Germany: Aims Of Technology Transfer In The 21st Century

Last Updated: 2 April 2001
Article by Heinz Goddar

1. Exploitation Of Technology In A Global Environment

In many aspects, today´s keyword to describe the worldwide status of not only politics, but especially also economical situations is "globalization". This means that local markets, whether in the Americas, in Europe, or in Asia, loose more and more of their regional character and become transparent in the sense of being interconnected with other regional markets in the world. A company which in the past may have been able, e.g. as an owner of a new technology, to use such a new technology just for the purposes of its local market, without even thinking of other parts of the world, faces and will face, respectively, the challenge, but also the chance of worldwide competition, in the sense that survival for a broad range of technologies only is possible if certain kinds of worldwide standards are contributed to by the respective products.

The purpose of this presentation is, with a specific view to developing markets, to show that and how licensing can help in surviving in the aforedescribed globalized environment.

2. What Is "Licensing"?

Licensing means "permitting", and quite in general nothing can be licensed which the potential licensee is enabled or permitted to do even without the permittance by the potential licensor.

Usually, and at least in the understanding of this paper, by "licensing" it is understood that a third party, the licensee, is enabled to use patents and other intellectual property rights, abbreviated as "IPRs", owned by the licensor, which otherwise the licensee could not use. Insofar, one has to distinguish between two completely different aspects of licensing, namely the enabling and the permitting aspect. As an example, in case of a pure knowhow license, licensing means that the licensor enables the licensee to use the licensed knowhow by disclosing same to the licensee, since otherwise, without the specific knowledge achieved by licensing, the acquiring party, the licensee, as a matter of course could not use such knowhow. In other cases, like in a pure patent license, where the licensor would not undertake any obligation to teach the licensee anything more than one could already learn from a respective patent specification, there is only a licensing in the sense of permitting the licensee to use the otherwise exclusive right of the licensor as granted by the patent.

In any case, securing its exclusivity by appropriate IPRs with respect to a certain technology, trademark, design, copyright, or trade secret, is the first duty of any potential licensor, since without such title and right, i. e. without IPRs in the most general sense, there is nothing to prohibit, and therefore also nothing to permit and accordingly to license for the licensor.

3. Kinds Of Licenseable Intellectual Property Rights

In order to illustrate to the audience the types of intellectual property which can be licensed, reference will subsequently be made to the different types of IPRs in the widest possible sense. Any advisor participating in licensing should be guided by means of a type of check list to investigate the structure and possible scope of license arrangements.

3.1. Registered IPRs

Typical IPRs are those in a narrower sense, namely registered IPRs. These rights are the easiest basis of someone wishing to license out or in, though the world of licensible IPRs certainly is not restricted to such rights.

3.1.1. Patents

A preeminent role among IPRs is enjoyed by patents, which in the present context also cover patent applications. When valuing these it must be borne in mind that even a patent application already represents an economic basis for licensing, although it still fails to provide full exlusive rights.

Naturally, in the case of a patent application there is a risk of it subsequently not leading to a patent during examination proceedings because its invention is not considered patentable, but the risk of a subsequent patent destruction also exists with already granted patents, which can be destroyed during opposition or invalidation proceedings. In the practice of licensing of technology which is subject to patent applications or patents rather seldom there is a significant risk factor deduction in case of patent applications compared with already granted patents. This is largely the opposite to what happens when according e.g. to German practice compensation for employees' inventions is calculated, where a 50 % risk deduction up to patent grant has been adopted. A transfer of this rule to licensing has not generally been observed, though certain reductions during the application period of an invention which is subject to a patent application might be justified.

3.1.2. Protection Certificates

Socalled protection certificates occupy a special position among registered IPRs. At present such protection certificates in most countries can only be obtained for medicines. As an example in the Federal Republic of Germany such protection certificates, which give a supplementary protection term following onto the life of the patent, can be obtained for those patentprotected medicines, whose initial acceptance as medicines took place after January 1, 1988. When valuing IPRs of medicinemanufacturing enterprises for the purpose of licensing, which have patent applications or patents for not yet or only just authorized medicines, it is necessary to carefully check whether it is possible by means of a protection certificate to obtain an extended exclusion effect and therefore by means of the protection certificate a corresponding prolongation of a possible license period can be obtained.

3.1.3. Utility Models

For the purpose of the present paper utility models, wherever they exist because of local legislation, can be looked upon as "petty patents". Fundamentally they are exclusive rights substantiating claims to cease and desist and for damages. Since the right of the utility model owner insofar are no different from those of the patentee, they lead to the corresponding consequences for licensing.

3.1.4. Designs

Unlike in the case of patents and utility models, designs do not protect technical inventions, but instead creations having an esthetic uniqueness. It is not a question of whether the particular article represents a work of art or is "attractive" in the esthetic sense, it is only the uniqueness differentiating a particular design from a generally known shape fund, no matter whether it is attractive or not. The protection of the design, unlike that of a patent or utility model, is not an "absolute" protection, but instead only covers the copying of the protected design, a requirement which does not exist with patents and utility models.

Subcases of design protection are the protection of typographic characters and the topographies of microeletronic semiconductor products. If the enterprise to be acquired is of such a nature it will be necessary to check such rights. Rights of the aforementioned kind are valuable assets in case of licensing.

3.1.5. Variety Protective Rights

In special cases variety protective rights, particularly concerning seeds etc., in accordance with the variety protection acts existing in many countries may be considered for licensing.

3.1.6. Registered Marks

Apart from patents, trademarks constitute extremely valuable IPRs which can be used for licensing in the broadest sense. Marks, namely word and picture marks, but also sound or threedimensional structures, can assume considerable values, as will be made apparent by the fact that e. g. in 1991 seven marks for alcoholic drinks with which it was possible in the past to obtain an annual turnover of about 235 million US $ were sold by the Canadian drinks firm Seagram for more than 370 million US $ to American Brands, giving an average mark value of more than 50 million US $.

Other than in the case of patents, utility models and designs the protection term of trademarks is unlimited. Also for the economic use period it is difficult to give empirical values, because it can range between zero in the case of stock marks and extend to infinity. On e. g. considering Coca Cola, the value of a mark frequently exceeds many times the total value of the remaining assets of the enterprise.

Obviously, trademarks are an ideal subject for license agreements, taking duly into consideration the aforementioned aspects.

3.2. Unregistered Exclusive Rights

Often when licensing is taken into consideration, not sufficient attention is given to the fact that there are also unregistered exclusive rights which give the potential licensor a competition advantage and therefore represent a value which economically can be used for licensing purposes.

3.2.1. Trade Secret KnowHow ("Unprotected Invention")

To continue to use "patent language", firstly reference is made to unprotected inventions in the form of trade secret knowhow. The latter covers such information, particularly of a technical nature, which is not known to the public or is not easily accessible to the public. Typically any technical invention fulfilling the requirements for patentability, i. e. which is novel and inventive compared with the prior art, in the case that it is not made accessible to the public and in particular is not applied for as a patent, constitutes secret knowhow, which gives its owner an economically usable competition advantage, in that the particular knowhow cannot be used by competitors because they are unaware of it. Therefore the disposal of such knowhow represents an asset, which can be used for licensing purposes.

3.2.2. Copyrights

Copyrights, which are unregistered e. g. in Germany unlike in many other countries, can also constitute an important asset for licensing purposes, particularly if it is borne in mind that copyrights not only represent the duplication rights for books or musical works, but also software rights, which according to the law of many countries cannot be patented and are instead subject to copyright protection. Thus, not only when thinking of licensing in case of publishing houses and the like, such copyrights play an important and in fact decisive part, but also in technologyoriented enterprises, such as software companies and the like.

3.2.3. GetUp Rights Unregistered Trademarks

Not only getup features, such as word or picture marks, paekings, etc., which are protected by registered marks, represent a value that can be used in licensing transactions, but also those markings which are only protected, either by Trademark or Competition Law, in that they are known in business and are e. g. understood to represent a particularly high quality. Particulary in the franchising sector, i. e. restaurant chains and the like, an important part is played by such getup rights, so that they are economically usable and correspondingly have to be considered in licensing business.

3.2.4. Name And Business Name Rights

The goodwill associated with the name of the enterprise must not be underestimated. On assuming that a firm called Microsoft would have to be valued, then the name MICROSOFT would in this case constitute a business name right, would still have a considerable economic value even if no parallel trademark or mark protection existed. The aforementioned goodwill can be made subject of licensing, too.

For further explanations relating to the kinds of IPRs that can be made the basis of license arrangements, reference is made to the transparencies accompanying this paper.

4. Trends And Developments In The International Licensing Scene: Its Impact On Developing Markets

Most, if not all, of the trends and developments observable in the international licensing scene already nowadays also apply to the developing markets or, in the very near future, soon will do so. Where the driving force to exchange technology by licensing in developing countries cannot be determined so clearly yet as e. g. in U.S.A., a similar development will take place as it often is the case with regard to trends and developments in general business matters when comparing U.S.A. and Europe, particularly Germany: After the expiration of a couple of years, normally 3 – 5 years, trends observable in U.S.A. insofar in a more or less explicit manner also get weight in Europe. Certainly, as far as licensing is concerned, even nowadays still rather "underdeveloped" markets will follow the lead of U.S.A., like Europe, i. e. regions where licensing contributes to the wealth of the local economies already today to a large extent.

4.1. General Trends And Developments

Licensing is a valuable instrument to help individuals and enterprises to survive and to be more successful in the global market. Why is that so? Particularly small and medium sized enterprises (SMEs) usually are not in a position, because of lack of capacity, capital, and experience, to act globally. Accordingly, the owner of e.g. a certain new technology, which in principle may be useful worldwide, is not in a position to manufacture and import products from a certain market, like a developing/emerging country, into markets elsewhere, like in the Americas or in Europe.

This is even more so because in relation to a variety of goods, especially and as an example in the pharmaceutical field, one must follow a wide variety of national admission procedures, standardization etc..

The most natural step for a company, not being a socalled global player, in such a situation is to look for cooperation partners in those parts of the world which cannot be served directly. An ideal form of such a cooperation partner, to which the new technology shall be "transferred", or by the aid of which the new technology in question shall be transferred to the respective foreign market, is a licensee.

Also, in a broad range of technical fields there is a permanent need for new products. As an example, pharmaceutical industry worldwide, the same applying, however, for software industry, constantly is in the need of new developments, which by the "giants" of this world could be further developed and marketed worldwide. Again, a small or medium sized company would not have neither the sources nor the knowledge of such technologies being available elsewhere. The natural cooperation partner in such an example would be a licensor, possibly even a licensor from abroad which, as far as its own market is concerned, is in a similar situation, and which would even be willing to grant exclusive rights to a licensee in a certain foreign territory, because that territory would be fully out of reach for such a licensor.

As a consequence of the aforementioned situation, which in its totality is due to the above described increasing globalization of world markets, licensing, both in and out, plays a steadily increasing role in nearly all fields of technology, but particularly in such fields like pharmaceuticals, computer software, or telecommunication, which may provide for the most prospering licensing markets in the world.

4.2. Examples Of Successful Licensing

Some examples may show how licensing can be successfully used a) to solve conflicts which otherwise would have to be cleared by litigation, and, last but not least, b) how rather small companies, with only limited capital reach into foreign markets, can use licensing to make global use of a technology locally developed.

a) As an example of how conflicts can be solved, otherwise to be subject of patent litigation, by licensing, without giving too much details, I would like to mention an example of my own practice: When detecting that in a certain field of dental technology a couple of U.S. patents of a German patentee clearly, i. e. literally, were used and thereby infringed by a competitor in the U.S. market, in view of the high litigation costs there the German patentee decided not to litigate, rather to license the technology to the competitor. Because of the reasonable royalties requested, something like 5% based on turnover, the former competitor and now licensee of the German patentee found the peaceful environment of a license agreement much more comfortable than being in patent litigation, the more since the profit margin of the aforementioned products before tax was at about 20%, thereby the aforementioned royalty rate fulfilling the ominous, nevertheless often in international licensing used 25% rule (i. e. 25% of the profit before taxes is considered a generally accepted royalty rate). On the other hand, the German patentee, client of mine, had not to run into U.S. patent litigation with, for several years, legal fees of at least about US$ 1.000.000,00 to be borne annually, before any final success.

b) As a last example, effervescent tablet technology, as widely used in vitamin tablets etc., should be considered (based on my own experience): Having developed a technically superior technology nearly 20 years ago, the European creator of the aforementioned technology established a worldwide network of reliable patent protection and thereafter licensed the technology to licensees even in the remotest areas of the globe. The own capital corset of the licensor would never have permitted to exploit the technology by own manufacturing efforts globally, like in Japan, but by licensing this could be done extremely successfully, with the effect that even in this case, with no global player on the licensor´s side being in the game, practically a worldwide standard could be set.

4.3. Special Considerations Relating To Developing Markets

The increase in the number of licenses and similar cooperations as discussed under 3.1. above taking place all over the world, the impact on developing markets cannot be overestimated: On one hand, the worldwide competition of goods will make it more and more necessary for enterprises in all countries, even in emerging market areas, to manufacture and sell products being able to compete with similar products worldwide, i.e. of similar technical standard and technology. This in many instances will make it necessary to license in uptodate technology from licensors in other countries. This is the challenge.

On the other hand, the chance, immediately and inherently connected to the increasing globalization of worldwide economies and the denser and denser network of license agreements worldwide derived therefrom, is that own developments, just as an example: biotech or computer related inventions developed by rather small or medium sized companies in Japan, in future will no longer be used just on a local or regional scale, but through the aforementioned network of licensing reach each and every country and industrial region of this world, with the highly welcomed contribution of royalties, i.e. essentially income beyond general overheads connected with the development of new technologies, flowing into the home country of such enterprises.

5. Key Factors To Consider When Embarking On Cross Border Licensing

As an overall rule, one may state that whenever licensing goes beyond the borders of a region, licensespecific laws and regulations will have to be observed, not only when license agreements are concluded with a partner in a territory under the jurisdiction of such a law or regulation, but, because of the worldwide reaching character of the demands of such laws, whenever economically affecting such a territory.

5.1. Specific Aspects Of Licensing Under EU Rules

License agreements affecting countries of the European Union must observe the competitional rules of the European Union (EU). Amongst those is Article 81 (1) of the Treaty of Rome, which in principle considers at least exclusive patent and know how license agreements as potentially interfering with the principles of free competition and trade inside the European Union, so that as a base rule only such license agreements are exempted from the general prohibition of Article 81 (1) of the Treaty of Rome which are blockexempted under the existing Block Exemption Regulation for Technology Transfer of the European Union, i.e. Regulation 240/96. The aforementioned Regulation cannot be discussed in detail here, but it is strongly recommended that it is strictly followed when formulating licensing agreements having effect for the territories of the European Union.

The aforementioned rules must be taken specifically into consideration with regard to possible territorial restrictions, export bans and parallel import regulations in license agreements.

5. 2. Licensing Into And Out Of Areas Outside Europe

Similar regulations, as discussed in detail with regard to the European Union above, exist in U.S.A. and the other NAFTA countries (Canada, Mexico). They will have to be observed when concluding and exercising license agreements affecting those markets.

Also, the world is changing as far as Asian markets are concerned. Both The People’s Republic of China and Japan are drafting new regulations with regard to the competition and antitrust environment of license agreements, in many aspects similar to the European rules, which, as such, historically were developed based on antitrust regulations that got into force in U.S.A. shortly after World War II.

6. The Role Of LES (Licensing Executives Society) In Licensing

Whoever enters into or wishes to survive in the international world of licensing, certainly should make use of the assistance and experiences of licensing executives worldwide.

A particularly valuable institution insofar is the Licensing Executives Society (LES), with its 27 member societies worldwide and its holding structure, LES International, Immediate Past President of which to be during this year 2001 is the honour of the author. Having more than 10.000 members worldwide and covering with a few exceptions by far most of the industrialized and emerging regions of the world, LES has established an ideal networking platform for license practitioners worldwide. The focus of LES International, insofar complementary to an organization like the International Assocation for the Protection of Industrial Property (AIPPI), with its focus on legal questions of IPRs, i. e. how to obtain, protect and enforce them, is an educational society aiming at the goal of free technology transfer and licensing worldwide, with a general view to commercialization of IPRs. Particularly for economies in developing countries, now entering the international licensing scene with more and more strength, both with regard to licensing out as in relation to licensing in, individual membership by persons involved in this type of is nearly a must.

7. Summary

Licensing, both on an exclusive and on a nonexclusive basis, plays a more and more important role in many fields of technology. Owners of patents and other intellectual property titles should always consider to make a better use of such titles by licensing out. On the other hand, enterprises interested in introducing new technologies etc. should always think of licensing in certain technology, in order to avoid unnecessary doubledevelopments which might cause unnecessary costs, compared with the usually available modest royalties to be observed in many fields of technology.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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