Technology licensing is a contractual arrangement in which the licenser’s patents, trademarks, service marks, copyrights, trade secrets, or other intellectual property may be sold or made available to a licensee; compensation is negotiated in advance between the parties. This article details the process of technology licensing and is part of "A Basic Guide to Exporting" provided by the U.S. Commercial Service to assist companies in exporting.
Last Published: 10/20/2016
There are two additional ways of obtaining international sales income: technology licensing and joint ventures. Although not always the most profitable forms of exporting, these arrangements do offer certain advantages, particularly for small and medium-sized businesses.

Technology Licensing
Technology licensing is a contractual arrangement in which the licenser’s patents, trademarks, service marks, copyrights, trade secrets, or other intellectual property may be sold or made available to a licensee; compensation is negotiated in advance between the parties. Payment may be in the form of a lump-sum royalty, a running royalty (based on volume of production), or a combination of both. U.S. companies frequently license their technology to foreign companies who manufacture and sell products in one or more countries, per the licensing agreement.

A technology licensing agreement usually enables your company to enter a foreign market quickly, and it poses fewer financial and legal risks than owning and operating a foreign manufacturing facility or participating in an overseas joint venture. Licensing also permits U.S. companies to overcome many tariff and non-tariff barriers that frequently hamper the export of U.S.-manufactured products. Therefore, licensing can be attractive for small companies or companies with little international trade experience. Technology licensing may also be used to acquire foreign technology through cross-licensing agreements or grant-back clauses that award rights to improved technology developed by a licensee. (Seek legal advice to determine liability.) 

Technology licensing is not limited to manufacturing. Franchising is also a form of technology licensing—the franchiser (licenser) permits the franchisee (licensee) to use its trademark or service mark in a contractually specified manner for the marketing of goods or services. The franchiser usually helps support the franchisee through advertising, accounting, training, and related services. The franchiser also often supplies products needed by the franchisee.

Scores of new franchising concepts are converted into profitable businesses every year, and the majority is created in the United States. Recent global franchising successes include personal fitness, flower and candy, and elder care companies. Many franchises are created especially for entrepreneurs in developing countries and feature relatively affordable license fees. Attending the International Franchise Association (IFA) Annual Convention (franchise.org) is a good way to learn about trends and new franchising concepts.

As a form of “exporting,” technology licensing has some drawbacks. Your control over the technology is weakened because it has been transferred to another company; additionally, licensing usually produces smaller profits for your company than exporting actual goods or services. And in some countries, adequately protecting the licensed technology from unauthorized use by third parties may be difficult.

You should register your patents and trademarks in each country. Copyright is recognized globally, but patents and trademarks are territorial, so rights may vary depending on different countries’ legal conventions. (You only need to file your patents and trademarks once with the European Union [EU], as EU laws apply to all EU members. The Patent Cooperative Treaty (PCT) and the Madrid Protocol allow you to apply for patent protection in the EU, as well as in specific countries throughout the world. For more information, visit www.stopfakes.gov and uspto.gov.

When considering technology licensing, remember that foreign licensees may attempt to use the licensed technology to manufacture products that compete with your company or other licensees. Often, U.S. licensers may try to impose territorial restrictions on foreign licensees, depending on U.S. and foreign antitrust laws and host country licensing laws. Also, U.S. and foreign patent, trademark, and copyright laws can often be used to bar unauthorized sales by foreign licensees, provided the U.S. licenser has valid protection in the applicable countries.

Many countries, particularly members of the EU, also have strict antitrust laws that affect technology licensing. The EU’s block exemption regulation—Commission Regulation (EC) No. 772/2004 of April 27, 2004, dealing with the application of article 81(3) of the Treaty of Rome to categories of technology transfer agreements— governs patent and information licensing agreements, as well as design and model rights and software copyright licenses. If you are currently or considering licensing technology to the EU, be sure to understand and carefully consider the regulation.

Due to the complex nature of international technology licensing, be sure to get qualified legal advice in the United States before entering into an agreement. It’s also often a good idea for U.S. licensers to retain qualified legal counsel in the host country, to be able to obtain advice on applicable local laws and to receive assistance in securing the foreign government’s approval of the agreement. Sound legal advice and thorough investigation of the prospective licensee and the relevant practices of the host country will increase the likelihood that your licensing agreement will be a profitable transaction.
 
Franchising
Many small business owners choose franchising over starting a new business because franchising provides an easy access to an established product, reduces risk, provides marketing assistance, and, in some instances, offers help in obtaining startup capital.




Licensing