
               TECHNOLOGY LICENSING AND JOINT VENTURES


          TECHNOLOGY LICENSING

          Technology licensing is a contractual arrangement in which
          the licenser's patents, trademarks, service marks,
          copyrights, or know-how may be sold or otherwise made
          available to a licensee for compensation negotiated in
          advance between the parties. Such compensation, known as
          royalties, may consist of a lump sum royalty, a running
          royalty (royalty based on volume of production), or a
          combination of both. U.S. companies frequently license
          their patents, trademarks, copyrights, and know-how to a
          foreign company that then manufactures and sells products
          based on the technology in a country or group of countries
          authorized by the licensing agreement.

          A technology licensing agreement usually enables a U.S.
          firm to enter a foreign market quickly, yet it poses fewer
          financial and legal risks than owning and operating a
          foreign manufacturing facility or participating in an
          overseas joint venture. Licensing also permits U.S.  firms
          to overcome many of the tariff and nontariff barriers that
          frequently hamper the export of U.S.-manufactured products.
          For these reasons, licensing can be a particularly
          attractive method of exporting for small companies or
          companies with little international trade experience,
          although licensing is profitably employed by large and
          small firms alike. Technology licensing can also be used to
          acquire foreign technology (e.g., through cross-licensing
          agreements or grantback clauses granting rights to
          improvement technology developed by a licensee).

          Technology licensing is not limited to the manufacturing
          sector.  Franchising is also an important form of
          technology licensing used by many service industries. In
          franchising, the franchisor (licenser) permits the
          franchisee (licensee) to employ its trademark or service
          mark in a contractually specified manner for the marketing
          of goods or services. The franchisor usually continues to
          support the operation of the franchisee's business by
          providing advertising, accounting, training, and related
          services and in many instances also supplies products
          needed by the franchisee.

          As a form of exporting, technology licensing has certain
          potential drawbacks. The negative aspects of licensing are
          that (1) control over the technology is weakened because it
          has been transferred to an unaffiliated firm and (2)
          licensing usually produces fewer profits than exporting
          goods or services produced in the United States. In certain
          Third World countries, there also may be problems in
          adequately protecting the licensed technology from
          unauthorized use by third parties.

          In considering the licensing of technology, it is important
          to remember that foreign licensees may attempt to use the
          licensed technology to manufacture products that are
          marketed in the United States or third countries in direct
          competition with the licenser or its other licensees. In
          many instances, U.S. licensers may wish to impose
          territorial restrictions on their foreign licensees,
          depending on U.S.  or foreign antitrust laws and the
          licensing laws of the host country.  Also, U.S. and foreign
          patent, trademark, and copyright laws can often be used to
          bar unauthorized sales by foreign licensees, provided that
          the U.S. licenser has valid patent, trademark, or copyright
          protection in the United States or the other countries
          involved. In addition, unauthorized exports to the United
          States by foreign licensees can often be prevented by
          filing unfair import practices complaints under section 337
          of the Tariff Act of 1930 with the U.S. International Trade
          Commission and by recording U.S. trademarks and copyrights
          with the U.S.  Customs Service.

          As in all overseas transactions, it is important to
          investigate not only the prospective licensee but the
          licensee's country as well. The government of the host
          country often must approve the licensing agreement before
          it goes into effect. Such governments, for example, may
          prohibit royalty payments that exceed a certain rate or
          contractual provisions barring the licensee from exporting
          products manufactured with or embodying the licensed
          technology to third countries.

          The prospective licenser must always take into account the
          host country's foreign patent, trademark, and copyright
          laws; exchange controls; product liability laws; possible
          countertrading or barter requirements; antitrust and tax
          laws; and attitudes toward repatriation of royalties and
          dividends. The existence of a tax treaty or bilateral
          investment treaty between the United States and the
          prospective host country is an important indicator of the
          overall commercial relationship. Prospective U.S.
          licensers, especially of advanced technology, also should
          determine whether they need to obtain an export license
          from the U.S. Department of Commerce.

          International technology licensing agreements, in a few
          instances, can unlawfully restrain trade in violation of
          U.S. or foreign antitrust laws. U.S. antitrust law, as a
          general rule, prohibits international technology licensing
          agreements that unreasonably restrict imports of competing
          goods or technology into the United States or unreasonably
          restrain U.S. domestic competition or exports by U.S.
          persons.

          Whether or not a restraint is reasonable is a fact-specific
          determination that is made after consideration of the
          availability of competing goods or technology; market
          shares; barriers to entry; the business justifications for
          and the duration of contractual restraints; valid patents,
          trademarks, and copyrights; and certain other factors.  The
          U.S. Department of Justice's Antitrust Enforcement
          Guidelines for International Operations (1988) contains
          useful advice regarding the legality of various types of
          international transactions, including technology licensing.
          In those instances in which significant federal antitrust
          issues are presented, U.S. licensers may wish to consider
          applying for an export trade certificate of review from the
          Department of Commerce or requesting a Department of
          Justice business review letter.

          Foreign countries, particularly the EC, also have strict
          antitrust laws that affect technology licensing. The EC has
          issued detailed regulations governing patent and know-how
          licensing. These block exemption regulations are entitled
          "Commission Regulation (EEC) No. 2349/84 of 23 July 1984 on
          the Application of Article 85(3) of the Treaty [of Rome] to
          Certain Categories of Patent Licensing Agreements" and
          "Commission Regulation (EEC) No. 556/89 of 30 November 1988
          on the Application of Article 85(3) of the Treaty to
          Certain Categories of Know-how Licensing Agreements." These
          regulations should be carefully considered by anyone
          currently licensing or contemplating the licensing of
          technology to the EC.

          Because of the potential complexity of international
          technology licensing agreements, firms should seek
          qualified legal advice in the United States before entering
          into such an agreement. In many instances, U.S. licensors
          should also retain qualified legal counsel in the host
          country in order to obtain advice on applicable local laws
          and to receive assistance in securing the foreign
          government's approval of the agreement. Sound legal advice
          and thorough investigation of the prospective licensee and
          the host country increase the likelihood that the licensing
          agreement will be a profitable transaction and help
          decrease or avoid potential problems.

          JOINT VENTURES

          There are a number of business and legal reasons why
          unassisted exporting may not be the best export strategy
          for a U.S. company. In such cases, the firm may wish to
          consider a joint venture with a firm in the host country.
          International joint ventures are used in a wide variety of
          manufacturing, mining, and service industries and are
          frequently undertaken in conjunction with technology
          licensing by the U.S. firm to the joint venture.

          The host country may require that a certain percentage
          (often 51 percent) of manufacturing or mining operations

          be owned by nationals of that country, thereby requiring
          U.S. firms to operate through joint ventures. In addition
          to such legal requirements, U.S. firms may find it
          desirable to enter into a joint venture with a foreign firm
          to help spread the high costs and risks frequently
          associated with foreign operations.

          Moreover, the local partner may bring to the joint venture
          its knowledge of the customs and tastes of the people, an
          established distribution network, and valuable business and
          political contacts. Having local partners also decreases
          the foreign status of the firm and may provide some
          protection against discrimination or expropriation, should
          conditions change.

          There are, of course, possible disadvantages to
          international joint ventures. A major potential drawback to
          joint ventures, especially in countries that limit foreign
          companies to 49 percent or less participation, is the loss
          of effective managerial control. A loss of effective
          managerial control can result in reduced profits, increased
          operating costs, inferior product quality, and exposure to
          product liability and environmental litigation and fines.
          U.S. firms that wish to retain effective managerial control
          will find this issue an important topic in negotiations
          with the prospective joint venture partner and frequently
          the host government as well.

          Like technology licensing agreements, joint ventures can
          raise U.S. or foreign antitrust issues in certain
          circumstances, particularly when the prospective joint
          venture partners are major existing or potential
          competitors in the affected national markets. Firms may
          wish to consider applying for an export trade certificate
          of review from the Department of Commerce (see chapter 4)
          or a business review letter from the Department of Justice
          when significant federal antitrust issues are raised by the
          proposed international joint venture.

          Because of the complex legal issues frequently raised by
          international joint venture agreements, it is very
          important, before entering into any such agreement, to seek
          legal advice from qualified U.S. counsel experienced in
          this aspect of international trade.

          U.S. firms contemplating international joint ventures also
          should consider retaining experienced counsel in the host
          country. U.S. firms can find it very disadvantageous to
          rely upon their potential joint venture partners to
          negotiate host government approvals and advise them on
          legal issues, since their prospective partners' interests
          may not always coincide with their own. Qualified foreign
          counsel can be very helpful in obtaining government
          approvals and providing ongoing advice regarding the host
          country's patent, trademark, copyright, tax, labor,
          corporate, commercial, antitrust, and exchange control
          laws.

