Forms of International Intellectual Property Transaction

There are many forms of international intellectual property commerce activities, of which, license trade, and franchising are most common.

Ⅰ.License Trade

License trade is the most common form of international intellectual property trade. The parties can establish a sale-and-purchase relationship by entering into a license contract or agreement. In such contract or agreement, the licensor, who transfers an intellectual property, is the seller, whilst the licensee, who is transferred the intellectual property by paying the agreed consideration, is the purchaser. Though there are kinds of intellectual property, the license trade in international market mainly concerns patents, trademarks, and know-how.

Patent License By establishing a patent license contract or agreement, the licensor authorizes the licensee to use the licensor’s patent technology. The main obligations and responsibilities of a licensor under such contract or agreement are to inform of the licensee the serial number and interpretation literature in connection with the transferred patent, and to authorize the licensee to apply the transferred patent in production and sell the products. The main obligations and responsibilities of a licensee are to pay the licensor the agreed royalties.

Generally speaking, the licensees are always inferior to the licensors in bargaining patent licensing, so patent license trade is always of legal risks. To avoid legal risks in patent licensing trade, the prospective licensee shall pay attention to or observe the following points:

The licensed patent shall be new and practical in application, and shall accord with relevant laws and regulations in connection with technology importing. In addition, the licensed patent shall accord with the requirements of the licensee’s level of technology and production. Should the licensed technology is old or obsolete, not state of the art, on one hand, it will resulted in waste of foreign exchange, and on the other hand, make the objective and motive of the enterprise to import the technology aborted. For the goods produced under old technology will find great obstacles in exporting.

Make the royalties arranged as reasonable as possible in amount and in term. Excessive royalties may threaten the economic viability of the licensee and drain hard currencies form the country of the licensee. In practice, the royalties is often calculated in accordance with the profit of the licensee obtained by applying the transferred technology in production. The LSLP (the licensor’s share in the licensee’s profit) principle is extensively recognized by most developing countries. In accordance with the LSLP principle, the licensor’s share rate in the licensee’s profit shall be the royalties divide the licensee’s profit and multiply 100%, and the transferring price of a patent shall be the licensee’s profit multiplies LSLP(%). In addition, to make the licensor’s profit correlate to the production when the patent is applied, the payment of royalties can be arranged to be on installments and be in accordance with the benefit of the licensee.

Since the technical data in connection with the transferred patent are concerned in the interpretation literature of the patent, and are available through public channels, the licensors under a patent license contract are always not required to furnish the licensee with such technical data. But in reality, the most important know-how in connection with the patent is always pocketed by the licensor when he applied for the patent. In this sense, to solve practical problems in production and produce the goods that the licensee intends to produce, the license contract shall cover the transference of such know-how.

Trademark License To expand the export market, an enterprise can use a well-know trademark of another enterprise in a foreign country by entering a trademark license contract or agreement. Under such contract or agreement, the licensor or the owner of the trademark authorizes the licensee to use such trademark on the products or services which the licensee produces or supplies. Generally speaking, under such contract or agreement, the main rights of the licensor are: (1) getting payment for the licensing, and (2) supervising the quality of the products produced by the licensee on which the trademark is used; the main obligations of the licensor are: (1) providing the detailed information in connection with the licensed registered trademark, and (2) permitting the licensee to use such trademark on the agreed scope and in the agreed term. On the other hand, under such contract or agreement, the main right of the licensee is to attach such trademark to his own products or services, whilst the main obligations of the licensee are to pay the licensor for using such trademark and to assure the licensor that the quality of the products or services on which the licensed trademark is used is in compliance with the stipulation provided in such contract or agreement.

Since the term for the licensee to use the licensed trademark is stipulated in the trademark license contract or agreement, therefore, the licensee shall not use the licensed trademark when the term is over or when the contract or agreement is terminated for reasons whatsoever.  If the licensee continues to use such trademark, he will have to extend the previously signed license contract or agreement or sign another trademark license contract or agreement; otherwise, the licensee will have to change the trademark on his products or services. However, the change may make the licensee’s sale of his products or services influenced seriously and even make the licensee lose market, as customers have been familiar to the previously licensed trademark. So, in drafting trademark license contracts or agreements, on point shall be observed that such contracts or agreements shall not stipulate that the licensee can only use the licensed trademark, but stipulate that the licensee can use a combined trademark, which consists of the licensed trademark and the licensee’s own trademark. In that case, when the trademark license contract or agreement is terminated, the licensee can continually have his share of market by using his own trademark.

Know-how License In addition to patent licensing and trademark licensing, know-how licensing is another way to promote an enterprise’s level of technology and strengthen the competition of the enterprises’ products or services in international market. A contract concerns the transference of know-how is a know-how license contract, under which, the main rights of the licensor are just the same as the rights of a patent licensor, whilst the main obligations of the licensor are: (1) permitting the licensee to use the know-how; and (2) providing the licensee with technical data of the know-how, technical instruction, and training service to ensure that the licensee can master such know-how. On the other hand, the licensee shall pay royalties and particularly, keep the licensed know-how in strict confidence.

Just as patent licensing, know-how licensing is with legal risks as well. To protect the licensee’s rights and ensure that the licensee can apply such know-how to production, a know-how license contract shall definitely stipulate the scope of technology in connection with the licensed know-how provided by the licensor with the licensee. In addition, such contract shall provide that the licensor is liable for providing technical instruction and personnel training services for the licensee.

Ⅱ. Franchising

To some extend, franchising trade is similar to license trade. The feature of franchising trade is that, franchising can have patent, trademark, and know-how licensed comprehensively. In a franchising contract, the franchisor, who is always a successful enterprise or other entity, transfers his trademark, trade name, sign of service, patent, know-how and managing method or experience to the franchisee, and the franchisee is entitled to use those transferred trademark, trade name, sign of service, patent, know-how and managing method or experience subject to paying the agreed amount of franchising fees. The purpose of a franchising contract is to make the franchisee’s products or service the same as those of the franchisor. Therefore, the franchisee’s management and technical process will be monitored by the franchisee, and the franchisee does not have the freedom to run the franchised business in any way he wants to. He must operate it strictly in accordance with the franchising contract.

Since the franchisor’s profits and those of the franchisee supplement each other, generally speaking, the franchisor will make every effort to make the franchisee benefit from the franchising. In the point of rights and obligations of the two parties, the franchisor is mainly liable for providing all the contracted technology or service, whilst the franchisee is mainly under the obligation of running the franchised business in accordance with the franchisor’s formula for success. But the franchisee is not definitely assured to get benefit from such franchising, nor is the franchisor legally responsible for the franchisee’s profit and loss. In addition, a franchising does not make the two parties combined nor make one party attached to the other party. The franchisee remains an independent entity other than a branch or a subsidiary to the franchisor.