Licensing and franchising

Intellectual property rights, Part 5:

ByEstebanBurrone,WIPO

CBINewsBulletinPage6

ExportMarketing&Management

If youre company is seeking to expand to foreign markets you have various possibilities. Manufacturing a product domestically and exporting it is, of course, one option. Producing directly on the foreign market is another option which, however, may require major investments. A third option is to partner with other companies that have the capacity to manufacture, distribute or market your product or service in the foreign market. One way of doing that is by providing intellectual property (IP) licenses.

The word license simply means permission: one company grants permission to another to do something. In an IP license, one company grants permission to another to use its IP, to which it has exclusive rights. In a licensing agreement there are at least two essential parties: the licensor or the party who owns the intellectual property rights (i.e. patents, trademarks, designs, copyright or trade secrets), and the licensee or the party who receives rights to use the IP under agreed conditions and in exchange for payment. The payment may take the form of a flat fee or a running royalty often a percentage or share of the revenues gained from use of the IP right(s) in question. While an IP license grants the licensee certain rights over the IP, it does not transfer ownership of the rights: these remain in the hands of the licensor. You can license companies in your domestic market, but the focus of this article is on licensing as a strategy for international expansion.

Four basic conditions For an IP license to be effective, four basic conditions must be met: the licensor must have ownership of the relevant IP (or authority from the owner to grant a license); the IP must be protected by law or at least eligible for protection; the license must specify what rights with respect to IP it grants to the licensee; and the payment or other assets to be given in exchange for the license must be clearly stated. A key decision in any licensing agreement is whether it will be exclusive or non-exclusive. If it is exclusive, only one other company will be entitled to exploit the licensed IP right for a given territory; if it is non-exclusive, more than one company will be licensed. In case of an exclusive license, it mus be clear in the licensing agreement whether the licensor will be entitled to exploit the IP right in any way in the territory for which the license is being granted. There are many different types of IP licenses: technology licenses, trademark licenses (often included in franchising agreements), publishing and entertainment licenses, merchandising licenses and more. Which type is relevant for you, depends on the sector in which youre operating. Technology licensing For a good example of technology licensing, lets take a look at the Croatian pharmaceutical company Pliva. In 1980s Pliva developed an original antibiotic named azythromycin. From early trials, azythromycin proved to be an extremely efficient antibiotic with the characteristic of remaining in the body tissue of animals longer than other similar antibiotics. At the time, however, the Croatian firm was a small player compared to the leading global pharmaceutical firms. There was a lot of foreign market potential, but Pliva lacked the capital to commercialise its product. Pliva decided to patent azythromycin in various markets of interest, including the United States and a number of European countries, hoping a partner capable of commercialising the product in those markets would emerge. Shortly afterwards, scientists from a large pharmaceutical multinational came across Plivas patent while searching the US Patent and Trademark Office database. They realised the enormous potential of the antibiotic. Talks between the two firms eventually led to a licensing agreement through which Pliva granted the other company the exclusive right to commercialise the patent (i.e. to produce and sell the new antibiotic) in various markets in exchange for royalty payments. Pliva, however, maintained the right to sell the product in Central and Eastern Europe under its own brand name. The antiobiotic went on to become a best-selling drug that enabled Pliva to expand significantly and to earn revenues from markets it could not have exploited on its own. Expansion opportunity The case of Pliva illustrates how owning valuable IP (in this case a patent) and licensing it to a business partner can become an opportunity for international expansion. The Croatian company lacked the manufacturing capacity, the financial resources and even the expertise to commercialise its product in attractive markets such as the US and Europe, but its patents represented an important asset that attracted the attention of a company that did have those qualifications.

In technology licensing the object of the license may be more than a single patent. Technology licensing often involves a number of patents. It may include different IP rights and may involve the transfer of know-how, trade secrets, operating manuals, equipment or other. Given the nature of the partnership between the two companies, negotiations may be long and complex and expert support during negotiations is often crucial1. Also, technology licenses are not spot transactions that end the moment the agreement is signed; it is generally the beginning of a long-term partnership. The implementation of the agreement may require the sharing of confidential information, training of professionals by the licensor and other similar activities that require a high degree of trust and commitment from both partners. In some countries, there are regulations on licensing and technology transfer. If you are considering this option, make sure any contract you draft meets national regulations. For example, certain clauses would not be admitted in certain countries for being considered anti-competitive. As an exporting company you may also need to license in technology, i.e. to obtain a license to use technology owned by others. Always make sure both the licensor and the licensee have obtained all the necessary licenses to export to a given market. If you dont, you may get into trouble. In particular, you should note that technology that is used in the public domain (i.e. unprotected) in a given country may have been patented in a given export market, in which case a license is required for that market. Franchising The history of Nandos chicken, a chain of fast-food restaurants, began in Johannesbourg, South Africa, in 1987 when Fernando Duarte and Robert Brozin set up their first restaurant selling spicy chicken according to a well-kept secret recipe. Over the following 19 years, Nandos became one of South Africas best known brands and a global company with over 200 restaurants around the world. Like many other well-known fast-food concepts, the international expansion of Nandos was based on a franchising model, which enabled it to use its trademark and successful business model as a basis for contractual agreements with local entrepreneurs. Franchising may be defined as a contractual arrangement under which one enterprise (the franchisor), which has developed a system for conducting a particular business, allows one or more other enterprises (the franchisees) to use that system in accordance with the prescriptions of the franchisor, in exchange for a monetary consideration. At the core of the franchising arrangement is a license agreement, granted by the franchisor to the franchisee, to use its trademark and the franchised system. In a franchising relationship, the parties have a close working relationship defined by the terms of the franchise agreement. The income of each party is dependent on the combined efforts of both parties. The more successful the franchisees business becomes, the greater the income for both parties. The franchisees success is also dependent on the franchisors ability to develop a profitable system, train the

CBINewsBulletin2006 September/OctoberPage7

1)Guidanceonthenegotiationoftechnologylicensingagreementsmaybe

obtainedfromtwoWIPOpublicationsonthissubjectmatter. WIPOpublication903SuccessfulTechnologyLicensingandWIPOpublication906:ExchangingValueNegotiatingTechnologyLicensingAgreements: ATrainingManual.Visithttp://www.wipo.int/ebookshopforinformation.

franchisee to properly operate the system, advertise the trademark, improve or promote the concept, and support the franchisee for the duration of the franchise agreement to achieve continued success. A clear brand image Franchises are common in a wide variety of sectors. The best known are probably fast-food restaurants; however, franchising is common in clothing and shoe stores, drug stores, hotels, insurance companies, accounting and tax services, business and management consultancies, education and training, fashion, leisure and sports, travel agents and even laundry and drycleaning businesses. For a business to be franchisable, it must be a credible business with an identity that is clearly differentiated from that of its competitors (brand image), a standardised operating system which is properly documented and which can be passed on to a new franchisee within a short period of time. Above all, the business must be capable of providing a muchhigher-than-average return on the franchisees investment. Besides the trademark, franchising may also involve the licensing of a number of other IP rights, such as trade secrets (e.g. Nandos chicken recipe), or any patents, copyright or industrial designs that may be owned by the franchisor and are required to operate the franchise. In many countries, franchising is heavily regulated. It is important to become familiar with local franchising regulations. Like technology licensing, franchising may also be used in the domestic market. Internationally known franchises usually spread within their domestic markets before establishing a presence in foreign countries. Trademark licensing sometimes occurs on its own, without the license over the entire franchise system. As in franchises, the licensor maintains some degree of control over the quality of the products sold under the trademark by the licensee. Trademark licensing agreements will indicate in what way the licensor will exercise that control, so as to ensure that the reputation of the trademark is not damaged. Conclusion Depending on the sector and business strategy of your company, licensing may be an appealing strategy for international expansion. A pre-requisite, however, is that your company owns valuable intellectual property rights, such as a patent over useful technology or a trademark that has acquired a certain reputation. Second, you need to have taken steps to ensure that your IP is protected in the relevant foreign markets. At the heart of any IP licensing agreement is the fact that it allows you as a licensor to obtain revenues from the licensee while retaining ownership of the underlying intellectual property right.

CBINewsBulletinPage8

ExportMarketing&Management

The World Intellectual Property Organisation (WIPO) is an international organisation dedicated to promoting the use and protection of works of the human spirit. With headquarters in Geneva, Switzerland, the WIPO is one of the 16 specialised agencies of the United Nations. It administers 23 international treaties dealing with different aspects of intellectual property protection. The organisation has 183 member states. For more information, go to www.wipo.int./sme/en or contact the author of this article at esteban.burrone@wipo.int This series is a co-production of the CBI and the WIPO.

AboutWIPO