Jim Harris passed away on Tuesday (9-21-99) night from heart failure.
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THE ROLE OF THE INDEPENDENT INVENTOR IN TECHNOLOGY TRANSFER
I have had many inventors ask me many questions over the years,
but one of
the most prevalent has always been "What is technology
transfer, and why
should I be bothered with it?" It is an appropriate
question, and one that
really has many answers.
For simplicity's sake, let's define technology transfer as
"a set of
business relationships in which technology that is developed in
one place
or for a sole purpose is turned into something that is
economically and"
commercially viable as a product or process by some other
organization.
Now that we have a definition that we can understand, let's break
it down
into key phrases that we can explore.
"A set of business relationships" means exactly
that. A set is a group of
similar things that share a common interest. You can have a
"set" of many
things, for example, dishes, tires, silverware, etc. Note
here that a set
doesn't necessarily mean a pair, but it doesn't preclude
"pair" either.
Basically a set is something in common that by the virtue of it
being a set
increases the overall worth of it being a solo piece. So,
to the inventive
community, a "set of business relationships" should
infer more than one
corporate entity, in harmony, working together to increase the
entire worth
of a singular project. A good example here would be the
automobile. While
it may be a Ford, or a Chevrolet, many entities working together
make the
final product what it is. Goodyear may supply the tires,
U.S. Steel may
supply the metals, American Tubing may supply the host of hoses
and tubes
that make the engine run, and Dupont may supply the paint that
makes the
finished product look like it does, showroom new. Many
other companies
will have a corporate involvement in the final process as
well. This is a
classic example of technology transfer carried the the Nth level,
all of
the entities that support the final product are located in some
diverse
geographical locations, certainly not in the main production
facility of
the vehicle manufacturer. Many of the components are
contractually made
(job shops, but also many of the components are licensed to the
various
support manufacturers, for final assimilation into the finished
product.
Many of these entities employ the process of joint venturing to
allow them
capitalization for their contribution.
Of course all independent inventors should be concerned with
whether their
innovation is "economically or commercially
viable." Without passing this
test, they in fact have no chance at a successful product
launch. One of
the very best ways to find this information is through
testimonial letters
from complete strangers, of course only after you are in a
"patent pending"
state. These letters will help to validate your product to
the
marketplace, and conversely they can add credibility to the
licensing
effort. Never underestimate the power of testimony or the
lack thereof,
the Simpson case perfectly illustrates this point. Credible
testimony from
satisfied users who have no active involvement in your project
will greatly
enhance your opportunities in the negotiation phase, just as the
Œcredible"
testimony of Mark Furman may have greatly enhanced the
opportunity for a
conviction in the much-celebrated case of California vs.
Simpson. Your
project will be judged at many levels by potential manufacturers,
consumers, buyers, and others. Don't make the mistake of
hiding key
testimonials that are negative, they also enhance credibility and
show
design flaws, but like any good trial attorney, supplement your
case
whenever possible with a "preponderance of evidence",
thus greatly
increasing your odds of a favorable verdict.
In the technology transfer method of product launch, licensing is
the
standard and accepted method of implementation. A license
in this sense
grants another entity to manufacture and/or market your
intellectual
property, while you maintain the rights to said property.
Licenses can be
either exclusive or non-exclusive. A license is a binding
contractual
agreement that should fairly represent the aspirations and
expectations of
both parties involved. There are certain responsibilities
that both
parties must maintain, so in a sense, a licensing agreement is
comparable
to a limited partnership. We will look at some of these
responsibilities a
little later.
In an exclusive licensing agreement, the inventor grants by
contract the
right of exclusitivity to the licensee. At his point, the
inventor becomes
the licensor.
It is interesting to note that fully eighty-five percent (85%) of
licenses
are of this type. It is a very good idea to have an
accomplished
negotiator enact the agreement, as it is a legal document.
There are many
standard agreements in use (see sample), but the wide variances
in royalty
arrangements make every percent a valuable commodity to the
independent
inventor, or licensor. Current national averages put the
percentage paid
for new product licenses at somewhere between three and seven
percent
(3%-7%) of the wholesale, in terms of royalties. Depending
on the level of
product development and the amount of research and development
costs
incurred by the inventor, there may be room in the negotiation
process for
some "up-front" money, but do not make the mistake of
trading off royalty
percentage points for so called up-front money that is to be
withheld from
future royalty earnings. So much here is contingent upon
your cost of
effort up to and to the time of negotiation, and the true dollars
you have
invested. For example, a new product with strong
testimonials, some sales
success, a good strong, broad patent, and a ten-cavity mold is in
a much
better position to seek true up-front recovery of some of the
initial
expenses than is the project that simply has patent pending
status, some
marketing ideas, no monies expended on tooling, and little if any
testimonials proving that a market exists. Every exclusive
licensing
agreement involves a potential risk for the manufacturer, as he
will have
to gear up to produce an unknown value, but the weight of due
diligence
completed by the inventor (licensor) will negate tremendously the
liability
impact the manufacturer must deal with. If the company is
the right
company for your project, never let the concept of up-front fees
"kill" a
potential deal. There may be another company down the road
that has the
capability to produce, and will offer a token sum in up-front
money to
attract the exclusive license, but that certainly doesn't qualify
them as
the right company. Are their lines of distribution as wide,
do they have
multiple machining capacity (redundancy factors) built in, do
they have the
excess manufacturing capacity to meet unexpected market demand,
etc. These
can be big-time tradeoffs, make sure the up-front money is worthy
of the
potential sacrifice.
One final thought on exclusive licensing arrangements. The
licensor by
signing gives the licensee total control of his or her
project. This step
takes a tremendous leap of faith. A good negotiator will
often times try
to secure a consulting arrangement to insure the licensor's
continuing
involvement, or a sales agreement which would not only pay you
the
contracted minimum royalties, but also a commission on sales you
as
licensor were responsible for. But the licensee controls
the course of
direction the project takes, he may by right sub-license without
your prior
approval (normally that is covered in the initial agreement), or
he may
elect to request patent adaptations that will strengthen a method
or alter
a claim of the original patent application, these type of things
normally
fall into the realm of the licensors responsibilities, or are
split as a
function of the entire arrangement to include both the licensee
and the
licensor.
As non-exclusive licensing arrangements account for only a small
portion
of the total technology transfer process, it is my intention to
just hit on
a few basic points to ponder. Without exception, they are
much more
difficult to negotiate, as the potential licensee knows when
approached he
will be enjoined by competition in the very product you are
asking him to
become involved with. Also, certain U.S. Anti-Trust laws
can quickly come
into play when dealing with multiple licensees. Often a
competitive
advantage may be gained by one licensee that pays a slightly
higher royalty
rate (even though his capacity for sales and distribution is
higher) to
attract new business through non-exclusive new product
arrangements, thus
resulting in an "unfair business practice." Ask
yourself how you would
respond to a potential licensing arrangement if you were the
fifth or sixth
licensee to sign the dotted line on the same legal
instrument. For this
reason, non-exclusive licenses are difficult to administer, and
very costly
to consummate. Think back to the definition of
"technology transfer."
"Organization", not multiples of the same, is the
optimum word, and should
be your goal. The only really advantageous situation that
may require
multiple licensees would be a geographical non-exclusive, but the
same
Anit-Trust Laws will be in effect, so even here expect additional
legal
expenses.
Should you elect to venture your innovation, perhaps the
advantages of
teaming up with another manufacturer in a joint venture may serve
distinct
advantages to you. Through additional capitalization,
acquisition of
existing lines of distribution, complimentation of packaging
needs, or many
other caveats whereas the venture partner may have as much to
gain and as
much to lose as yourself. Although I seldom recommend
independent
inventors to venture their product, there are times when such a
move is
prudent, and many large companies are in existence today because
at one
point someone had an idea, and enough practical business sense to
make it
all happen. Henry Ford did not invent the automobile, but
he had the
foresight to know there was a way to automate the process, thus
lowering
the cost, and because of that an industrial giant was born.
But also keep
in mind, Henry didn't operate solo on that great effort, he
surrounded
himself with many experts, each one contributing to his
dream. Should you
decide to venture, my suggestion is to do the same. The
Model A was the
world's first assembly-line vehicle, but what if the Model T had
been the
Edsel. Just a tidbit for thought, could your venture
support an "Edsel?"
I feel this paper would be incomplete if I did not include some
of the
many advantages and disadvantages to both the licensee and the
licensor in
the technology transfer process as it relates to licensing.
ADVANTAGES FOR THE LICENSOR
1. Increased Income with little or no additional capital
investment
2. New uses of licensee technology
3. Minimum capital required, little or no staffing needed
4. Certain legal problems can be easily avoided
5. Adjusted expectancy and provisions for equity capital
6. R & D improvement possibilities from licensor's
staff (design)
7. Maximize potential for market improvement and
distribution
ADVANTAGES FOR THE LICENSEE
1. Technical and commercial assistance expansion
2. Expanded rights (including new products and R & D)
3. Expansion of existing profit potential
4. Possible development of entire new product line
5. Expanded market and sales potential
DISADVANTAGES FOR THE LICENSOR
1. Potential problem due to non-performance of licensee
2. Possibility of time management problem (raised cost of
service)
3. Potential problems from unfair or undesirable
competitors
4. Logistics problems may be encountered depending on
geographics
5. Limited if not total lack of opportunity for management
direction
DISADVANTAGES FOR THE LICENSEE
1. Limited opportunities beyond the license scope unless
future
improvements to patent are included in initial agreement.
2. Unforeseen technical problems due to insufficient
testing or market
experience of the licensor.
3. Lack of redundant systems to keep order fulfillment
ongoing, lack of
which may negate agreement by breach, or raise cost of service.
4. Unrealistic expectations and demands from licensor.
It is my hope that you have found this information helpful, and
that it
has at least answered as many questions as it has raised.
The age of the
transfer of technology is here today, as it was yesterday and
will be
tomorrow. I would strongly urge all who read this that are
independent
inventors, technicians, or entrepreneurs to become better
acquainted with
the myriad hosts of advantages and disadvantages of technology
transfer. I
have included a list of inventor resources, including some of my
favorite
publications on the subject, as an addendum to this paper.
Feel free to
call me at (918) 789-5072, or email to tekscout@sprynet.com
should you
have any specific questions not covered in this paper or the
resources
provided.
©1996, Jim Harris, All Rights Reserved
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