With COVID having made setting up and operating in foreign countries increasingly difficult, more companies are seeing the benefits of international licensing. My good friend Aaron Rose, recently wrote an excellent blog post, Consider Licensing Your Technology to Generate Revenue for Your Business, on the benefits of technology licensing.
In this post, I heavily borrow from what Aaron has already done, but expand it a bit to include licensing agreements more generally and to focus a bit more on international licensing. Aaron has a long history of successfully founding tech companies, investing in tech companies, and consulting to tech companies, both domestically in the United States and internationally.
Aaron starts his post by stating that “too many business owners miss the opportunity to generate revenue and increase their business’ value through the licensing of their technology.” I completely agree, and this is even more true when it comes to international licensing. I have seen too many companies spend big money taking their businesses into foreign countries when they likely would have made more money and spent less and incurred far fewer hassles had they licensed their technology and/or brand name instead.
Aaron then lists the following as licensing advantages:
1. The licensor (inventor-owner) does not have to finance the commercialization process.
2. The innovation may have a greater chance of getting to market faster because a larger, more experienced company will be handling the commercialization.
3. The innovation may reach more markets if the licensee is a large, well-funded enterprise.
4. The licensor will not have to build and manage a commercialization team.
5. The licensor will not have execution risk (though if the licensing agreement is based on sharing revenue from the licensee’s commercialization of the technology, some execution risk remains for the licensor).
6. The licensor will be protected from product liability if the licensing agreement is properly written.
7. The licensor retains ownership of the intellectual property.
A licensor that licenses its technology to a local company in a foreign country is likely to benefit from the following as well:
1. Your country risk will almost certainly be less with an international licensing agreement than having your company set up and operate overseas. Take China as an example. Your doing business in China as a foreign company is considerably riskier than having your China company licensee do business in China.
2. It can be complicated and risky to send or have foreign employees in some countries. An international licensing agreement can obviate or greatly reduce your need to send or have someone overseas.
3. Cultural and legal and other differences can make it difficult to figure out and successfully market/sell various products or services in many foreign countries. An international technology licensing agreement with a local company in a foreign country will reduce your need to deal with these differences.
4. International licensing can be a relatively cheap, quick and easy way to increase your brand recognition internationally.
Aaron then lists out some of the issues relevant to a licensing agreement:
1. Will it be an exclusive license or a non-exclusive license?
2. Will you or your licensee be responsible for defending your IP?
3. How will royalty payments be determined?
4. What conditions constitute grounds for early termination of the licensing agreement?
5. Will you allow for renegotiating the agreement after a period of time has passed?
6. Will your licensing agreement guarantee a minimum or maximum royalty per contract period.
7. What happens if the licensee goes bankrupt or is acquired? Better get that into the contract as well.
Aaron had this to say about his own experience licensing a mobile application to China:
When I was co-founder and chief executive of ROI3, Inc., our primary product was a mobile application that allowed Chinese speakers to learn specialized English terminology. One app was focused on English medical terminology and another app presented English terms used in aviation settings. Rather than making our apps available for consumers to download on one of the many app stores available in China, ROI3’s business model focused on licensing our technology to enterprise customers. We licensed our medical app to Chinese medical schools and research institutions and our aviation app to flight training centers in China. Items my colleagues and I had to consider included exclusivity or non-exclusivity, when license fees were to be paid, auditing mechanisms to ensure that the licensee was accurately reporting revenues resulting from the use of our technology, and ensuring that our technology would not be used by the licensee in ways not defined in the license agreement.
Aaron then lists a dozen (!) China law blog articles “as a useful resource” for those considering licensing technology to China. Of that dozen, I suggest you check out the following five most recent ones:
- China Licensing Term Sheets, 2018
- China Licensing Deals so Horrible They are Hard to Believe, 2018
- How to do Business with China Without Having to go to China: Licensing Deals, 2020
- China IP Licensing Deals, 2020
- China Technology and Trademark Licensing Agreements, 2021
Though focused on China, nearly all that is written in the above five posts directly relates to any international licensing transaction.
Bottom Line: Done right, there are many benefits to international licensing and I urge you to read Aaron’s entire post here.