Fast-food chain Bojangles' Restaurants Inc. wanted to take its fried chicken to Chinese consumers through local franchises. But how could the Charlotte, N.C.-based company protect its secret recipe in a country famous for all kinds of IP theft? The answer was to license the recipe to a U.S.-based food distributor that would blend the spices and pass along the finished product to its Chinese subsidiary. "We did not want to deal with the Chinese arm of the U.S. supplier and have them handling sensitive matters like the breakdown of spices," says Erin Newman, Bojangles' executive vice president and general counsel. "We wanted to know the [franchisees] we would be dealing with in China, but the most important thing was to take the contractual enforcement out of China and keep it in the U.S."
IP challenges such as this one are being contemplated with increasing regularity in executive suites as globalization drives more -- and more complex -- licensing agreements. "As globalization becomes more prevalent, we encounter [trade-secret and know-how licensing] related issues day in and day out," says Michael McCoy, who heads the IP practice of Alston & Bird LLP. "The trend is that it's gathering steam, and the thing that's driving it is these countries' thirst to move up the technology food chain."
For a licensor, transferring knowledge around the globe is more challenging than just negotiating a licensing agreement for a patent. It involves having managers with the technical and communication skills to deliver sometimes-complex information; it means coming up with creative agreements to protect trade secrets; and it means conducting regular audits to make sure licensees are working within the parameters of the original agreement.
Licensing know-how is not a new phenomenon. Chemical and aerospace companies were early adopters, sharing the details of how to manufacture complicated plastics or engine parts with international partners. In return, the licensors were able to widen their own footprints by developing relationships with international suppliers and customers.
Today, licensing know-how has perhaps spread most widely within technology companies, where systems can be so complex that without the details of how a technology works, a licensee would be getting little of value. "It shows the licensee how they will make better use of a patent," says Michael Pierantozzi, director of strategy and IP licensing at Hewlett-Packard Co. "It's one thing to get a naked patent for defensive purposes, but for some companies that are coming to us on a proactive basis, the know-how is the real value."
What's more, for the licensors, it's value that lasts and lasts. Unlike patents, trade secrets (and the know-how that encapsulates them) never expire. One of the most famous trade-secret licensing deals was struck in 1886 between J.J. Lawrence, the maker of Listerine, and the Lambert Pharmaceutical Co. By 1956, what had become Warner-Lambert Pharmaceutical Co. had paid more than $22 million in licensing fees to the Lawrence family. The trade secret, however, had been made public years earlier, and Warner-Lambert [now Pfizer Inc.] decided that fact voided the earlier agreement. The U.S. courts disagreed, ruling that royalty payments on Listerine should continue because the company had gained a clear advantage in the marketplace by getting the formula first. The courts also determined that a licensor of a trade secret can still be protected even if others independently develop the formula.
That's why most licensing experts recommend that a company create two separate licensing agreements for the transaction -- one for the patents and another for the know-how. But as the case with Bojangles illustrates, licensing know-how raises some thorny problems when moving into a country with questionable IP protection.
| Know-how licensing checklist |
| • Create separate licensing agreements for patents and know-how, to maximize revenue generation. |
| • Define trade secrets internally so when an employee leaves, you can specify what things he or she should not share with a potential competitor. |
| • Include instructions on how to protect your licensed know-how in the licensing agreement, to prove that you are in fact trying to keep it secret. |
| • Do a background check on any company that wants to license your know-how. |
| • Demand that IP protection measures be established at the licensing company, such as limiting access to the technology, confidential labels on equipment, locked storage for paperwork and employee training that highlights the consequences of trade-secret leaks. |
| • Ensure proper legal procedures are established at the licensing company, such as noncompetes and non-disclosure agreements, and "golden handcuffs" for key |
Source: The Deal |
For some dealmakers, the solution is to steer clear altogether. John Gerard, president of Access Plant Technology Inc., is a broker of seed technology developed in university and private research labs. His Plymouth, Ind.-based firm has licensed corn, wheat and soybean seed technology to farmers in Western Europe and South America, where he believes laws are sufficient to protect his clients' seed technology. That's not the case, he says, in India and China, where buying as opposed to harvesting seeds every year runs counter to what farmers have done for millennia, and where Gerard believes his clients' know-how on cultivating more resilient seeds may be at risk.
"There have been attempts by people in the cotton and rice business and a few in turf grass that have gone into China and then retreated," Gerard says. "It's typically a probing experience to see if it's ready."
For other companies, licensing the details of their products means hedging their bets in as many ways as possible. Many high-tech manufacturers protect their most critical know-how by sending only lower-end manufacturing processes overseas; they finish the products in the U.S. Other firms spread manufacturing around as much as possible to keep one party from gaining all of the know-how.
Still others adjust the price to reflect the uncertainties in the deal. Michael Lasinski, managing director with the Chicago-based merchant banking firm Ocean Tomo and head of the firm's valuation practice, says last year he helped a U.S. steel company broker a know-how agreement in China, where the U.S. company demanded a huge royalty payment up front because it was difficult to see how the Chinese company planned to use the know-how. "The issue there is that you cannot necessarily track or audit the know-how, so you ask for a lot up front and minimal payments per year," Lasinski says. "And because a lot of companies in China have common ownership with the state, we were unsure during our negotiations that only the company we were working with would use the IP." Even with the inherent distrust, Lasinski says in the past year he's done two deals in China and there are more on the horizon.
Successfully licensing know-how also means having employees with the right skills to transfer the knowledge in a meaningful way, often in the face of significant geographic, language and cultural barriers. Take the case of Hewlett-Packard, which licenses patents and know-how through its Atomic Resolution Storage program. ARS technology allows large quantities of data to be stored on a tiny flash card used in digital appliances.
Companies that license the technology receive a portfolio of patents and access to HP's engineers, who teach the licensee how to use the ARS and apply it. HP's Pierantozzi talks with managers and engineers to determine who has the skills to transfer the knowledge and who is willing to do it. Engineers must be good communicators, able to explain how to adapt the technology for other applications. Not every engineer fits the model.
During the transfer, engineers may travel to the licensee's campus to talk one-on-one with the licensee's engineers or they may teach classes at their own office. In some cases, the engineers are even written into the licensing agreement. An added bonus of licensing know-how for HP is retention of its most talented engineers, according to Pierantozzi.
"It's a big validation to the tech team when they get to transfer their knowledge to another party and see their inventions in use." Pierantozzi keeps a record of which HP employees are involved in transferring know-how. That way, if a key employee does leave, the company can stress to him or her which IP should be kept under wraps.
It's just one more consideration for companies trying to simultaneously share and secure their most critical know-how.
The right formula, once they find it, is almost a secret worth licensing in its own right. - Stacey Higginbotham
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