TECHNOLOGY LICENSING AND JOINT VENTURES
TECHNOLOGY LICENSING
Technology licensing is a contractual arrangement in which
the licenser's patents, trademarks, service marks,
copyrights, or know-how may be sold or otherwise made
available to a licensee for compensation negotiated in
advance between the parties. Such compensation, known as
royalties, may consist of a lump sum royalty, a running
royalty (royalty based on volume of production), or a
combination of both. U.S. companies frequently license
their patents, trademarks, copyrights, and know-how to a
foreign company that then manufactures and sells products
based on the technology in a country or group of countries
authorized by the licensing agreement.
A technology licensing agreement usually enables a U.S.
firm to enter a foreign market quickly, yet 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. firms
to overcome many of the tariff and nontariff barriers that
frequently hamper the export of U.S.-manufactured products.
For these reasons, licensing can be a particularly
attractive method of exporting for small companies or
companies with little international trade experience,
although licensing is profitably employed by large and
small firms alike. Technology licensing can also be used to
acquire foreign technology (e.g., through cross-licensing
agreements or grantback clauses granting rights to
improvement technology developed by a licensee).
Technology licensing is not limited to the manufacturing
sector. Franchising is also an important form of
technology licensing used by many service industries. In
franchising, the franchisor (licenser) permits the
franchisee (licensee) to employ its trademark or service
mark in a contractually specified manner for the marketing
of goods or services. The franchisor usually continues to
support the operation of the franchisee's business by
providing advertising, accounting, training, and related
services and in many instances also supplies products
needed by the franchisee.
As a form of exporting, technology licensing has certain
potential drawbacks. The negative aspects of licensing are
that (1) control over the technology is weakened because it
has been transferred to an unaffiliated firm and (2)
licensing usually produces fewer profits than exporting
goods or services produced in the United States. In certain
Third World countries, there also may be problems in
adequately protecting the licensed technology from
unauthorized use by third parties.
In considering the licensing of technology, it is important
to remember that foreign licensees may attempt to use the
licensed technology to manufacture products that are
marketed in the United States or third countries in direct
competition with the licenser or its other licensees. In
many instances, U.S. licensers may wish to impose
territorial restrictions on their foreign licensees,
depending on U.S. or foreign antitrust laws and the
licensing laws of the host country. Also, U.S. and foreign
patent, trademark, and copyright laws can often be used to
bar unauthorized sales by foreign licensees, provided that
the U.S. licenser has valid patent, trademark, or copyright
protection in the United States or the other countries
involved. In addition, unauthorized exports to the United
States by foreign licensees can often be prevented by
filing unfair import practices complaints under section 337
of the Tariff Act of 1930 with the U.S. International Trade
Commission and by recording U.S. trademarks and copyrights
with the U.S. Customs Service.
As in all overseas transactions, it is important to
investigate not only the prospective licensee but the
licensee's country as well. The government of the host
country often must approve the licensing agreement before
it goes into effect. Such governments, for example, may
prohibit royalty payments that exceed a certain rate or
contractual provisions barring the licensee from exporting
products manufactured with or embodying the licensed
technology to third countries.
The prospective licenser must always take into account the
host country's foreign patent, trademark, and copyright
laws; exchange controls; product liability laws; possible
countertrading or barter requirements; antitrust and tax
laws; and attitudes toward repatriation of royalties and
dividends. The existence of a tax treaty or bilateral
investment treaty between the United States and the
prospective host country is an important indicator of the
overall commercial relationship. Prospective U.S.
licensers, especially of advanced technology, also should
determine whether they need to obtain an export license
from the U.S. Department of Commerce.
International technology licensing agreements, in a few
instances, can unlawfully restrain trade in violation of
U.S. or foreign antitrust laws. U.S. antitrust law, as a
general rule, prohibits international technology licensing
agreements that unreasonably restrict imports of competing
goods or technology into the United States or unreasonably
restrain U.S. domestic competition or exports by U.S.
persons.
Whether or not a restraint is reasonable is a fact-specific
determination that is made after consideration of the
availability of competing goods or technology; market
shares; barriers to entry; the business justifications for
and the duration of contractual restraints; valid patents,
trademarks, and copyrights; and certain other factors. The
U.S. Department of Justice's Antitrust Enforcement
Guidelines for International Operations (1988) contains
useful advice regarding the legality of various types of
international transactions, including technology licensing.
In those instances in which significant federal antitrust
issues are presented, U.S. licensers may wish to consider
applying for an export trade certificate of review from the
Department of Commerce or requesting a Department of
Justice business review letter.
Foreign countries, particularly the EC, also have strict
antitrust laws that affect technology licensing. The EC has
issued detailed regulations governing patent and know-how
licensing. These block exemption regulations are entitled
"Commission Regulation (EEC) No. 2349/84 of 23 July 1984 on
the Application of Article 85(3) of the Treaty [of Rome] to
Certain Categories of Patent Licensing Agreements" and
"Commission Regulation (EEC) No. 556/89 of 30 November 1988
on the Application of Article 85(3) of the Treaty to
Certain Categories of Know-how Licensing Agreements." These
regulations should be carefully considered by anyone
currently licensing or contemplating the licensing of
technology to the EC.
Because of the potential complexity of international
technology licensing agreements, firms should seek
qualified legal advice in the United States before entering
into such an agreement. In many instances, U.S. licensors
should also retain qualified legal counsel in the host
country in order 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 host country increase the likelihood that the licensing
agreement will be a profitable transaction and help
decrease or avoid potential problems.
JOINT VENTURES
There are a number of business and legal reasons why
unassisted exporting may not be the best export strategy
for a U.S. company. In such cases, the firm may wish to
consider a joint venture with a firm in the host country.
International joint ventures are used in a wide variety of
manufacturing, mining, and service industries and are
frequently undertaken in conjunction with technology
licensing by the U.S. firm to the joint venture.
The host country may require that a certain percentage
(often 51 percent) of manufacturing or mining operations
be owned by nationals of that country, thereby requiring
U.S. firms to operate through joint ventures. In addition
to such legal requirements, U.S. firms may find it
desirable to enter into a joint venture with a foreign firm
to help spread the high costs and risks frequently
associated with foreign operations.
Moreover, the local partner may bring to the joint venture
its knowledge of the customs and tastes of the people, an
established distribution network, and valuable business and
political contacts. Having local partners also decreases
the foreign status of the firm and may provide some
protection against discrimination or expropriation, should
conditions change.
There are, of course, possible disadvantages to
international joint ventures. A major potential drawback to
joint ventures, especially in countries that limit foreign
companies to 49 percent or less participation, is the loss
of effective managerial control. A loss of effective
managerial control can result in reduced profits, increased
operating costs, inferior product quality, and exposure to
product liability and environmental litigation and fines.
U.S. firms that wish to retain effective managerial control
will find this issue an important topic in negotiations
with the prospective joint venture partner and frequently
the host government as well.
Like technology licensing agreements, joint ventures can
raise U.S. or foreign antitrust issues in certain
circumstances, particularly when the prospective joint
venture partners are major existing or potential
competitors in the affected national markets. Firms may
wish to consider applying for an export trade certificate
of review from the Department of Commerce (see chapter 4)
or a business review letter from the Department of Justice
when significant federal antitrust issues are raised by the
proposed international joint venture.
Because of the complex legal issues frequently raised by
international joint venture agreements, it is very
important, before entering into any such agreement, to seek
legal advice from qualified U.S. counsel experienced in
this aspect of international trade.
U.S. firms contemplating international joint ventures also
should consider retaining experienced counsel in the host
country. U.S. firms can find it very disadvantageous to
rely upon their potential joint venture partners to
negotiate host government approvals and advise them on
legal issues, since their prospective partners' interests
may not always coincide with their own. Qualified foreign
counsel can be very helpful in obtaining government
approvals and providing ongoing advice regarding the host
country's patent, trademark, copyright, tax, labor,
corporate, commercial, antitrust, and exchange control
laws.
