Intellectual Property Regime and Licensing Decision

In my post on Planning for TechnologyTransfer I had discussed the various aspects that need to be considered while planning transfer of technology from one firm to another. One of the major aspects which influence the arrangement for transfer of technology is the Intellectual Property Right (IPR) Regime in the host country of the technology receiver.

In a nut shell, intellectual property refers to creations of the mind. These may be inventions, literary and artistic works, symbols, names, images and/ or designs used in commerce. The intellectual property rights are rights that the originator of the intellectual property has over his/ her creation. They cover bundle of legal instruments which provide protection to the originator against use of their creations by other people. Each of these rights are different in scope, duration and have different purpose and different effects. However, the common feature of IPR is that these instruments delineate exclusive rights to innovators over the use of his or her creation for a certain period of time.

So why do we need IPR. Well, there instruments allow the owner to disclose their creation to the world without the fear of loss of control over their use. This helps in the dissemination of new creations and is very important for development in the technical field. 

The IPR may either deal with industrial properties like patents, industrial designs, trademarks or geographical indicators or may deal with literary or artistic properties like copyrights.

Let’s take patents to explain the rights. A patent is an exclusive right granted to the inventor for an invention. This invention may be a product or a process that provides a new way of doing something. It can also be something that offers a new technical solution to an existing problem. So what does this protection provide? Patent protection prevents the commercial manufacture, use, distribution, or selling of the patented invention without the patent owner's consent. Patent provides the protection to the inventor for 20 years. Once the patent expires, the protection provided ends, and the invention enters the public domain wherein other people can freely use the invention for commercial purposes. A Patent provides the following rights to the Patent holder:-

  • A patent owner has the right to decide who may, or may not, use the patented invention.
  • The patent owner may give permission to, or license, other parties to use the invention on mutually agreed terms.
  • The owner may also sell the right to the invention to someone.

Every country in the world has an IPR regime. These are basically laws enacted by individual countries to provide the protection to the inventors. Once the laws are enacted, following things can happen:-

  • Firstly, the laws could be very strict providing maximum protection to the inventor, or they may be lenient laws. 
  • Secondly the enforcement could be strict or lax.

If the laws are lenient, they would give lee way and provide loopholes to exploit to the counterfeiters and people involved in piracy. Hence lower level of protection is provided to the inventor. On the other hand even if the laws enacted are strict but the enforcement is lenient, then again the protection provided would be minimal as the counterfeiters and pirates would not get prosecuted. So we land up with the following four situations:-

  • Laws are strict and enforcement is strict providing maximum protection to the inventor.
  • Laws are strict but enforcement is lax, this would reduce the protection accorded to the inventor. However, when a case is reported, he/ she can be assured of getting necessary respite.
  • Laws are but enforcement is strict. In such a case, some protection is provided to the inventor.
  • Laws are lenient  and enforcement is also lax. This becomes a high risk scenario where the invention can be copied and the inventor cannot expect much respite also.

Another very important factor that comes into play in protection of the IPR is the capability and capacity of the host country to copy the invention. Because, if the economy is not technically advanced enough, then even if the IPR laws are lenient and the enforcement is lax, the risk of losing control over the invention is minimised.

We have seen that the inventor or the transferring company can transfer the technology in exchange for monetary benefits. This exchange can take place in the form of equity in receiver company, lump sum payment by receiving company or periodic royalty payments by the receiving company. So what is the methodology that the transferring company should use? 

My further discussion assumes that the receiving economy has the capability and capacity to copy the invention. I shall discuss the matter purely from point of view of the risk due to the IPR regime in the host country of the receiver and not the risks of product failure, risk of competition etc. Also, I assume that at least 15 years are left before the patent expires. So what are the options for compensation to the transferring company?

If the laws are strict and enforcement is also strict, the transferring company’s technology is well protected and may not even face much competition for a few years. In such a scenario the transferring company must go in for royalty payment related to the sales of the product.  

In case the laws are strict but enforcement is lax, the protection accorded to the inventor reduces and chances of piracy and competing products coming into the market increase. In such a scenario, the transferring company may opt for an annual fixed royalty to counter the threat of piracy and protracted legal proceedings to counter the piracy. In addition, part royalty may be linked to the sales of the product.

 In countries where the laws are lenient but enforcement is strict, there is a risk of piracy and hence additional competition. In such a scenario, the transferring company may opt for a lump sum payment to counter the threat of piracy and protracted legal proceedings to counter the piracy. In addition, royalty may sought linked to the sales of the product.

The worst case scenario are countries where the laws are lenient  and enforcement is also lax. Here the transferring company has hardly any protection accorded to it from piracy and counterfeiting. In such cases, the best option may be to sell the technology to the receiving company for a lumpsum payment. Additionally, the transferring company may wait to transfer the technology close to when the patent is expiring.