Many businesses in Magna, Utah are using licensing agreements to grow. Don’t be left behind. However licensing is a complex process. You will need the services of an experienced Magna, Utah corporate lawyer. When you need help with starting a business, closing a company, corporate governance, mergers, acquisitions, purchases, sales, LLCs, etc. Please make sure you call Ascent Law LLC for your free business consultation.
Every licensing arrangement has a number of advantages and disadvantages to both the licensor and the licensee. This may be largely attributed to the fact that the lease of the intellectual property rights covered by the license agreement creates a form of reliance between the parties and, to some extent, restricts their independence with regard to commercial activities in a particular area. As a result, it is important that you consult with a Magna, Utah corporate lawyer to assess the objectives and skills of the other party prior.
General Advantages of a Licensing Arrangement
The parties to a licensing arrangement may have a number of different objectives. Certainly, for a licensor, one of the goals is to realize revenues from the use of technology by the licensee which can be offset against any of the expenses associated with the development or acquisition of the subject technology. From the licensee’s perspective, a licensing agreement often represents a cost-effective method for accessing new technologies that fit into the licensee’s overall strategic business plans. For both parties, the license should facilitate the creation of a relationship in which each party is permitted to contribute its specific strengths while, at the same time, taking steps to minimize any weaknesses or functional limitations in its own competitive capabilities.
Access to Vertical Capabilities
The “life cycle” for any product requires successive focus upon such disparate capabilities as research and development, the refinement of products for production, acquisition and processing of raw or semi-finished materials, manufacturing, distribution, sales and marketing, and service. In those cases where a firm may lack the financial or managerial resources to independently fulfill each of the tasks needed to bring a product to market, a licensing arrangement with one or more parties can provide the firm with the required access to other vertical capabilities to allow the firm to fully exploit it current strengths.
For example, a firm may possess the technical skills for the development of new products yet lack the financing and facilities required for large-scale production and manufacturing. However, if the firm is able to license the technology to a firm with the resources capable of producing the new products on the requisite scale, it is then able to exploit its technical skills without taking on the costs and risks of developing its own production capability. The firm might consider using the proceeds from the sale of the various new products to finance the acquisition of its own manufacturing function. If this is the case, the licensor will seek to structure the original license so that the manufacturing rights revert to the licensor when it is ready to take over production itself.
Technology Acquisition and Exchange
A firm may look at a licensing arrangement as a means of acquiring new or existing technology that may be needed in order for the firm to lawfully continue its own development and product sales efforts. Given the rapid technical changes that sweep across almost every industry, even the largest firm may no longer be able to keep pace with research in all areas. As a result, firms will maintain their technological portfolio through licensing arrangements with other commercial entities, universities, and research organizations, including entities located outside of the United States, without subjecting themselves to the costs and risks associated with new development efforts.
Licensing also presents an attractive vehicle for exchanging technology and marketing information between the licensor and the licensee. For example, a licensor may grant a license to a licensee actively involved in research and development activities which may result in enhancement and improvements to the licensed technology. By using grant-back clauses, which provide for a license from the licensee to the licensor of any improvements made to the basic technology, it is possible for the original licensor to minimize the costs associated with further development of the technology. Similarly, the grant of a license for the sale and distribution of the licensor’s products may also permit the licensor to gain valuable information about new markets.
Market penetration is one of the primary attractions of a licensing arrangement for both parties. For a firm that lacks the distribution network necessary to sell its new products in a given market, a licensing agreement with an experienced distributor will facilitate rapid market entry and allow the licensor to generate revenue from sales in a new market without the need to commit any significant new capital to the development of a direct sales force. From the distributor’s perspective, the licensing agreement may allow it to use its sales channels to distribute a line of products that might not have otherwise been available through its internal development efforts or allow it to exploit the reputation and goodwill associated with the licensor’s products.
Even in those cases where the licensor may have some sales capability, there will be situations where it is more efficient to engage licensees with specific expertise in a given geographic or product market. However, the success of this type of strategy depends, in large part, upon the skills of the licensee. As such, the licensor may want to retain the ability to alter its sales strategies in the market, including the option to make a direct investment, either in the form of a wholly owned operation or as a more formal joint venture, with the licensee or a new partner.
Neutralizing and Blocking Patents
A firm may develop technology that, if properly exploited, might conflict with the existing patent rights of other firms. In those cases, the firm may consider entering into a cross-licensing agreement with the firms holding the blocking patents in order to ensure that the technology can be utilized to its fullest extent without concern about an infringement action. An arrangement of this type may be quite expensive, and the firm should investigate the possibility of blocking patents before any significant amount of resources are expended on research and development activities. Moreover, cross-licensing arrangements raise a number of antitrust issues, depending upon the size of the market and the relative positions of the firms.
Local Regulatory Requirements
In order to enter a new foreign market, licensing, rather than direct investment, may be necessary in order to satisfy local customs and to comply with any governmental decrees regulating the participation of foreign firms in a specific market. For example, a number of countries have enacted laws to encourage development and expansion of local industry and reduce the degree of dependence on the use of imported technology. In such cases, licensing will be the only way to penetrate the local market, since any direct investment by foreign firms in those industrial sectors targeted for “self-sufficiency” will be limited or restricted. Moreover, even in those cases where a firm is permitted to make a direct investment, it may be prudent to enter into various license agreements that provide access to existing distribution channels of local firms, many of whom may receive, directly or indirectly, some form of government assistance.
Protection of Intellectual Property Rights
Licensing may be required in order to preserve the protection of inventions and other items under the intellectual property laws of a number of foreign countries. For example, many countries will require that the holder of a patent granted under local law must actually work or exploit the patented invention in the local market or forfeit the exclusive rights generally associated with the grant of a patent. In such cases, the holder of the patent will license a local firm to work the patent in order to avoid any action by the local authorities to grant a compulsory license of the patent to local firms, thereby severely undercutting the value of the patent rights to the original inventor.
Licensing is now a common strategy for firms seeking to control or reduce their manufacturing costs with respect to any new products that utilize technology developed by the firm. In recent years, firms have licensed foreign firms to manufacture products at a fraction of the cost that would be incurred by the licensor. A strategy of this type allows the firm to maintain its market share, lower its overall costs, and improve its margins, while avoiding the need to constantly reconfigure and rehabilitate its own production capabilities.
Enhancing Cash Flow and Harvesting
While licensing agreements are usually entered into for at least one of the broader strategic reasons above, it often makes sense to grant a license simply to generate additional cash flow from the technology in the form of royalties and fees. These types of licenses are particularly appropriate when the firm is seeking to “harvest” its previous investment in a given area and has no further desire to continue with development work, perhaps due to the costs associated with keeping up with new technologies or a broader change in the strategic objectives of the firm.
Just as it is essential to understand the specific goals and objectives pursued within the licensing strategy, notice needs to be taken of the various disadvantages to the licensor and the licensee that may arise out of the relationship. Obviously, licensing, like any other form of strategic business relationship, creates a material degree of interdependence between two firms with distinct cultures and business objectives. However, certain other factors must also be considered, including the very real possibility of creating a new competitor.
Except for the situation where the license is granted as a part of the licensor’s harvesting strategy, a license arrangement is generally chosen when it fulfills a specific strategic need of one or both of the parties. For example, a licensor may enter an arrangement with a licensee to distribute the licensor’s products in a specified market when the licensor believes that it would be too costly or risky for the licensor to attempt to engage in any direct sales efforts in the market. Accordingly, the licensor is dependent upon the licensee to assist the licensor in recovering its initial investment and achieve acceptable market acceptance for its products. As such, a good deal of care must be taken by the licensor in selecting the licensee, since any mistakes made by the licensee may lead to a loss of the market opportunity to another firm or a reduction in revenues such that the entire investment in the development cannot be recovered.
Both of the parties to a prospective licensing agreement should carefully investigate the relevant skills and resources of the other party. For example, a licensor seeking a distribution partner must understand both the technical and marketing capability of the potential licensee in order to determine the likelihood that the distributor will be able to achieve the required level of sales over the term of the arrangement. In addition, an effort should be made to determine whether the marketing efforts of the distributor will be compatible with the perceived quality of the products of the licensor. Finally, the licensor will want to make sure that it will not be called upon to expend an inordinate amount of effort in providing technical assistance to the licensee, since the hidden costs associated with this type of activity may reduce the overall benefits from the arrangement.
The risks and uncertainties of dependence on the performance of the other party to the licensing arrangement can be particularly acute when the parties differ substantially in size and maturity. For example, a start-up firm with a single new product may well be forced to rely on the manufacturing and distribution capabilities of a larger, established firm in the industry.
Many Utah businesses have grown significantly using licensing agreements. Your business too can benefit significantly by using licensing agreements. An experienced and seasoned Magna, Utah corporate lawyer can provide you with invaluable advice when it comes to growing your business using licensing agreements. The lawyer will ensure that you get the best deal from the licensing agreement.
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