CHAPTER 16

TECHNOLOGY LICENSING AND JOINT VENTURES

TECHNOLOGY LICENSING

Technology licensing is a contractual arrangement in which the
licenser's patents, trademarks, service marks, copyrights, or know-how
may be sold or otherwise made available to a licensee for compensation
negotiated in advance between the parties. Such compensation, known as
royalties, may consist of a lump sum royalty, a running royalty (royalty
based on volume of production), or a combination of both. U.S. companies
frequently license their patents, trademarks, copyrights, and know-how
to a foreign company that then manufactures and sells products based on
the technology in a country or group of countries authorized by the
licensing agreement.

A technology licensing agreement usually enables a U.S. firm to enter a
foreign market quickly, yet it poses fewer financial and legal risks
than owning and operating a foreign manufacturing facility or
participating in an overseas joint venture. Licensing also permits U.S.
firms to overcome many of the tariff and nontariff barriers that
frequently hamper the export of U.S.-manufactured products. For these
reasons, licensing can be a particularly attractive method of exporting
for small companies or companies with little international trade
experience, although licensing is profitably employed by large and small
firms alike. Technology licensing can also be used to acquire foreign
technology (e.g., through cross-licensing agreements or grantback
clauses granting rights to improvement technology developed by a
licensee).

Technology licensing is not limited to the manufacturing sector.
Franchising is also an important form of technology licensing used by
many service industries. In franchising, the franchisor (licenser)
permits the franchisee (licensee) to employ its trademark or service
mark in a contractually specified manner for the marketing of goods or
services. The franchisor usually continues to support the operation of
the franchisee's business by providing advertising, accounting,
training, and related services and in many instances also supplies
products needed by the franchisee.

As a form of exporting, technology licensing has certain potential
drawbacks. The negative aspects of licensing are that (1) control over
the technology is weakened because it has been transferred to an
unaffiliated firm and (2) licensing usually produces fewer profits than
exporting goods or services produced in the United States. In certain
Third World countries, there also may be problems in adequately
protecting the licensed technology from unauthorized use by third
parties.

In considering the licensing of technology, it is important to remember
that foreign licensees may attempt to use the licensed technology to
manufacture products that are marketed in the United States or third
countries in direct competition with the licenser or its other
licensees. In many instances, U.S. licensers may wish to impose
territorial restrictions on their foreign licensees, depending on U.S.
or foreign antitrust laws and the licensing laws of the host country.
Also, U.S. and foreign patent, trademark, and copyright laws can often
be used to bar unauthorized sales by foreign licensees, provided that
the U.S. licenser has valid patent, trademark, or copyright protection
in the United States or the other countries involved. In addition,
unauthorized exports to the United States by foreign licensees can often
be prevented by filing unfair import practices complaints under section
337 of the Tariff Act of 1930 with the U.S. International Trade
Commission and by recording U.S. trademarks and copyrights with the U.S.
Customs Service.

As in all overseas transactions, it is important to investigate not only
the prospective licensee but the licensee's country as well. The
government of the host country often must approve the licensing
agreement before it goes into effect. Such governments, for example, may
prohibit royalty payments that exceed a certain rate or contractual
provisions barring the licensee from exporting products manufactured
with or embodying the licensed technology to third countries.

The prospective licenser must always take into account the host
country's foreign patent, trademark, and copyright laws; exchange
controls; product liability laws; possible countertrading or barter
requirements; antitrust and tax laws; and attitudes toward repatriation
of royalties and dividends. The existence of a tax treaty or bilateral
investment treaty between the United States and the prospective host
country is an important indicator of the overall commercial
relationship. Prospective U.S. licensers, especially of advanced
technology, also should determine whether they need to obtain an export
license from the U.S. Department of Commerce.

International technology licensing agreements, in a few instances, can
unlawfully restrain trade in violation of U.S. or foreign antitrust
laws. U.S. antitrust law, as a general rule, prohibits international
technology licensing agreements that unreasonably restrict imports of
competing goods or technology into the United States or unreasonably
restrain U.S. domestic competition or exports by U.S. persons.

Whether or not a restraint is reasonable is a fact-specific
determination that is made after consideration of the availability of
competing goods or technology; market shares; barriers to entry; the
business justifications for and the duration of contractual restraints;
valid patents, trademarks, and copyrights; and certain other factors.
The U.S. Department of Justice's Antitrust Enforcement Guidelines for
International Operations (1988) contains useful advice regarding the
legality of various types of international transactions, including
technology licensing. In those instances in which significant federal
antitrust issues are presented, U.S. licensers may wish to consider
applying for an export trade certificate of review from the Department
of Commerce (see chapter 4) or requesting a Department of Justice
business review letter.

Foreign countries, particularly the EC, also have strict antitrust laws
that affect technology licensing. The EC has issued detailed regulations
governing patent and know-how licensing. These block exemption
regulations are entitled "Commission Regulation (EEC) No. 2349/84 of 23
July 1984 on the Application of Article 85(3) of the Treaty [of Rome] to
Certain Categories of Patent Licensing Agreements" and "Commission
Regulation (EEC) No. 556/89 of 30 November 1988 on the Application of
Article 85(3) of the Treaty to Certain Categories of Know-how Licensing
Agreements." These regulations should be carefully considered by anyone
currently licensing or contemplating the licensing of technology to the
EC.

Because of the potential complexity of international technology
licensing agreements, firms should seek qualified legal advice in the
United States before entering into such an agreement. In many instances,
U.S. licensors should also retain qualified legal counsel in the host
country in order to obtain advice on applicable local laws and to
receive assistance in securing the foreign government's approval of the
agreement. Sound legal advice and thorough investigation of the
prospective licensee and the host country increase the likelihood that
the licensing agreement will be a profitable transaction and help
decrease or avoid potential problems.

JOINT VENTURES

There are a number of business and legal reasons why unassisted
exporting may not be the best export strategy for a U.S. company. In
such cases, the firm may wish to consider a joint venture with a firm in
the host country. International joint ventures are used in a wide
variety of manufacturing, mining, and service industries and are
frequently undertaken in conjunction with technology licensing by the
U.S. firm to the joint venture.

The host country may require that a certain percentage (often 51
percent) of manufacturing or mining operations

be owned by nationals of that country, thereby requiring U.S. firms to
operate through joint ventures. In addition to such legal requirements,
U.S. firms may find it desirable to enter into a joint venture with a
foreign firm to help spread the high costs and risks frequently
associated with foreign operations.

Moreover, the local partner may bring to the joint venture its knowledge
of the customs and tastes of the people, an established distribution
network, and valuable business and political contacts. Having local
partners also decreases the foreign status of the firm and may provide
some protection against discrimination or expropriation, should
conditions change.

There are, of course, possible disadvantages to international joint
ventures. A major potential drawback to joint ventures, especially in
countries that limit foreign companies to 49 percent or less
participation, is the loss of effective managerial control. A loss of
effective managerial control can result in reduced profits, increased
operating costs, inferior product quality, and exposure to product
liability and environmental litigation and fines. U.S. firms that wish
to retain effective managerial control will find this issue an important
topic in negotiations with the prospective joint venture partner and
frequently the host government as well.

Like technology licensing agreements, joint ventures can raise U.S. or
foreign antitrust issues in certain circumstances, particularly when the
prospective joint venture partners are major existing or potential
competitors in the affected national markets. Firms may wish to consider
applying for an export trade certificate of review from the Department
of Commerce (see chapter 4) or a business review letter from the
Department of Justice when significant federal antitrust issues are
raised by the proposed international joint venture.

Because of the complex legal issues frequently raised by international
joint venture agreements, it is very important, before entering into any
such agreement, to seek legal advice from qualified U.S. counsel
experienced in this aspect of international trade. Many of the export
counseling sources in chapter 2 can help direct a U.S. company to local
counsel suitable for its needs.

U.S. firms contemplating international joint ventures also should
consider retaining experienced counsel in the host country. U.S. firms
can find it very disadvantageous to rely upon their potential joint
venture partners to negotiate host government approvals and advise them
on legal issues, since their prospective partners' interests may not
always coincide with their own. Qualified foreign counsel can be very
helpful in obtaining government approvals and providing ongoing advice
regarding the host country's patent, trademark, copyright, tax, labor,
corporate, commercial, antitrust, and exchange control laws