How come licensing by European companies is largely lagging behind the US? A March 2009 OECD Study on licensing practice by European and Japanese patent holders tells the story. Zuniga and Guellec published a their study [1], “Who Licenses out Patent and Why?” using the outcome of the OECD survey (done in 2007). 600 European companies, 1.600 Japanese companies have been surveyed by the researchers from OECD, EPO and University of Tokyo. Overall, the study finds that approx. 20%[2] of European companies holding patents license out at least one of their patents to an unaffiliated partner (mostly in UK followed by Nordic countries). This figure seems relatively large, we think unrealistically large, potentially due to the response data. For EPO member countries, the overall response rate was 40.6%. The resulting sample is 612 responding companies (of which 476 are private companies) out of 1,428 companies whose addresses were found. Still this number is way lower then the US.

Motivations for licensing by European companies are:

1. in majority of cases: license patents to third parties “earning revenue” is the prime motive (smaller companies more so then larger ones)
2. “entering into cross licensing deals” (for larger more so then smaller companies)
3. “stop others from infringing your patents”
4. setting the inventor’s technology as standard (licensing boosts the diffusion of the invention, which might therefore become a de facto standard)
5. “Outsourcing manufacturing” is a very weak motivation in Europe as is “Sharing technology”

Difficulties mentioned in licensing are:

1. finding partners and concluding licensing deals
2. existence of transaction costs,
3. lack of experience in drafting contracts,
4. disagreements on exploitation conditions such as geographical or exclusivity restrictions or payment conditions (royalties, lump sum, etc.).

The OECD study further finds that for European companies, the share of “frustrated licensors” is higher among firms with more than 250 employees than among firms with 250 and less employees if they are not already engaged in licensing transactions. Among licensing companies, a higher share of frustrated companies is reported by smaller firms: 50% of them would be willing to license more against 36% in the case of larger companies. Moreover, amongst the smaller companies, 48% would be willing to license more than 20% of their patent portfolio. There is no significant difference within licensing companies in terms of willingness to license: around 80% of companies, SMEs or larger, would like to license out a patent.

Overall, about 20%[3] of European companies holding patents license out at least one of their patents to an unaffiliated partner and the highest proportion of firms license-out in Europe is found in the UK, followed by Nordic countries. This figure seems relatively large, we think unrealistically large, potentially due to the response data. For EPO member countries, the overall response rate was 40.6%. The resulting sample is 612 responding companies (of which 476 are private companies) out of 1,428 companies whose addresses were found.

Licensing is, as those who practice it know very well, a very tough business. A successful licensing program requires a good knowledge of the technology to be licensed (access to knowledgeable engineers), financial skills, access to relevant market data, knowledge of market players and their needs, access to reverse engineering tools and other “tools”. The most difficult part is to show that someone is actually using the patent. This requires claim charting and in case of chip level based patents, expensive and time consuming reverse engineering. Most smaller companies simply do not have the means nor the skills to license.

As Joff rightfully points out in his blog the biggest impediment to patent licensing in Europe is the lack of a strong intermediary market and funding of players in this market. The very few players in this market will have funding from investors who believe in the strength of IP. However, funding of licensing programs is still at its infancy among European investors.

If we want to change that, we don’t think, like Joff Wild suggests, that much more governmental focus on IP, along the lines of Japan’s IP Strategic Programme – will do the trick. Rather it is a task for existing IP professional not to focus solely on legal issues of licensing but rather teach the business and economic mechanisms of licensing. This requires that universities –especially the technical universities in Europe –should pay much more attention to curriculae that teach young engineers, economist, business people and lawyers that licensing is a profession, a difficult one to master. The earlier one get to know how these things work the likelier it gets that student finished their studies will in their business life do exactly what they have been taught.

[see the ipeg blog on the right side for Strategies for Negotiating Licenses, under the column "Monetization & IP Investments"]

[1] Pluvia Zuniga, M. and D. Guellec (2009), “Who Licenses out Patents and Why?: Lessons from a Business Survey”, OECD Science, Technology and Industry Working Papers, 2009/5, OECD publishing, © OECD. doi:10.1787/224447241101

[2] According to a 2005 PATVAL-European Union Survey, less than 10% of patents are subject to licensing outside the company, whereas 10-15% of inventions are candidates for license. This survey, on the value of patents, shows a significant share of patents that are not used at all: 35% of patents are not used at all; 18.7% of inventions are actually patented with the aim of blocking. This in itself is not surprising at all, as common practice is that any patent portfolio will have a large part of patents that are not used, that cover outdated technologies, technologies the use of which cannot be established other then by difficult and expensive reverse engineering, etc. In that respect a percentage of 35% of non-used patents is relatively low. We would expect that any even good patent portfolio has at least 70% of patents, not suited for licensing for reasons just mentioned.

[3] According to a 2005 PATVAL-European Union Survey, less than 10% of patents are subject to licensing outside the company, whereas 10-15% of inventions are candidates for license. This survey, on the value of patents, shows a significant share of patents that are not used at all: 35% of patents are not used at all; 18.7% of inventions are actually patented with the aim of blocking. This in itself is not surprising at all, as common practice is that any patent portfolio will have a large part of patents that are not used, that cover outdated technologies, technologies the use of which cannot be established other then by difficult and expensive reverse engineering, etc. In that respect a percentage of 35% of non-used patents is relatively low. We would expect that any even good patent portfolio has at least 70% of patents, not suited for licensing for reasons just mentioned.