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Exploring the survival of patent licensing: some evidence from French foreign agreements

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Abstract

This paper aims to determine the factors that impact on the duration of technology licensing contracts. Using a transaction costs framework, we derive some propositions related to the influence of the contractual safeguards and of institutions on the failure rate of such agreements. We conduct an empirical investigation based on a new dataset of 250 contracts from the French National Institute of Intellectual Property. We show that the actual duration of licensing agreements (a) is positively associated to their profitability and to the level of technological competition, (b) is positively associated to the presence of a renegotiation clause, and (c) is independent of other contractual or institutional safeguards.

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Notes

  1. In addition to direct monetary gains, it is widely acknowledged that licensing can be profitable in relation to its impact on the competition. Licensing is sometimes presented as a strategic tool reduce competition, such as in the case of deterring the entry of potential rivals (Rockett 1990; Eswaran 1994a), or competing R&D programs (Gallini 1984; Gallini and Winter 1985) or market cartelization strategies (MacGee 1966; Eswaran 1994b; Lin 1997). On the other hand, the pro-competitive aspects of licensing have also been highlighted. For instance Katz and Shapiro (1986a, b) show that licensing can be used in order to set up technological standards that boost the diffusion of innovations, while Farrell and Gallini (1988) and Shepard (1987) show that licensing is sometime needed in order to create alternative supply sources for the downstream users. Finally, some few articles highlight the defensive role of licensing when patent rights are not well defined (Hall and Ziedonis 2001; Hall 2005), nor enforced (Fosfuri 2000; Sattin 2013).

  2. One interesting question would be whether the empirical results would be similar if we focus on licensing agreements among two partners from the same country. However, to build another database on a national basis may be difficult. Disclosure was mandatory in France only for foreign agreements, and the details of licensing deals are generally kept confidential by the partners due to their strategic importance.

  3. Teece (1977) reports that the cost of drafting and negotiating a licensing agreement is equal to 19 % of the average income arising from the contract.

  4. These authors note that on average a licensor earns only 40 % of the monopoly rent from its patent.

  5. The model in Arora (1995) mixes a fixed fee spread over time, and the supply of a complementary input by the licensor. If the contract proves to be self-enforcing with payments that are no longer contingent on the licensee's performance, it relies also on a more restrictive hypothesis about the nature of the transferred assets.

  6. The importance of the monitoring costs may have been exaggerated in the academic literature (Bessy et al. 2008). In the real world, the majority of licensors check the royalties of their licensees by comparing their own income and market size to the size of the licensed market. The threat of costly control of the licensee's books by a certified independent accountant who must be paid by the licensee if its royalty statement is found to be incorrect leads the licensee to understate its sales only up to a certain point. This is the reason also why the licensors, when asked, declare that they expect to earn only 70–80 % of the royalties due in the contract (see Byrnes 1994).

  7. This correction enables us to solve the problem arising from the variation in the royalty rate between the contracts. Although Contractor (1981) argues that this rate can vary freely between two extremes depending on the relative bargaining power of the licensor and the licensee, Degan and Horton (1997) and Sullivan (1994) report that the price of a licensed technology is strongly related to the industry sector.

  8. Following Arora and Fosfuri (2003), the strength of the technological competition should be negatively correlated to the exclusivity clauses. This proposition seems to hold when tested on this data set. More precisely, and if we except the licenses arising from the seed sector, the correlation between INDTECH and the presence of exclusivity (sole or exclusive license only) is −0.16, significant at the 1 % level.

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Acknowledgments

I am grateful to Yoram Barzel, Eric Brousseau, Markus Reitzig, Bentley MacLeod and Emmanuel Raynaud for very useful comments that much improved a previous version of this paper. I also thank Claude Ménard, Benjamin Coriat, Maria Smirnova, Antoine Terracol, Annie Royer, Sophie Pommet and Henri Colette for many helpful suggestions. Finally I am especially grateful to Sandra Areia, Isabelle Germanotta and Winfried Germanotta who provided invaluable research assistance. The usual disclaimers apply.

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  1. Université Paris 1 Panthéon-Sorbonne, PRISM Sorbonne, 17 rue de la Sorbonne, 75005, Paris, France

    Jean-François Sattin

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Sattin, JF. Exploring the survival of patent licensing: some evidence from French foreign agreements. J Technol Transf 41, 610–630 (2016). https://doi.org/10.1007/s10961-015-9431-x

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