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How much are flexibility and uncertainty worth in patent licensing?

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Abstract

As patent licensing has become the prime driver of technology trade, understanding the rationales behind a properly-defined payment structure of the agreements is essential. Specifically, among the other remuneration components, upfront fees are critical in license negotiations since they imply a significant initial investment by the licensee and represent a source of liquidity for the licensor. We investigate how contractual flexibility, market uncertainty and technical uncertainty shape upfront fees from the licensee’s perspective. Upfront fees are shown to be positively associated with contractual flexibility and market uncertainty, while technical uncertainty is positively associated with upfront fees only if the license warrants contractual flexibility to the licensee. Licensees therefore do not necessarily see uncertainty as a negative attribute of a patent license, but rather as a potential value, above all if in presence of contractual flexibility.

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Notes

  1. These acronyms are drawn from the Security Exchange Commission official webpage (available at https://www.sec.gov/forms#.VRPNlI54pNM, retrieved on the 26 March 2015): they refer to Annual report (10-K), Registration statement (S-1) and Current report (8-K).

  2. Datastream is a proprietary dataset for macroeconomic analysis, own by Thomson Reuters, available at http://financial.thomsonreuters.com/en/products/tools-applications/trading-investment-tools/datastream-macroeconomic-analysis.html?gclid=CMPkserE-MQCFYHKtAodAjYA8g.

  3. Kamien and Tauman (1984) debated zero upfront payments by studying the choice between fixed fee and royalty-based contracts in a game theoretical context. This literature addresses the optimal contract design of licensing agreements (see e.g. Katz and Shapiro 1985; Gallini and Wright 1990). The Heckman approach results are depicted in the appendix in Table 3.

  4. For a discussion on the role of bargaining power in licensing contracts, see Sakakibara (2010).

  5. As noted by one of our reviewers, it would have been useful also to control for whether the licensor was an NPE. We, however, do not observe any NPEs in our dataset.

  6. “Industrial Standards” is one of the most frequently used methods and standard practice for evaluating intellectual property rights, especially in a licensing context (e.g. Parr and Sullivan 1996; Parr and Smith 2005).

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Acknowledgments

We thank the Financial Valuation Groups for allowing us to use their data on Licensing Contracts. We thank Marco Ceccagnoli, Andrea Fosfuri, Alfonso Gambardella, Marco Giarratana and Thomas Rønde for valuable comments and suggestions on earlier drafts. We also gratefully acknowledge the financial support from the Italian Ministry of University and Research (PRIN Project, CUP B41J12000160008).

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Authors and Affiliations

  1. Department of Business and Management, LUISS Guido Carli University, Viale Romania 32, 00197, Rome, Italy

    Maria Isabella Leone & Raffaele Oriani

  2. Department of Innovation and Organizational Economics, Copenhagen Business School, Kilevej 14A, 2000, Frederiksberg, Copenhagen, Denmark

    Toke Reichstein

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  1. Maria Isabella Leone
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  2. Raffaele Oriani
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  3. Toke Reichstein
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Correspondence to Raffaele Oriani.

Appendix

Appendix

See Table 3.

Table 3 Determinants of upfront fees—results of Heckman selection specification
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Isabella Leone, M., Oriani, R. & Reichstein, T. How much are flexibility and uncertainty worth in patent licensing?. Econ Polit Ind 42, 371–394 (2015). https://doi.org/10.1007/s40812-015-0020-7

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