Technology transfer may take place either by means of a purchase, or by means of a licensing agreement.
Of the two, the second is more commonly used, due to the plurality of benefits which it entails.

Between 1962 and 1970 about 3500 licensing agreements were notified to the European Commission.
They were distributed thus:

• 2% were licences for patents and trade-marks
• 4% were licences for trade-marks alone
• 5% were licences for know-how alone
• 12% were licences for patents and know-how
• 15% were licences for patents, trade-marks and know-how
• 27% were licences for patents alone
• 35% were licences for trade-marks and know-how.

A relationship of technical cooperation (know-how) therefore existed in 67% of the cases.

To understand the problem better, we can consider the survey conducted by the Council of European Industrial Federations in 1973.
This survey took a sample of eight large companies which achieved a total of 4302 licensing agreements either active or passive.
These agreements were as follows:

• 2% were licences for patents and trade-marks
• 3% were licences for trade-marks and know-how
• 5.5% were licences for patents, trade-marks and know-how
• 10.5% were licences for know-how alone
• 14% were licences for trade-marks alone
• 22% were licences for patents alone
• 43% were licences for patents and know-how.

In this survey too we see a percentage of 62% of technical cooperation.
This confirms the peculiarity of technology transfer inasmuch as it is prevalently a transfer of experience and therefore of knowledge.

A licence is usually a technical cooperation, medium or long term, often on an international level, whereby an undertaking puts another undertaking in a condition where it is able to manufacture (and/or sell) a product, or to use a method, in return for the payment of a compensation, which normally consists of a royalty on the production or sale.

This cooperation necessarily has an effect on the Company’s strategies and entails elements both of trust and, at least potentially, of competition between the contracting Companies. These peculiar aspects mean that the Company has to have a clear and defined strategic position towards a cooperation of this type; and also that the Company, whether licensor or licensee, has to have an organisational and cultural evolution which is not always the case.

For a Company which has its own know-how there is always the problem of deciding how the technological advantage which it has acquired, with its innovations and/or inventions, can be exploited for the greatest profit.
One way is to manufacture and sell the relative product independently, or to exploit the relative method independently.
Another way is to receive a compensation which derives from licensing, or licensing the use of, the technology itself.
This second solution, which is also the most commonly adopted, involves creating, or promoting, an at least potential competitor.
Moreover, due to recent trends in legislation, it is becoming substantially impossible for the products of the foreign licensee not to appear on the home market.

In the matter of licensing some Companies, particularly the larger ones, establish real and proper policy lines.

Advantages and disadvantages of assignment

Assigning technology entails at least the following advantages:

1. first of all the compensation connected with the licence, which can be of four types:
   1. a one-off payment to partly refund the expenses incurred to acquire the technology;
   2. a one-off payment for the assignment of designs, instructions, etc.;
   3. a one-off payment for the supply of apparatus, devices, etc.;
   4. royalties on the product.
      These compensations and royalties may be transmitted according to different forms and means, depending almost exclusively on the contractual capacity of the partners;
2. it is possible to have access to new technology obtained in direct or indirect transfer for the technology offered;
3. it is possible to improve one’s own technology by transferring information, improvements, etc.;
4. it is possible to enter markets which are difficult for the Company to access or which otherwise cannot be accessed;
5. it is possible to obtain parts, or materials, on more favourable conditions than those which can be obtained in the market where the Company is operating;
6. it is possible to exploit the organisation of one’s own manpower to the maximum, and optimise the monetary profits thereof;
7. it is possible to revise one’s own structure and adapt it to the licensed technology and therefore to make it grow.

The disadvantages of assigning technology are substantially:

1. the loss of a monopoly acquired in a certain territory, particularly when one’s own technology has made it possible to protect this monopoly by means of patents;
2. the loss of a privileged position obtained in a certain technological field, if one’s own technology has been kept secret;
3. the possibility of finding on one’s own market the products of the licensee in competition with one’s own products;
4. the expenses of protecting one’s own technology by means of patents and the consequent patent policy which cannot only include the most important countries;
5. the danger that there might be an information leak of one’s own know-how even during negotiations, a danger which secrecy agreements only partly limit;
6. the danger of not finding a partner with whom one can establish a relationship of trust;
7. the danger that the partner might change or alter unpredictably, perhaps taking over, or being taken over by, a dangerous competitor;
8. the danger that the partner might acquire the licence and then not manufacture, or manufacture in limited quantities;
9. the general and specific contractual responsibilities which accrue to the licensor;
10. the expense of activating the agreement, which can be considerable if not well defined and verified during negotiations;
11. the expense of finding the partner and of negotiating the agreement;
12. the dangers and limitations inherent to certain legislations;
13. the dangers of one’s own secrets being divulged to third parties.

Advantages and disadvantages of purchase

Purchasing a licence substantially entails the following advantages:

1. it is possible to have access to new technologies in a shorter time and at limited cost;
2. the dangers involved in research carried out independently are reduced;
3. one’s own collaborators are stimulated to acquire a new way of thinking and operating and therefore, generally speaking, to grow;
4. it is possible to enter new fields in very short times;
5. it is possible to acquire not only the technology and relative know-how, but also to obtain data and information on the machines, equipment, lay-out, organisation, etc.

Purchasing may be disadvantageous for the following reasons:

1. the cost of adapting the acquired technology to one’s own facilities;
2. the cost of adapting one’s own facilities to the needs of the technology acquired, a cost which should not be evaluated only in material terms;
3. any possible limitations imposed by the licensor;
4. one implicitly renounces creating one’s own research and development structure and therefore one’s technological subservience continues;
5. the obligation of transferring one’s own experience to the licensor and therefore the resulting position of subordination;
6. the possible burden, even though only partial, of maintaining and/or defending the rights acquired;
7. an unsuitable partner may be chosen;
8. one’s own contractual and organisational weakness.

It is therefore the sum of all these factors which can lead the Company to define first a strategy in the field of technology transfer, then a specific transfer policy.
Nevertheless, it must be remembered that licensing or purchasing (sales) agreements - however thoroughly and accurately they may be stipulated - cannot foresee all the eventualities that may arise in the execution of the agreement.

It should also be remembered that there are other types of agreement which may foresee and contribute to technology transfer. It is possible to have other types of transactions including, for example, transactions which include conditions in which the technology transfer involves a participation of the assignor or the licensor.
This participation may also involve a participation, at least temporarily, in the capital and/or in the management of the connected or consequent initiative.

Any negotiations concerning a technology transfer involving licenses must first of all be conceived in the context of the Company’s strategic and organic strategic plan, which must be the consequential evaluation of the evolution which can be inferred within the context of the Company, according to the actual and potential market.

If we examine the actual parameters and compare them with those regarding the market, it is possible to make one or more hypotheses of development, though in different times.
The two main components are the technical time needed and the capital which has to be invested before there is a return on the capital.
Other components have to be considered too: one’s own technical capacity, both commercial and financial, possible requirements for alliances and agreements, one’s own organisational structure, the type of one’s own collaborators, etc.
By analysing these various factors we obtain a logical statement of an evolved plan with one or more correctional variants.
Only when all this is quite clear, assimilated and agreed on by the Management is it possible to start negotiating officially, though negotiations may have already started in the meantime.

However, there is one prior aspect to be considered: entering, or expanding into, a technological field must always be preceded by a careful inventory of the state of the art.
This inventory serves to provide the company with a greater and more complete background knowledge, making available what is practically the most advanced technology.
Moreover, it is thus possible to evaluate the strength or weakness of the technology in point and therefore to evaluate the most suitable way.
One way may be to use the technology, another may be to avoid it, another may be to license it and finally one might decide to do one’s own research.
In order to avoid the technology, the state of the art needs to be examined carefully; this may suggest alternative ways, if purchasing a licence is being considered. It may also suggest barring any alternative ways if there is a possibility that a licence may be assigned.
Then it is also possible to take advantage of the provision, which now exists in most countries, by which an obligatory licence may be requested.
Certain procedures and rules must be observed, and it must be taken into account that the product thus obtained is subject to certain rules affecting its circulation.
From these comments it is obvious that beginning negotiations for a licence requires a number of well thought-out decisions to be taken in advance.
And in the course of the negotiations there are many factors to be examined and considered.

When there is a licensing agreement there must be a relationship of trust between partners, inasmuch as the result of the agreement very much depends on the type of cooperation existing between the partners.
This is the main feature to examine and evaluate with great care, so we do not find ourselves with a partner who is demanding and always complaining, who is only interested in acquiring our technology, and also so that we do not find ourselves with a partner who is technically and/or commercially unsuitable.

We also have to evaluate the danger that the partner might undergo changes, and thus the characteristics of the original relationship might change.
These changes can occur for example when shares change hands, when managers change, when partners transfer, when the branch of activity is hived off, etc.
These eventualities, and the possible transmission of the licence, must be carefully evaluated and regulated in the agreement.

In most cases, a licence is an international relationship, and this involves a number of political and economic risks, not to mention the relative costs.
A licence with a partner operating in Western countries normally subjects the relationship to conditions which depend on specific legislative norms, though these may not be expressed.
But this is different when the partner acquiring the technology operates in a developing country.
In this case any restrictive clauses, and the free circulation of the royalties and fees, may suffer limitations, even drastic ones.
The EU has also included limitations for particular clauses which impede free competition.
It is therefore necessary to carefully evaluate the law to be applied and what authority has to interpret the agreement according to the law.

A licence lasts for quite a long period of time, and therefore it is necessary to consider that some situations can change, for example, the market, and the political, economical, fiscal, and currency situation, etc.
In addition, according to the duration of the agreement it must be taken into account that in the meantime the product may become obsolete.

For all these reasons, and others still, it is necessary to clearly identify the circumstances which have allowed us to begin and finalise the agreement, and also the assumptions on which the agreement is based.
These features, which are inserted as premises in licensing agreements, make it possible, in the long term, to clarify the reason for and the meaning of clauses which, subsequently, could be at the very least obscure or doubtful.

The object of the agreement must be defined very carefully. For example, it must be clear:

• exactly what the object of the agreement consists of;
• whether any patent titles come within the agreement and if so, which;
• what is meant by know-how, should the agreement include transfer of know-how, what this concept includes for the purposes of the agreement and in what manner the know-how is transferred;
• should there be any transfer of drawings, plans or suchlike, what exactly is included and how it is handed over;
• what territory the licence covers;
• the possible time scale of the transfer of the content of the licence.

To simply define generally that know-how is transferred only serves to bind the purchaser, who cannot always complain if he then receives information which is at least partly public.
To indicate generally that there are patents involved, without specifying them and/or saying anything about them only creates confusion and a danger of conflict.
The same applies when it does not indicate clearly what the object of the agreement is, what its characteristics are, how it can be identified, etc.
To improve this part of the agreement, recourse is often made to the use of definitions which serve to give a precise and circumscribed content to the individual aspects.

Then, it has to be decided if the licence is to be exclusive or non-exclusive.
If the licence is exclusive, it may be so, for example, with regard to production but not to sales, or it can be exclusive in one territory but not in another, etc.
One must consequently evaluate if the licensee can grant sub-licences in the territories covered by the licence, and on what conditions.
It must also be defined if the licensee can manufacture other products in competition or if he has to acquire the object of the licence as a primary or single product in his range.

An important point is to define what freedom and autonomy the licensee shall have at the end of the agreement, and under what conditions.

It must be examined whether, for the duration of the agreement, the licensor has to maintain some freedom or autonomy, or whether he must undertake not to sell, and/or not manufacture in the territory covered by the exclusive licence. There may also be particular cases where supplies are made outside the territory, or special supplies are made in the territory to Companies whose head office is outside the territory.

It is important to clarify and quantify the technical assistance given.
Therefore the man/hours spent at the licensor’s and/or the licensee’s must be indicated accurately, and what the characteristics of the technicians are.
It is also better to clarify who pays the incidental expenses of the workmen on transfer, and who is responsible for the board and lodging, the travel expenses and the insurance.
For distant partners it is better to indicate how and from what point the computation of the man/hours begins wherein the licensor supplies assistance to the licensee.
It is a good thing to clarify the methods of calculating, debiting and paying for any assistance in excess of that agreed beforehand.

An important point is the minimum quality which the licensee has to guarantee, and also the technology used in order to control the quality.
It must also be considered what penalties are to be applied if this quality is not restored within a certain period starting from the moment the licensor becomes aware of the deficiency.

The obligation to provide technical assistance, which the licensee must provide before and after sales, is usually included in the agreement.

It is important to define the obligation to secrecy which must in any case apply at least to the licensee, as well as the duration of this obligation after the end of the agreement, and who is subject to the obligation.

It must be defined if the licensee has to mark the product, and indicate the licensor, and in what way.
In many agreements, where the product allows, control means have to be included (matriculation number, sealed measuring systems, etc.).
It is usual to define how the parties will behave in the event of improvements, new solutions, innovations and inventions which one party or the other may possibly achieve during the course of the agreement.

The guarantee which the licensee gives regarding patent rights and the existence of possible rights of third parties is extremely important.
Provision must also be made for the possibility that the licensee, or his clients, may be attacked, or that he may have to defend himself in cases of infringement.

The economic aspects of the licence must be clearly regulated, and the methods of payment which include:

• the possibility of a one-off payment for the licence concerning the patent rights;
• the possibility of a one-off payment for the know-how;
• the possibility of payments made in advance which have to be deducted from the periodically paid royalties (amounts to be agreed on);
• royalties with or without a guaranteed minimum;
• any other payments.

In the case of royalties, it must be indicated exactly how they are calculated and on what they are applied, if they include any taxes paid at source, if a certificate concerning double taxation has to be sent, if a precise report has to be sent and, if so, by whom it must be certified, etc.
It is useful to indicate any banks used, under what conditions payment is assumed to have occurred and penalties for late payment.

Normally one or more control clauses are inserted so that the licensor can carry out any necessary controls, not only technical but also accounting.
In some cases it is indicated how part of the accounts must be kept and how, by whom and when checks can be made.

Usually there are also clauses connected with any changes the partner may be subjected to, events of force majeure, partial modifications and invalidity of the clauses, the competent court and laws or, alternatively, arbitration and the type of arbitration, the addresses to which official communications are to be sent, etc.
There are also clauses concerning financial events (bankruptcy, composition with creditors, etc.).
If there is an arbitration clause, it normally indicates that it endures for a certain period, to the extent that there are matters which can be referred to arbitration, even after the agreement has ended.

Finally, the duration of the agreement must be clearly regulated, and the conditions under which the agreement becomes operative.