Thursday, December 1, 2011

Exclusivity and Fields of Use -- Part 8 in out IP and Patents series

This is the eighth in a planned 20-part series of articles on intellectual property.  In future posts, we will explore additional aspects of licensing and commercialization of products.

In this posting, we will provide an overview of two of the many facets of licensing: exclusivity and fields of use.

A license is an agreement that allows the licensee to use a technology for some purpose – usually to create products based on the technology, in exchange for a license fee and/or a commission on revenues.

In other words, the licensee will take the idea and turn it into a viable product or otherwise create some kind of revenue stream off the technology.  The inventor will then see a portion of those revenues under the terms of the license.

License terms can vary widely and can encompass many things, all of which can be very important to the parties involved.  In this post, we will look at exclusivity and fields of use.  In upcoming posts, we will discuss other important terms.

Exclusive vs. non-exclusive

One of the more important aspects of licensing is the question of exclusivity – that is, whether there will be one licensee or several. 

To the entity granting the license, factors in deciding whether to grant exclusivity will include the capability of the licensee to penetrate the markets, agreed-to minimum sales, the size of the market and other factors.  For example, if a technology is going to address a multi-billion dollar market covering multiple applications, several licensees might be in order.  However, for a much smaller market, the licensor might want to limit the licensees to one or two companies. 

The licensor will not want too few licensees or he may not be adequately covering the potential market.  However, the last thing either party wants is for there to be so many licensees that many are not successful, or the market is poisoned or confused. 

To the licensee, exclusivity is important from a competitive standpoint – they will want the market to themselves.  But, they will need to understand that, if the licensor is willing to consider exclusivity, the license fees will be higher and the licensee might be expected to pay the patent costs.

So, it becomes a negotiation that takes into account the size of the market, the penetration ability of the licensee and the willingness of the licensee to pay a premium for the exclusivity as well as meet certain performance goals to maintain the exclusivity.

Exclusivity can take on several forms, however.  They do not necessarily have to grant exclusivity or non-exclusivity for all applications or areas. 

Fields of use

Licenses will typically define fields of use.  The fields of use might be geographic, application-based a combination of the two.

The person granting the license might want someone with experience in certain fields to concentrate on those areas of expertise and leave other areas to more qualified people.  The licensee might also be interested in using the technology in a certain area, as opposed to all areas.

For example, let’s say a company is licensing a new kind of battery.  The company might be granted exclusivity for all applications in all areas throughout the world, or just for, say, batteries used in cell phones in the United States. 

Or the license could be granted for exclusivity in one or more fields and non-exclusivity in others.  For example, the battery licensee might have exclusivity for cell phones and non-exclusivity for batteries used in automobiles.

The license could also prohibit one licensee from participating in a certain application.  For example, a license could be exclusive in cell phones, and non-exclusive in all other fields of use except power tools, where a license may not be granted (or where someone else may have exclusivity).

Also, there could be strictly geographic limitations.  The licensee might have exclusivity in, say, Los Angeles County, non-exclusivity in the rest of the state of California, and be prohibited from selling in other areas.
Or the license could be a mixture of these factors.

It is important for both parties to understand and consider the market size and conditions, the experience and reach (or lack thereof) of the licensee and the expected impact in the various applications and geographic areas of the technology when deciding on the number of licensees and the granted fields of use.

Additional details on a typical license and its structure and terms will be addressed in upcoming installments.

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