. Often people look at the historical cost that they incurred in developing IP.

If I am a university, and I am licensing out a patent portfolio, certain technologies and know-how to the industry, one way for me to think, or to understand how much I should be charging for the license is looking back at the historical cost that I incurred in developing this technology. So, basically you go back and you say, well, the research team that developed this technology has that many people. I paid that much for their lab equipment, and for their salaries and for protecting the IP. You come up with like a total and you would think that your license to the industry should at least pay back that investment that you made in developing the technology, back to the licensor, back to the university.

Another way of doing that is looking around within your legal entity, if you have a lot of licensing out in the industry, publications and studies that are being made. And there are also people who offer this kind of service to compare this license with other similar transactions. So you license a technology out, people can have access to data, it's often confidential but you have studies which tell you, well, that's how much people pay in a particular industry to acquire such a license.

And then finally, people look at future revenue. How much money you expect the licensee to make by using that technology? Well, a fraction of that revenue should be calculated as royalty, as something that returns to the licensor as a compensation for the license. So these are kind of high-level rules and things that people can think of as a general guidance, when calculating the value, the price, that a license will have.

And then of course the market potential, how important is the technology to the final product? How fast is the technology likely to be substituted by a newer technology? And how important is the technology for the owner, or different questions maybe that one needs to answer when defining the price of a license, which of course is a matter of negotiation.

Now, to the second part of your question, how payments happen? And how can people control that the payments are correct? You know, we talked about royalties before, generally, speaking in licenses you will always, or sometimes you can have what we call lump sum payments, and then you're going to have royalties. You don't necessarily have both of these but often you will have one, or the other, or both. So lump sum payments are specific amounts that the licensor is payed by the licensee for the license. So you could have for example a specific amount paid on the date of signature or after certain milestones are reached. Maybe the first product to be sold in the marketplace, maybe some sort of technical training or document transfers being completed etc. So these are specific amounts. You know how much money that is and when it should be paid, when you sign the contract. We call them lump sums.

And then you have the royalty, as we said before a royalty is a percentage that is calculated on the price of the products that the licensee is selling. So, the licensee has a permission to use certain technology and they can sell certain products or services to the end users. Every time, the licensee sells to an end user, there is a percentage of that sale that should go back to the licensor as a remuneration. It could be 2%, 5%, 7%, it depends a little bit on the commercial relationship and the kind of product and industry were talking about.

Now, how does the licensor know that the licensee pays back to them what they are supposed to receive, these 2%, 4%, whatever it is? There will be a system in the contract of royalty reporting. Meaning that every certain period, quarter, three months, half a year, yearly, whatever it is, the licensee will report, will basically send information back to the licensor about how many sales they have made. And on the basis of this calculation, they're going to tell the licensor, well here is the percentage I should be paying back to you. Again, the percentage more often than not will be expressed as a percentage of the sales, net sales, that the licensee makes. And then the licensor receives these reports, obviously issues an invoice, and the payment is made.

And then the licensor will often have audit rights, right? They will have a right to go and check, and confirm that the licensee does the reporting correctly, that they report all of their sales, and that they pay the right price back to the licensor. So this is more of a practical part of the contract, if you want, but a very important one, obviously making sure that this mechanism works in the correct way so that the licensee makes the correct payments to the licensor and the relationship develops fruitfully for both parties.

Natalie Humsi: Earlier, you did mention that an average license agreement is usually 10, 15, 20 years. That's a long time. What would happen if someone wants out? If they want to terminate these types of agreements? Is that complicated? Is there a specific process for that or is someone essentially committed for that duration?

Theo Stamatiadis: 10, 15 years, I mean this type of duration will often be for technology licensing where you give someone the right to use a technology and it will often be for a longer period of time. Simply because the licensee may be making some investments to be able to do so, and maybe selling a product in the market. So if you're a licensee and you acquire a license to a technology in order to sell something on the marketplace, you don't want to do that for 2 to 3 years, right? You want to be able to sell this product for a longer period of time.

Same for copyright licensing. Often where a publisher acquires rights to a book, to some other sort of copyrighted work, they want to be able to exploit these rights for a broader period of time.

Some other types of licensing like R&D, for example, well, R&D projects are shorter, so these licenses might have a smaller duration. But to the point of your question because licenses are often these long-term relationships, you want to make sure that number one, the contract is going to be a win-win contract. As we said before, where both licensee and licensor are happy with it, if you want, satisfied with a business outcome and both of them make money. Because again, the licensor more often than not, will only make money when the licensee makes sales. So it's important for both of them, for the whole thing to work.

And number two, termination is obviously possible and will be possible, but it's sometimes a bad idea for both parties. Why? Because they have gone into these technology sort of partnerships that the licensor has given technology and maybe confidential information and know-how and software codes, you know, and all of these things to the licensee. Now, if the license terminates because of some sort of dispute that is bad for both parties. Because on the one side, the licensee no longer has a permission, a right to use the technology. And number two, because from the licensor standpoint, they gave all of this important information and technology out there to someone and that someone now can “run free”. I mean, they're not bound by their restrictions, in the terms of the licensing.

The answer to your question is, yes, you can always have in the contract mechanisms whereby the license is terminated. It can be terminated for breach. It can be terminated for change of control, for the licensee failing to meet quality requirements, you know, all of these things. But often people will try to find negotiated solutions out of the sort of disputes because terminating a license is kind of the last resort. Basically, you would always have to try and find a solution before terminating for the reasons that we have mentioned before.

Natalie Humsi: That make sense. I mean, it would be a commitment of time, effort and investments. So to terminate that, you need to really have a good reason. So are there any other elements related to IP licensing and negotiations that our listeners should know about?

Theo Stamatiadis: Yeah, I mean again, it depends a lot on the business relationship, but there definitely are other important things to keep in mind. Confidentiality I would say is one of that. So often licensor will give confidential information to the licensee related to the technology, the know-how, but it will also be the other way around, because the licensee will give certain confidential information to the licensor, for instance the royalty reporting and their sales reporting which is obviously confidential information, but also technical reporting if the licensee does further developments on the technology etc. So confidentiality is always something to keep in mind.

Improvements, meaning additions, developments of the licensed IP and technology. You will want to think about that. Will the licensee get access to improvements, new technologies in the same field that are being developed by the licensor and vice versa? If the licensee develops something, will a licensor get information about it? So improvements is another important element and then quality, I would say when we speak about licensing in the commercial space, quality is always a big question.

For the licensor quality is important because if the licensee doesn't achieve the right level of quality, then the licensor’s reputation, and the reputation of the technology of the licensor will also be damaged. So, if I make a product, I go find a licensee in a different country. So the licensee can make and sell that product in that country, if the licensee doesn't achieve the same level of quality, then my trademark, my technology, my reputation as a company is also damaged, at least in that territory. And on the flipside of that, the licensee obviously will also want to make sure that it gets all the right technology, and support, and documents, and technical assistance from the licensor so that they can actually achieve the level of quality that the products or services should have.

So I think you will often find that at least in the commercial context, quality is a big part of the discussions. And if you think obviously about franchise agreements etc. there can be very strict standards that the licensee would need to meet to be able to make sure that the quality and the reputation of the products out there in the marketplace are the same as expected by the licensor.

And again, you know, there may be other things in their technical reporting and obviously all the legal questions about warranties, indemnities, and all of that in the contract. This is maybe a little bit more technical but yes, these are all the other things you should be thinking in addition to the core elements of the license that we spoke about before. Meaning, what IP is being licensed? What is the scope of the license? What is the duration of the license? And what are the payments for the license?

Natalie Humsi: Well, thank you so much Theo, this brings us to the end of our classroom conversation for today. Before we wrap up, I wanted to ask if you have any final pieces of advice or wisdoms, you'd like to share with our listeners on IP licensing?

Theo Stamatiadis: I don't know about wisdom, but hey you cannot really negotiate I believe such a contract without the support of an experienced professional, a lawyer basically that knows how to draft and negotiate this type of agreement. So my recommendation is you obviously lead as a business in this negotiation because it's a business deal at the end of the day. But you need to have an experienced professional when drafting such an agreement to make sure that you're going to get it right. Again, these are complex documents where a multidisciplinary approach between legal, business, the technical and commercial is required.

And then the last thing I would like to end our discussion today with would be focus on win-win solutions. Again licensor is successful when licensee is successful and then this is like a long-term partnership that will require certain flexibility and certain readjustment. So you need to leave enough space for these things to happen and make sure that the contract ends up being a good business deal for both parties. So this is, I think, what I would say is the main focus when you negotiate a license agreement, it needs to be a win-win.

Natalie Humsi: Thank you so much Theo for all this practical information on IP licensing. I am sure these basic key elements will help entrepreneurs and SMEs when thinking about IP licensing in the future. And I would also like to thank our curious listeners for tuning in today and will catch you all next time on Classroom Conversations. Thank you, bye.