Patent licensing contracts

By definition, a licence is a ‘permission granted by an IPR holder, the licensor, to another legal entity (person or company) the licensee, to make use of, sell or otherwise benefit from the underlying IPR under certain restrictive conditions’. Whereas IPR encompasses patent copyrights, trademarks and trade secrets, licensing represents the leading mechanism in trading. Specifically, patent licences entitle the licensee (technology buyer) to use the patent rights and thus to exploit the underlying technology for a limited period of time in exchange for a defined royalty rate or a defined level of fixed fees or a mix of both. Although this is the typical picture of licence agreement as provided by the theoretical literature, the majority of contracts observed empirically are actually more complex and sophisticated. Indeed, real licensing agreements include several different clauses that are meant to detail the circumstances under which the licensee can make use of the licensed technology (exclusivity, grant-back clause and so on). There are two main reasons why licensing data – that are increasingly available – may be employed in providing new insight into patent valuation. First of all, licensing data provide more objective measures of patent value, based on market data (i.e. payment structure of the licensing contract). Second, the use of these data is consistent with the increasing evidence of the employment of such mechanisms to transfer patents between firms in many industries. Based on this premise, the aim of the chapter is to provide a complete understanding of the main features of licensing contracts and specifically to provide theoretical explanation and modellization of patent value based on licensing remuneration structure data.