Presentation on theme: "LICENSING AND FRANCHISING; FUNDAMENTALS"— Presentation transcript:
1 LICENSING AND FRANCHISING; FUNDAMENTALS Tamara Nanayakkara
2 OutlineChallenge to businesses – how to keep growing in a slowing economy; Importance of finding new ways of generating incomeThinking of intellectual property as assetsLicensing (and Franchising), strategic use of these assetsNegotiating
3 Economic GrowthTraditionally, economic winners were those who had natural resources.Scarce=assumption of finite growth. Resources down or constant, population up. But growth up!?
4 New EconomyReason the “new economy”. Knowledge making more effective use of resources knowledge component in manufactured goods 20%, 1990s 70%Application of knowledge, key to competitiveness
5 The IP SystemProvides a legal means for protecting creativity and knowledge; patents, TM, copyrights, design rights etc provide the creator the means to prevent others from using his knowledge/creativityEnsures the continued production of knowledge and its dissemination
6 IP AssetsBy providing such protection the IP system gives more than the right to prevent others but in fact creates valuable tradable (intangible) assets.
7 LicensingLicensing is when an owner of such an intangible asset, transfers the right to use that asset to another, for a price, while retaining ownership of that asset.In practice, the owner of technology protected by patents or trade secrets or both gives another the right to use that technology to manufacture given product(s)
8 Licensing of IPRLicensing is only relevant where there is an intellectual property rightTerritorial nature of IPRIf the technology (or other kind of expression of human creativity) is not protected by an IPR, it is then not property owned by someone and as such the issue of licensing does not arise.
9 Why License For the Licensor For the Licensee Simultaneous use by many Expand manufacturingEarn revenueAccess to marketsStick licensingCreate standardCross licenseFor the LicenseeStay current in evolving marketNo in-house R&D, yet access to technologiesExpand into new product lineSettle disputeManufacture standardized productAccess to patent, know-how, trainingFor the licensorExploit technology in non competing fieldAs part of the sale of the businessObtain needed technology – cross licenseConvoyed sales – copier/print inkAccess to markets could mean access to low cost labour,
10 Why Not License For the licensor For the Licensee Create competitor Bad choice of licensee could damage reputationLose control of proprietary informationAdministrative costLegal complicationsFor the LicenseeRoyalties add costSecrecy requirementsAdministrative burdens - audits, reports etcMay be obliged to grant back improvementsAdmin cost – cost of audits etc
11 Negotiationyou don’t get the deal you deserve but you get the deal you negotiate
12 Preparation - information gathering General information on the relevant marketCompanies active in that market and their productsExisting technologies used by such companiesOn going R&D about relevant technologiesPrevalent licensing practices in the relevant markets and products
13 Preparation - sources of information Publicly available information of publicly traded companies.Online and subscription database services for the relevant market or productsTrade publications, trade and technology exhibitions, fairs and showsTechnology licensing offices of research based universitiesRelevant government departmentsProfessional and business magazines, journals and publications concerning the relevant products and marketsProfessional and business associationsTechnology exchanges,Innovation centresPatent information services
14 Preparation - Patent Information Patent information is the collection of patent documents consisting of patent applications and grants worldwide.For technologies that are patented it is the most useful yet the least utilizedit is the most recent, gives the legal status, information on technological activity (possible alternatives) and those involved in such technological activity
15 Preparation Analyze your strengths and weaknesses Identify your team leader supported by financial, legal and technical peoplePrepare summary of key issues(Heads of Agreement, Term Sheet)
16 The Agreement – who, what Parties - who will be bound by itSubject matter - what exactly is being licensed
17 The Agreement - ExtentExclusive, non exclusive or sole (licensor and licensee can operate in the territory)Sub licenses – must be expressly grantedField of use – technology dividedScope - make, use or sell, offer for sale, importTerritoryImprovementsField of useMotor- car, plane, boatSound system – broadcast, theatre, homeScope – license to have made is implied in license to make. Not a sub license. A sub contract
18 The Agreement - Financial Lump sum - payable on the happening of a particular eventRoyalties - recurring payments tied to the use of the technology, commonly based on sales. Could go down as production goes up (fixed price per unit or % of sales)Annual minimum royalty - usually where the license is exclusive and the licensor needs to ensure a regular income.
19 The AgreementDispute settlement - Increasingly parties opt for alternative dispute resolution procedures, such as arbitration and mediation, or mediation followed by arbitration.Termination - either on the happening of an event such as the expiry of the patent or on termination by one of the parties
20 The AgreementClauses to pay attention to - grant back provisions (obliging licensee to give improvements to licensor), post termination use of know how, price and volume fixation by the licensor, tie in clauses (obliging licensee to take other technology that he does not need)
21 Nothing is cast in stone Everything is negotiable
22 Aim for win-win outcome Golden RuleAim for win-win outcome
23 Trade Mark LicenseA license giving the right to manufacture a particular product using the licensors technology may also include an agreement to use the licensors trademark. It may also be only a trademark license agreementIn either case in addition to the general clauses above there may be clauses particularly relevant to trademark license agreementsParticularly quality control – products must meet the quality standards set by the licensee, submit samples of products, labels, packaging etc for checkingOthers – renewals, not to use similar trade marks, not to abuse the reputation of the trademark
24 FranchiseA specialized license where the franchisee is allowed by the franchisor in return for a fee to use a particular business model and is licensed a bundle of IP rights (TM, service marks, patents, trade secrets, copyrighted works…) and supported by training, technical support and mentoringAll franchisees are licensees but not all licensees are franchiseesThe trade secrets include the franchisor’s documentation on operating procedures,technical assistance, marketing set-ups, training systems, management policies, accounting practices or even packaging techniques and all other relevant information that helps a franchisee to run thebusiness.
25 Both the franchisor and the franchisee share the overall aims and goals of the franchise and work for their mutual benefit
26 The franchisor maintains and updates the manuals, procedures and practices of the business model and trains and assists the franchisee in its use and implementationThe franchisee maintains and promote the franchise and conducts the business as prescribed in the manuals and guidelines, including protecting the IP of the franchise system, and to operate in accordance with territorial or geographical obligations agreedThe franchisee has the obligation to pay the agreed fees.
27 Why enter into a Franchise Why not enter into a Franchise Self employedLower risk of failureRecognisable imageOn going supportEasier to obtain financingBenefit from franchisors R&DReady made customer baseWhy not enter into a FranchiseAll IPR owned by the FranchisorPayment of feesObliged to follow the business modelInnovations may be assigned back to the FranchisorDepend on the success of the FranchisorLower risk of failure. The most vulnerable phase for a business is the start-up phase during which the failure rate is high. A franchisee benefits from a system with a proven track record for products and services that have already done well in the marketplaceBenefit from brand reputation. The franchisee benefits from the image, reputation and goodwill already attached to the brand,thus the cost of advertising will be significantly lower. In addition,the franchisee may benefit from the collective advertising effort of all franchisees (as well as the franchisor).Collective purchasing power. Franchisees may sometimes benefit from the collective purchasing power of all franchisees, obtaining supplies at a lower cost thus increasing the profit margins. However, it is not uncommon that franchisees are contractually limited to buying their suppliesthrough the sources authorized by the franchisor.Training and technical support. Franchisees often benefit from training and technical support on,for example, how to conduct their business successfully and ensure that it conforms to the standard operating procedures of the franchising system. This may include support on accounting procedures,management of human resources,and marketing and financial administration.Easier to obtain financing. A franchisor may support the request of a franchisee for funding from lending institutions, thus increasing the likelihood of obtaining funds for developing the business.Research and development. As the franchisor develops new or better techniques for the operation of the franchised units, this information is shared with the franchisees. This gives the franchisees access to the results of research and development that they may not be able to afford on their ownIP rights. All IP rights relating to the franchising agreement are owned by the franchisor regardless of how much the franchisee has contributed, for example, to increase the value and enhance the reputation of a mark.Payment of franchising fee and royalties. On entering into a franchising relationship the franchisee is required, invariably, to payan initial fee for the grant of the franchise. Thereafter, royalty fees are to be paid at a rate stipulated in the franchising agreement. Forthe franchisee, these amounts may represent significant costs that it may not be able to afford or that may limit its ability to obtainsufficient returns on its initial investments. In addition, the permanent liability of making payments often brings with it a feeling that the franchisee does not own the business but is merely renting it.Limited freedom to operate the business. The standard operating procedures generally provide the blueprint of how things must be done by franchising units; therefore the franchisee is very limited in his actions. A franchisor may,for example, limit the franchisee to selling only the products or services that he has approved. Sometimes, the standard operating procedures may prove to be inadequate in international franchiseswhere foreign methods may not be suitable for local circumstances and the overall local business environment. The franchisee is often unable to vary,modify, adapt or improve the system to suit local conditions.Innovations often assigned to the franchisor. If the franchisee develops certain innovations, within the limited freedom to operate, afranchise agreement would generally require the innovation to be contractually assigned to the franchisor so that it may be made available to all other franchisees.Dependence on franchisor’s success. If the franchisor is successful,it is likely - though by no means certain - that the franchisees will also prosper and benefit from the success of the franchisor. However, if the franchisor is not successful or encounters any problem it is more than likely to have a negative effect on the franchisees.
28 SummaryTo survive and flourish in the global business environment where competition is acute and product cycles are short, business have to find new ways of being competitive.Identifying IP assets and strategically using and leveraging them is crucial in this environment.Licensing is an efficient way of maximizing IP assets