European IP Helpdesk

Bulletin No. 1 Licensing


The Licence to Win: Licensing out Technologies from an SME’s Perspective

Written by Dr Richard Brunner and Dr Sevim Süzeroğlu-Melchiors, Dennemeyer Group

While companies have traditionally seen intellectual property rights protection as a defensive means to secure competitive advantages on the technology front, large corporations, but also more and more small and medium sized enterprises (SMEs) have realised that IP management goes far beyond the pure protection of intellectual property rights and aim to utilise their rights proactively. Certainly, the question how to generate the highest benefits from a company’s IP portfolio arises mostly after building up a solid protection base, but IP exploitation can also be an integral part of the business plan from the outset. Intellectual property is a broad concept and includes many different intangibles (e.g. patents, copyrights, trademarks, trade secrets, know-how). However, this article about technology licensing sets the focus on patents and utility models.

There are several ways of extracting value from a patent, such as using it as a bargaining chip in negotiations with cooperation partners or banks, selling it, and granting licences. Particularly licensing out technologies is a preferred way to commercialise and exploit IP, because it allows the owner to generate income, but still to reserve the greatest possible control over the IP and the related technologies. The classical explanation for licensing out builds on the idea that companies either recognise that a licensee has better capabilities to exploit a certain innovation than the IP owner, or they aim at establishing their technology as a de facto standard, for instance when network externalities are important to penetrate the market with the product. Other motives to license

out beyond direct revenue generation are to collaborate with others and develop new products and services jointly, or to expand the business into new sectors and geographical zones while saving costs and minimising risks, but retaining control over the quality of the products that utilise the licenced IP. Granting an equitable and affordable licence may also be reason enough to keep off new entrants from inventing competing products, if the licence is less costly, time-consuming, and risky than investing in research and development (R&D) themselves.

In addition, the importance of licensing out technologies increases, because nowadays we operate in a digitised and highly integrated but also fast moving environment. Offering up-to-date solutions and products often include a combination of diverse disciplines and technological fields, especially those which enable communication and data-driven business models. For example, brick-and-mortar producers of steel or concrete are in the process of transforming into technology-driven companies that incorporate connected services, machine-to-machine communication or artificial intelligence into their product developments and service offerings. Individualised, customer- and situation-oriented services ask for a combination and exchange of diverse technologies across industries. Therefore, the implications on the management of IP rights in the context of technology licensing are significant. It is expected, that licensing activities will increase in both directions (licensing in and licensing out) to meet this upmarket demand.

In practice, companies and particularly SMEs struggle to license out their technologies. A recent study by the EUIPO shows that only 19% of SMEs signed a licence agreement for IP rights, while only one fourth of those agreements contain technologies which are licenced out. Only a minority of SMEs sign licence agreements as licensors. The challenge for SMEs is to identify potential technology fields, applications and markets, potential cooperation partners and licensees. To tackle this problem, a practical concept for successful technology out-licensing for SMEs may be summarised in two important steps: first, defining the right licensing strategy by conducting analytics and, second, drafting

and negotiating an appropriate licence agreement that supports the strategy.

Defining the licensing strategy and conducting decision supporting analytics

The importance of a licensing strategy which fits the overall business strategy

First of all, it is important to define an adequate licensing strategy. The licensing strategy depends on the overall goal and motivation of the licensor. It may be different for a company with the approach of maximising profits in a short term, than for a company that plans to expand into new markets or seeks technology partners. The licensing strategy needs to be aligned with the overall business and R&D strategy. If the company aims to create a de facto standard that the market shall follow, the licensing strategy might focus on maximising profits, whereas a strategy to differentiate from other available products and to offer top-notch technologies might rather focus on the selection of potential partners as licensees or cross-licensees. It is important that the licensing strategy does not conflict with the overall business and R&D strategy.

Once the licensing strategy is defined, attention needs to be shifted to the following questions: How promising is the technology? Where can it be applied? And how strong is the patent?

Decision support by analysing the market characteristics, technology landscape, and strength of patent protection

Basically, technology licensing only occurs when a party owns valuable intangible assets, such as patents, which allow it to legally prevent others from using it. In other words, a licence is a deal by the patent owner to permit the use of IP in exchange for money or something else of value. That implies that technology licensing does not occur when there is no valuable IP.

This leads to the question about the value of the patent and affects the bargaining power and expected royalties. An assessment of the qualitative value of the patent can be derived by analysing the market, technology and the strength of the patent protection. The characteristics of the market or industry provide information about the