Presentation on theme: "TECHNOLOGY LICENSING TODAY Karl F. Jorda"— Presentation transcript:
1 TECHNOLOGY LICENSING TODAY Karl F. Jorda David Rines Professor of Intellectual Property Law & Industrial InnovationDirector, Kenneth J. Germeshausen Center for the Law of Innovation & EntrepreneurshipFranklin Pierce Law CenterTwo White Street, Concord, NH USAWorkshopIP Academy/Exploit TechnologiesSingaporeMarch 1, 2007
2 INTRODUCTION A. Increasing Importance of IPRs Live in “Golden Age” for IPRsPatent filings and issuances are skyrocketingTalk of patent “revolution,” “explosion,” “frenzy”“Anything under the sun that is made by man” is patentableCourts, Congress, Justice Department — pro IPRsCorporations built on patented technologiesMotto: Innovate or perishValue of IPRs for securing exclusivity — simply invaluableRoyalties for licensing IPRs in 2002: $150 billionOver $1 billion for some companiesUniversities jumped on bandwagonGetting patents, concluding licenses, collecting royalties
3 B. Similar Developments Abroad India of all places is the best example.There has been a sea change in how IP is viewed in India.In the North/South debates, India had spearheaded the opposition to patents, proclaiming that technology was the “common heritage of mankind” and should therefore be made available for free.Back in 1992, when I attended a WIPO program at the University in Delhi, I was crucified for the pro-patent views I expressed.A few years ago when I attended a WIPO International Conference in Delhi it came as a great surprise to me that they had turned decisively pro-patent.They were singing a different tune now that “IP is available in abundance in India”:• IP is being taught in “all academic schools” under government sponsorship,• IP institutes are springing up all over,• the Chamber of Commerce is promulgating the slogan “Patent or Perish,”• the phrases “IP literacy” and “IP awareness” have become buzzwords and• they are trying to “bring IP from a legalistic ivory tower down to the common man.”What an about-face!
4 C. Licensing – A New Ball Game We have a new ball game in the field of technology licensing and technology transfer.Years ago there was little or none.All product innovation had to be home-grown. NIH factor played a role.There is often an innate reluctance to license because• it is more profitable to self-commercialize than to license out.• There is risk that licensing will set up a competitor.Westinghouse, DuPont, Ciba-Geigy didn’t license.Ciba-Geigy scuttled projects and did not even inquire about availability of a license.
5 C. Licensing – A New Ball Game (continued) Nowadays no longer simple, straight-forward plain-vanilla licenses.Instead,• complex and sophisticated hybrid agreements,• option/license agreements,• cross-licenses, joint venture, corporate partnering, co-promotion or co-marketing arrangements,• strategic alliances and consortium licensing.Other very significant developments and trends in• licensing attitudes and practices (win-win),• IP valuation and royalty setting (other quid pro quos).Entirely different antitrust climate: restrictions commonly found in license agreements are viewed as pro-competitive and IP is considered property rather than a monopoly.Licensing, technology transfers and investments are ever so much easier to carry out via patents and other IPRs as vehicles or bases.
6 D. REASONS FOR LICENSING Unblock interlocking IPR’sSettle IP litigation, interferenceGrow and diversify the businessDeal with outside idea submissionConvert dormant IP portfolios into profits
9 F. DUE DILIGENCEAn investigation undertaken in the course of an IP transaction.The purpose of a due diligence investigation is to provide the data needed to analyze and assess the business and legal risks associated with the IP rights that are the subject of the transactions.Due diligence procedures may include, among other things:1) identification of all IPRs involved in the transaction,2) verification of ownership and inventorship of the IPRs,3) determination of the enforceability or strength of the IP assets,4) review and verification of all documentation associated with the IPRs, including registrations, licenses, security liens, file wrappers, and claims of infringement; and5) interviews of those persons with knowledge of the subject IPRs.
10 G. NEGOTIATION TACTICS Prepare thoroughly • do research on other side• develop strategy• prepare draft agreement or outlineChoose third or fourth choice candidate for first roundForm a teamStage a dress rehearsalGo in with win/win approach — not “wimpy/wimpy”Assure comfort and convenienceTake good notesTake up less controversial issues firstTake up money matters at end• agreement clauses have economic weightUse silence in negotiationsVolunteer to draft agreement
11 II. Patent Licensing – Dos and Don’ts A. Royalty Setting Misconceptions about royalties abound, e.g.,• licensors can charge what the traffic will bear,• licensors can recoup their R&D expenses,• the cost of the development of a technology is a big factor,• there are royalty standards within each industry to go by, etc.None of this is necessarily true.There is a limit to what a licensor can charge.The licensee’s economics, not the licensors, control the royalty determination.Less is more and greed never pays off.At Ciba-Geigy several agreements went South because the royalties were too high, the profitability was not there and the deals could not be sustained in the end.On other occasions, agreements had to be renegotiated for lower royalties.
12 A. Royalty Setting (continued) The cost to licensor of the development of the technology is not even a factor.“The research and development costs of developing the TI (Technical Information) are sunken expenses expended by the licensor whether or not the TI is licensed and, therefore, should not be considered by the licensor in arriving at a suitable royalty.” (Martin Landis)The public’s interest in buying a product is unrelated to the cost of developing it. (Tom Arnold)
13 A. Royalty Setting (continued) What about royalty standards in industry?Common belief: there are norms to rely on.But per John Romary industry average royalty rates are “folklore” and “suspect as a royalty-rate guide.E.g., “a 5% running royalty for a non-exclusive license helps very little in evaluating an exclusive license on different but related technology.”A “1.5% running royalty on technology that can be effectively designed around is equally unavailing in pegging the value of a pioneer patent critical to the competitor.”Still commonly recited averages provide additional data points.Such figures are based on the net sales price and a non-exclusive license.A 20 to 50 per cent premium may be a reasonable average for an exclusive license
14 A. Royalty Setting (continued) Factors to be taken into consideration in royalty setting:Tom Arnold’s “100 Factors Involved in Pricing the Technology License” (1988 Licensing Law Handbook)A handy checklist — not all factors play a role.The most important are:• the stage of development (embryonic and untested v. tested and commercial),• the strength of the IP rights (solid v. weak, easy to design around),• the degree of exclusivity (exclusive v. non-exclusive) and• geographic scope.Also, the importance and volume of complementary collateral trade secrets.Many other operative clauses in a technology license have economic weight, e.g.• grantback and grant-forward clauses,• payment structures and schedules,• MFL clauses,• representations and warranties, etc.Hence, royalty setting is not the first task in licensing negotiations but the last one — after all the others have fallen into place.
15 A. Royalty Setting (continued) MOST IMPORTANT FACTORSa) the state of development of the subject technology (embryonic and untested v. tested and commercial),b) the strength of the IP rights (solid v. weak, ease to design around vel non), andc) the degree of exclusivity (exclusive v. non-exclusive).-----the amount of, and value added by, trade secrets“Trade secrets are a component of almost every technology license...(and) can increase the value of a license up to 3 to 10 times the value of the deal if no trade secrets are involved.” (Melvin Jager).
16 A. Royalty Setting (continued) Royalty-bearingLump sum — single or installmentsRunning royaltiesFixedSlidingIncreasingDecreasingMaximum (Cap)MinimumCombination of bothMost common combination1) Initial lump sum (about 10%)2) Running royalty (on net sales)3) Minimum yearly royaltyTotal royalty income depends onRoyalty baseRoyalty rateDuration of agreementRoyalty-free
17 II. Patent Licensing – Dos and Don’ts B. Royalty-Free Licenses There is significant royalty-free (yes, free!) licensing, which makes eminent business sense but would hardly be endorsed by the IP value extraction and monetization gurus.In my experience there is great virtue in royalty-free licensing in terms of good will and good relationships, bringing about increased sales of goods and supplies and hence larger market share.I prepared once over 20 royalty-free non-exclusive licenses to carpet manufacturer under patents I had obtained in the U.S. and Canada on an important improvement in tufting carpets.Ciba-Geigy was not in the business of manufacturing and selling carpets but dyestuffs.Ciba-Geigy had no intention to practice this tufting method itself.Licensing was the best alternative - for free.Expectation: this would induce grateful carpet manufacturers to buy or buy more dyestuffs from Ciba-Geigy because these carpet manufacturers were pleased to be licensed for free to practice an important new technique for tufting carpets.
18 B. Royalty-Free Licenses (continued) •Note also the recent royalty-free licensing by Iridian Technologies of iris-scan patents.Iridian owns many patents on iris-recognition software for accurately identifying people at airport security or automated teller machines.Iridian licensed these patents also on a royalty-free basis, after deciding that the “upside of software sales was greater than the downside of collecting royalties.”They then won contracts with Schiphol Airport and the UAE government and expect other big government contracts.IP Law & Business concluded: Iridian will “end up getting a lot of business”.•Royalty-free licensing for creating good will and establishing or cementing good relationships and market share can be savvy business move.•In the field of licensing law and practice there are other instances of, or occasions for, granting free licenses, for instance— interference settlement agreements,— grant-back/grant-forward provisions,— releases of patent rights to employees,— in standard setting situations, and others.
19 II. Patent Licensing- Do’s and Don’ts C. CONTRACT DRAFTING 1 II. Patent Licensing- Do’s and Don’ts C. CONTRACT DRAFTING 1. Inescapable Uncertainty Principle In Contract Draftinga. Semantic Dilemma— undefined terms— terms incapable of definition— few terms universally understood to have a single meaninge.g. “public domain”, “line of business”if try to define, often substitute another uncertaintystiff definitions importantb. Human FrailtyImperfection of human intelligence and attentiveness, press of business— can be mitigatedCan lead to three defectsa.) ambiguity— two possible meanings —— different from vagueness (imprecise boundaries)e.g. “residence,” “period from June 15 to” can be eliminated— of different words— additional wordsb.) excessive vagueness — e.g. “indivisible”c.) unclear modifier— most common, most dangerous
20 2. Content of the All-Important Grant Clause The grant clause is the most important clauseIt has the following five elements:1) ABC Corp. grants (or agrees to grant or grants and agrees to grant) to XYZ Inc.2) a (non) exclusive (or sole) license under certain IP Rights3) to make, have made, use, offer to sell, sell or import Licensed Products (or to practice Licensed Methods)4) throughout the Territory5) for the duration of this Agreement.Insertion of such modifiers as “indivisible,” “irrevocable” and/or “non-transferable” in boilerplate fashion is inadvisable.
21 2. Content of the All-Important Grant Clause (continued) The term “indivisible” will take away the right “to have made”, which normally is implied and included in the term “to make,” when it is not specifically recited. Ambiguity may result.It will also rule out the right for subsidiaries and affiliates to operate under the license.And the term “irrevocable” does not belong in the grant clause. Conditions, if any, of revocability should be recited in the termination clause.The “non-transferable” language would not grant any right to assign or sublicense and would be ambiguous if assignment or sublicensing rights are recited.Re the bundle of rights to be granted, it is preferable to track the statutory language. Other terms, e.g. “lease,” “dispose of”, may lead to a restrictive reading because of the general rule that inclusion of one means the exclusion of the other.
22 3. Protection Of Exclusive Licensor 1. Lumpsum payment — paid up license2. Minimum royalties3. Termination power — outright• if a desired total not reached• if annual minimums not maintained4. Conversion to non-exclusive license5. “Best efforts“ clause• dubious language• variously interpretedvery strictly or leniently• better: reasonable diligence consistent with interests of business• best: objective, quantitative criteria of performance
23 4. Better Alternatives for the Common Best Efforts Clause “Best efforts” clauses are routinely written into exclusive license agreements.A best efforts clause to the effect that ABC “shall exercise its best efforts to exploit the Licensed Products,” is useless as a device for the protection of licensor, where licensee’s performance is unexpectedly low or inadequate.It is dubious language that courts can interpret strictly or loosely as merely stating a theme rather than a course of conduct.Preferable wording:“Reasonable diligence consistent with the interests of the business” or“’Best Efforts’ shall mean those efforts which a reasonably prudent person knowledgeable of such matters would consider desirable, necessary or commercially reasonable to further the intentions of the Parties hereunder.”Better yet: statements of objective, quantitative criteria of performance.Best of all: a requirement for minimum royalty payments, coupled with conversion from exclusive to non-exclusive status or termination power, if specified levels of performance or annual minimums are not maintained.
24 4. Best Efforts Obligation Licensee shall exercise its best efforts to produce, sell and offer for sale Licensed Machines. “Best efforts” shall mean those efforts which are commercially reasonable to further the intentions of the Parties with respect to quality as well as quantity of the Licensed Machines produced. Production of 250 Licensed Machines per half year after March 1, 2001 of a quality that conforms with established industry standards, will satisfy Licensee’s best efforts obligation hereunder.
25 5. Protection of Licensees from Third-Party Dominant Patent Risks Not infrequently, a licensee finds the exercise of the license blocked or impeded due to the existence or issuance of a third-party patent:• Mostly a dominant patent,• a patent on a component or subcombination, or• a patent one is aware of and rules out as being infringed but later turns into a threat due to a novel interpretation of the claims or claims scope or a novel (twisted) of infringement.This may occur in spite of rigorous due diligence.For protection licensee should negotiate a hold-harmless clause stipulating• licensor would get licensee another license,• provide a non-infringing alternative or• defend an infringement suit (but not open-endedly).Also a cost-sharing arrangement, if royalties to be paid to the third-party patentee or if it comes to an infringement suit.Renegotiation of the royalty provision in the first license is a possibility. Our Tolban example.
26 5. Protection of Licensees from Third-Party Dominant Patent Risks (continued) Licensor should not represent and warrant that the licensed subject matter “does not infringe any valid rights of any third party.”Licensor can’t foresee what licensee will do and evaluate the risk nor can licensor foresee, what other secret pending patents might issue.All licensor can represent and warrant is that it is not aware of any patents of others that would be infringed.
27 6. Trouble-Free MFL Clauses An MFL clause is a frequent bone of contention in my experience and in light of the number of lawsuits.It is a very important clause in non-exclusive licensesLicensees should negotiate MFL clauses to extend identical terms or to refrain from granting to subsequent licensees more generous terms.Licensor can include a so-called negative MFL clause.A general or overly broad MFL clause can be troublesome to licensor in special circumstances, e.g., a license arising from a settlement or litigation.It is advisable• to stay away from vague phrases, such as, “other terms and conditions,”• to include escape clauses or exceptions, e.g. settlements, and• to give licensee the right to terminate and renegotiate the license, if a subsequent licensee has been overly favored.Thus, an MFL provision, should be limited to royalty or other money terms giving prompt notice to licensee and option to accept such new terms within, say, 30 days.
28 6. Trouble-Free MFL Clauses (continued) PATLEX LICENSE ARTICLE XII – MOST FAVORED LICENSEE If subsequent to the effective Date of this Agreement another manufacturer of lasers, laser systems, or Low or High Power Laser Tubes similarly situated to LICENSEE is granted a license by PATLEX which provides to said another manufacturer a combined royalty rate and royalty base materially more favorable to said another manufacturer with respect to any of the Licensed Patents than that provided herein to LICENSEE for lasers, laser systems and Low or High Power Laser Tubes sold or leased in the United States, then LICENSEE may, at its option, adopt the subsequent license in its entirety, mutatis mutandis, as of the effective date of such subsequent license. PATLEX shall notify LICENSEE of any such subsequent license and provide LICENSEE an opportunity to exercise the option provided herein.
29 7. Additional Clauses Needing Close Attention Definitions — the second-most critical clause in licensesConfidentiality — crucial where trade secrets are involvedImprovements — “grant-back” by licensee to licensor or“grant forward” by licensor to licensee where they continue their R&D,a narrow, precise definition, tied to the scope of the patent claims,in non-exclusive formSublicensing rights — especially important in exclusive licenses for practical and legal reasonsTermination — this third most important clause is a multipronged concept,each prong needs to be defined separately,a license never terminates over night,different rights and obligations of the parties continue
30 II. PATENT LICENSING – DOS AND DON’TS D II. PATENT LICENSING – DOS AND DON’TS D. Assignment Rather than Exclusive LicenseIllustrative licensing experience in New ZealandAt one point I was to go to New Zealand, to chase down an elusive invention and an elusive inventor and prospective licensor and come back with a signed patent application ready for filing in the U.S. and Canada. And I was to bring back an executed exclusive license agreement, ready for execution by my management as well.Invention: a novel bovine parturition control method invented by a veterinarian of a dairy company employing dexamethasone TMA, a pharmaceutical of Ciba-Geigy.I came back with a finished patent application but also with an assignment with a provision for installment payments based on net sales.Why an assignment and not a license?I don’t recall why I prepared an assignment. Perhaps it was intuition, because it was not until later that I learned of Tom Arnold’s suggestion that“what is perceived by the businessman as an ‘exclusive license,’ is best negotiated into the form of a patent assignment with rights to reversions of title if royalties are not paid … because the exclusive license differs from assignments only in areas (like who sues infringer and has authority to compromise in settlement) which may be better borne by the party actively in the business than by the passive transferor of the technologyIndeed, the New Zealand dairy company was merely a “passive transferor of the technology” and my company was going to have to do considerable additional R&D work to obtain the requisite government approvals for commercialization.
31 II. PATENT LICENSING – DOS AND DON’TS (continued) E. Implied Licenses Shopright — employer-employee relationshipVia acquiescence or laches — where patent owner sits on his/her rightsLicensor-Licensee Relationshipunder unlicensed but indispensable patent — e.g. dominant patent issued later to licensor or earlier-issued dominant patent acquired by licensorSeller-Buyer relationshipunder combination or method patent of seller who sells a component or article for use in the patented combo or methodSee Jacobson v. Cox, Dist. Ct., Arizona, 1991Business relationship — close cooperation on innovative projectSee Wang v. Mitsubishi, CAFC, 1997
32 II. PATENT LICENSING – DOS AND DON’TS. F II. PATENT LICENSING – DOS AND DON’TS F. Case History – Gould Laser PatentsThis licensing story played out in the eighties. But it is not ancient history at all.It harbors• Invaluable lessons and• important licensing concepts and ingenious licensing strategies.It shows creativity in crafting win-win license agreements to resolve intractable controversies and disputes.Timeless, priceless! Mother of all Case Histories.As was stated by Tom Arnold:“(T)he various clause concepts are as keys upon a piano. Each may be played loudly, softly, staccato or with lingering resonance; and each may be played in solo melody or in chords with the others in infinite variety; they constitute a piano upon which infinite varieties of transactions can be played. “
33 LICENSING CASE HISTORY GOULD LASTER PATENTS CAST OF CHARACTERS1.) Gordon GouldSole inventor as Columbia graduate student — Owns 20% of patent rights and has a 20% share of the royalties.2.) Richard I. SamuelPartner of Lerner, David, Samuel, et al — prosecuted Gould applications — became President and CEO of PATLEX which had acquired 80% ownership in Gould patent rights from REFAC, a New York City licensing outfit, initially retained by Gould/Lerner, David, Samuel, et al to exploit Gould patent rights. (REFAC receives 16% and PATLEX, 64% of royalty income.)3.) Herbert Dwight, Jr.Entrepreneur and founder of Spectraphysics and its CEO till retirement in 1988.4.) Frank BormanFormer Astronaut and Chairman of Eastern Airlines, became Board Chairman of PATLEX in 1988.
35 LICENSING CASE HISTORY GOULD LASER PATENTS PATENT PROCUREMENT & LITIGATIONDifficult ProsecutionMulti-party InterferencesThree Re-examinationsAppeals from PTO to District Court and Federal CircuitInfringement LitigationControl Laser FLQuantronix CAGeneral Photomics CA
36 LICENSING CASE HISTORY GOULD LASER PATENTS STANDARD PATLEX LICENSE1. User LicenseGrant: non-exclusive worldwide license under USP 4,161,436 on “Method of Energizing and Material” — immunity under all Gould patents.Royalty: 1) 3% of purchase price of all lasers — for past infringement — within 60 days of effective date.2) 1% of purchase price on first, second and third anniversary of effective date.3) 6% of purchase price for future purchases unless purchased from licensed source.4) 8% for lasers which licensee hides.5) In case of acquisitions of companies over $20M, royalties as per 1) — 4) within 60 days of acquisition.
37 LICENSING CASE HISTORY GOULD LASER PATENTS STANDARD PATLEX LICENSEManufacturer LicenseGrant: non-exclusive worldwide license under all Gould patents.Royalty:For Past Infringement:1) 5% of net selling price upon signing under USP ,053,845.2) 13% under USP 4,161,436.3) 5% under Can. Pat. 907,110..4) 6% under USP 3,562,662, 3,576,500 and 3,586,998.
38 LICENSING CASE HISTORY GOULD LASER PATENTS STANDARD PATLEX LICENSEAs Future Royalties:1) 5% under USP 4,053,845(Optically Pumped Lasers)2) 2% under USP 4,704,583(Gas Discharge Laser) or3-1/2% or 5% depending on occurrence of certain conditions.3.) 3-1/2% under Application No. 869,831(Brewster’s Nagle Window)4) 3% under USP 4,161,436(User patent)5) 5% under Can. patent 907,1006) 6% under USP 3,576,500(Copper Vapor Laser)7) O% under any other Gould patent.For multiple patents — highest rate.Other terms:Complicated provisions with respect to the above patents as to royalty base.No royalty on governmental sales.Licensee’s customers won’t be sued.
39 LICENSING CASE HISTORY GOULD LASER PATENTS PATLEX/COHERENT LICENSEUSA SalesSales Range Royalty Rate$ O — $12.5 million %$12.5 million and above %Foreign SalesSales Range Royalty Rate$ O — $7.5 million %$7.5 million and above %As long as Spectraphysics is neither licensed nor sued, royalty is only 3% of U.S. net sales and 1.2% of foreign net sales.Annual cap of $125K under Use Patent License.Contains MFL Clause.
40 LICENSING CASE HISTORY GOULD LASER PATENTS VOLUME BREAKPOINTS OR DESCENDING ROYALTY SCALEUSA SalesSales Range Royalty Rate$ 0-$15 million %$15-$20 million %$20-$25 million %$25 million and above %Foreign SalesSales Range Royalty Rate$ 0-$ 5 million %$ 5-$10 million %$10-$15 million %$15 million and above %
41 LICENSING CASE HISTORY GOULD LASER PATENTS KEY PROVISIONS — CRUX OF THE AGREEMENTSStep-up royalty from 2% to 5% in 2 stepsTriggers:1) when one competitor licensed or sued up to 3-1/2%2) when both competitors licensed or sued up to 5%
42 LICENSING CASE HISTORY – GOULD LASER PATENTS This case history clearly illustrates the dynamic interplay of• step-up royalty/MFL clauses to induce the smaller players to sign up when the bigger competitors — here Coherent and Spectra-Physics — are holdouts and thus have an additional competitive edge by not paying any royalties and• descending royalty schedules to entice the holdouts to take out licenses, inasmuch as their total royalty exposure is significantly reduced, e.g. down to about 1.7% in the case of Spectra-Physics.
43 II. PATENT LICENSING – DO’S AND DON’TS G II. PATENT LICENSING – DO’S AND DON’TS G. Case History Clock Calculator PatentFour-Step ProjectExhaustive infringement search and studyExhaustive validity search and studyDesign of comprehensive Licensing Strategya) Patent ownership transferred to new subsidiaryb) Narrow royalty basec) Low royalty rated) Offer of paid-up licensese) Agreements prepared for both paid-up and running royalty licensesImplementation
44 II. PATENT LICENSING – DO’S AND DON’TS H II. PATENT LICENSING – DO’S AND DON’TS H. Administration of Licensing Program Post-Signing IssuesDistribution of license agreement — “working copies”Cooperation with Accounting re royalty set upContinuing contacts with and monitoring, notifications of other party reQuality control (in trademark licenses, franchise agreements)Royalty auditsInformation exchange and technical assistanceGrantback and grantforwardsMFL clausesSublicensesPatent activitiesPatent markingsBankruptcies — M& A’sRenegotiation, revisionTermination — MultiprongedBreach of contract`Other follow-through
45 III. HYBRID LICENSES A. Patent/Trade Secret Technology Licenses Patents and trade secrets (and other IPRs)Very prevalent — >80% of technologyOver 90& of all new technology is grist for trade secrets, not patents, i.e. patents are tips of icebergs in an ocean of trade secretsProblematic — different duration, etc.Brulotte v. Thys Co. (Supreme court, 1964):collection of royalties after patent expiration — per se patent misuse or antitrust violationSolutions:• Separate agreements — ideally• Lumpsum payments• Differentiation between patents and trade secrets• Allocation of royalties to each• Reduction of royalty rate if patents•• terminate•• declared invalid•• if applications not issued• Reduction of royalty-payment period (e.g. 10 years)• Grant of royalty-free license to patents• Grant of trade secret license — no patent license
46 B. FRANCHISING Trademrks and trade secrets (and other IPRS) Franchising is big businessFranchised businesses account for:One trillion in annual sales50% of Gross National product50% of all retail sales10 million people employed600,000 franchised locationsVery popular and versatile form ofMarketing andExpanding businessesNationally and internationallyTruly win/win business arrangementBut legally it is a minefield
47 Franchising (continued) Business Advantages Franchisor’s BenefitsThe franchisor can engage in rapid system expansion and market penetration without the expenditure of any capital whatsoever, but instead with an infusion of capitalThe franchisor acquires the aggressive self-motivation of franchisees, whose ownership fervor is generally far greater than that of the employee managersThe franchisor can rely on “local entrepreneurs” that can decipher local requirements because of their direct customer contact and garner goodwill engendered in that contactThe franchisor can obtain revenue from a variety of sources: a substantial fee for the sale of the franchise, a royalty for the use of the mark and the business system, savings due to the reduction of large inventories and profits due to reduction of large inventories and profits due to economies of scale in the production, storage, and handling of productsThe franchisor has the ability to motivate and control huge numbers of indirect employees, avoids a certain amount of risk inherent in most businesses, receives the benefit of the constant accretion to the value of its trademark or service mark
48 Franchising (continued) Business Advantages Franchisee’s BenefitsThe franchisee is given access to a proven product or service that has been advertised and is known to customers.The franchisee benefits by the guidance provided by the franchisor in the form of business standards and from a standardized management system and methods of internal controlThe franchisee is assisted in capital matters like site selection, design and engineering of the facility, layout, choice and sources for equipment, furnishings, supplies and even general contractor services.
49 Franchising (continued) Franchise System Structure A prospective franchisee has little choice but to put his entire faith and confidence in the franchisor. From sources of supply to advertising, to orders, payments, credits, discounts, the franchisee must look to the franchisor for total guidance in every material aspect of the franchise relationship.As franchising is a creature of contract, the entire structure of a franchise system will be contained in a franchise agreement, which set forth in detail the rights, duties, obligations and activities which each party pledges to undertake and perform. The basic franchise is the unit franchise relationship, — only one — franchise outlet, at a specified location with a designated territory.The beginning point of the franchise relationship is the duration of the franchise relationship. If the term is too short, it will attract few buyers. Franchisees are purchasing a business opportunity where time is needed to develop name recognition, to maximize goodwill and to recoup their investment. If the term of the franchise is too long, the franchisor may be stuck with a less than desirable franchisee, who is unwilling or unable to operate the franchise successfully
50 Thank You!Karl F. JordaDavid Rines Professor of Intellectual Property Law & Industrial InnovationDirector, Kenneth J. Germeshausen Center for the Law of Innovation & EntrepreneurshipFranklin Pierce Law Center, Concord, NH