An Economic Perspective on Patent Licensing Structure and Provisions

Article excerpt

While economists have provided theoretical discussions of factors that shape the structure and provisions of technology licenses, there have been relatively few empirical studies that test these economic theories. This is likely due to the difficulty of obtaining large data sets of complete license agreements. By providing an overview of the characteristics of over 1,400 patent licenses collected from SEC filings, this paper provides empirical insights into the fundamental economic relationships that determine certain characteristics of patent licenses. This study confirms what economists have believed for some time-namely that there are differences in the structure and provisions of patent licenses across industries and across types of licensors. These findings support the view that differences in the structure and provisions of technology licenses can be attributable in part to fundamental economic differences between industries, as well as differences in the strategic incentives of parties negotiating agreements.

Business Economics (2011) 46, 229-238.

Keywords: patents, technology licensing, risk allocation strategies, royalties, sublicensing

The structure and provisions of patent licenses present a number of important issues for firms and individuals concerned with the economics of technology transfer. For example, if a technology license includes financial consideration, what is the motivation for some parties to prefer a running royalty and others to prefer a fixed fee, and why do many technology licenses include both forms of consideration? Why do some agreements include a grant of the licensee's stock or equity and others do not? Why do some agreements include separate sublicensing royalty terms or include provisions that reduce the base royalty rates in the event of selected contingencies (for example, royalty stacking provisions) and others do not?

Given these types of questions and the importance of technology licensing to businesses, one would think that economists working in the business community would be regularly engaged in reviewing, analyzing, and providing insights into the structure and provisions of technology licenses. After all, economists can draw on a long history of economic literature relevant to technology licensing, including such fields as property rights theory, contract theory, transaction-costs analysis, game theory under asymmetric information, and agency theory. However, based on my professional experience and conversations with other economists, there are few business economists whose responsibilities include reviewing their firm's technology licenses.

One possible explanation for the general lack of involvement by economists in technology licensing is that there are relatively few empirical studies of large data sets of licenses across multiple industries. This is in large part due to the exceptionally difficult task of obtaining enough licenses-many of which are protected under confidentiality provisions-in which to perform meaningful analyses.

Some rare examples of empirical research on technology licenses include Anand and Khanna [2000], which considered a set of 1,365 licenses comprised of a variety of agreement types. The focus of their study was cross-industry differences among the licensing parties and ex-ante vs. ex-post relationships between the parties. Sakakibara [2009] examined factors that affected royalty rates among 661 patent licenses in Japan. Gans, Hsu, and Stern [2008] considered a sample of "more than 200 technology licensing deals" obtained from a proprietary data set, and Lyarskaya [2009] considered 237 technology agreements collected from a survey of licensing professionals.

This paper draws on a unique data set of almost 1,500 patent licenses across multiple industries filed with the U.S. Securities and Exchange Commission (SEC) over a 17-year period (1994-2010). Roughly 25 percent of the agreements in this data set were filed with the SEC in redacted form and subsequently obtained in unredacted form under the Freedom of Information Act (FOIA). …