Platt Perspective on Business and Technology

Considering a cost and benefits analysis of innovation 7: licensing agreements 1

Posted in macroeconomics by Timothy Platt on July 6, 2014

This is my seventh installment in a series on the costs and benefits of innovation as it is tracked and measured through a complete innovation manufacturing cycle – as that is measured and understood from both the supply and demand sides (see Macroeconomics and Business, postings 162 and loosely following for Parts 1-6.)

I focused in Part 6 on proprietary and open source-developed innovation. And in the course of that discussion I made note of contractual agreements that would allow for use of those innovations, and as they would arise in several contexts. And I stated there that I would turn next to consider licensing agreements, and with a goal of more fully discussing these business to business usage contracts.

• I begin that here by noting that the shared, diffused use by non-owning businesses of both proprietary and open source process-driven innovations, tend to be regulated and legally constrained by legally contractually binding licensing agreements.

And I begin discussing that tangle of issues, not with a caveat but rather with an expressly stated warning. And by that I mean a warning that I would direct both to the legal owners of a licensable innovation, and to anyone who would sign agreements to secure usage rights to them. And the points I would raise here are sure to become increasingly important as the overall global business community becomes more closely and tightly interconnected – while still remaining headquartered and based in separate and distinct countries with separate and sometimes very different legal jurisdictions and with differing law and differing case law interpretations of their laws on the books and even when the wording of those laws seem essentially identical.

• If you are going to enter into a licensing agreement, and certainly where you enter into one where innovation access, innovation use, or both would cross legal jurisdictional boundaries, you need legal advice in shaping the terms of any licenses entered into.
• That much should be obvious to most any business owner and certainly where agreeing to a licensing contract would involve significant expenses, risk or other liability.
• But you increasingly need legal advice that is grounded in international law for this, that can represent you across those jurisdictional boundaries too, and even if that means working with attorneys who have colleagues they can turn to in specifically involved other countries and in their courts.

As an area of working examples, consider licensed use of a patented algorithmic process for sorting and filtering new levels of insight from customer-derived big data. And to keep this example simple, let’s assume that the owning business for this innovation has robust, multinational patent protection coverage that is generally enough written to prevent ready circumvention from development of same-results analogous algorithm solutions. So if another business seeks to use this or anything significantly like it, they have to sign a licensing agreement with the one owning company. And in this example, I assume that use of this innovation would significantly enhance customer relationship management (CRM) systems and prove a source of new competitive value so use or nonuse of this would have significant consequences.

• In different legal jurisdictions with different legally mandated protections as to what customer personal information can be gathered and used, and by whom and for how long,
• Case law and court processes and rulings might come to very different understandings as to what is and is not legally binding in a single licensing contract as written.
• This affects what usage rights a license purchasing company can claim. This affects the levels and types of legal protections they can and cannot assume from using it. This affects the innovation owning company and what it can assume as to what it can legally offer as included under license.
• So as my warning, read and understand any license you would consider signing off on – or offering to others to sign. And get expert legal advice from your own corporate council as based in the legal jurisdiction of your own headquarters. But only see that as a first due diligence step.
• And this applies to those sitting on both sides of the negotiating table – licenser and licensee alike. There is an old saying that the devil is in the details. I forego discussing potential devils, or angels here in this series and leave that to your legal counsel. My goal here is simply to outline more general principles, and ideally in a way that would facilitate asking attorneys involved in the specific instance, better questions.

With that in mind, I will begin here with a brief orienting discussion of licensing of use of proprietary, wholly owned innovations. After that I will discuss open source licensing.

The primary goal of an innovation owner in offering licensing access to a, here wholly-owned innovation is two-fold:

• Short-term and cash flow tactically, it is in most cases to garner licensing fees – rents to use the terminology of the economist David Recardo, and
• Long-term, and as such more strategically important it is to secure and maintain ongoing proprietary rights of ownership as an ongoing source of revenue generating value.

The primary goal of a licensee is to secure access to this innovation at a cost that they can cover from revenue generation made possible because of its use – plus the accrual of additional profit that would otherwise not be realized. So they want to break even and more from accessing and using this.

• This means being able to use this innovation effectively in the context of licensee systems and processes in place, and with this usability achievable by licensee staffing in place.
• This often means at least significantly defined local exclusivity of access to use of this innovation, where “local” in this context might or might not mean geographic. “Local” exclusivity, here, would mean this innovation not being made equally or even just significantly available to direct competitors who seek out business from the same potential customer base in the same markets. Note that what constitutes significantly local in this sense might not be immediately obvious and certainly as business moved into an actively online context.
• And in general, this is about gaining profitable access, and under terms that would deny the value limiting restrictions of loss of exclusivity of use where that would specifically matter for a licensee business.

Returning here to my warning notes from earlier in this posting, consider a situation where Company A owns this data analytic innovation and licenses it across jurisdictional boundaries to Company B. Under terms and case law interpretations of Company A’s own legal system, there are no encumbering limitations on what customer data can be collected and processed through this software, at least if those customers do not use a consistently proffered opt-out to limit the access, long-term storage or use of their personal data. So Company A drafts its licensing agreements with its own legal system in mind and with a goal of meeting its legally mandated restrictions and requirements. But Company B is based in a country that has strictly defined and enforced opt-in requirements where the legally defined default is that permission to gather and store this data is not granted – unless it specifically is and by particular sign-off agreement by the individual customer. With that, terms of exclusivity and similar contractual agreements are likely to be moot, as depending on the details of the innovation this legal system difference might make any licensed usage in Company B’s legal system jurisdiction moot. Here, let’s assume that one of the defining values offered by this innovation is transparency and automatic ease of data collection and organization – where a customer need not even know this is going on at all, and even as large amounts of personal data are being swept up.

I have just set up this example as a case study of what is sometimes called a train wreck. It might be stilted and seem forced in its details, to make it fail across borders but real world examples match it for their capacity to fail in real world usage too.

I will continue this discussion in my next series installment where as promised above, I will delve into licensing agreements as they arise in the open source context. Meanwhile, you can find this and related postings at Macroeconomics and Business.

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