Field-of-use restrictions in licensing agreements

Schuett, Florian (2008): Field-of-use restrictions in licensing agreements.

Abstract

A widely used clause in license contracts -- the field-of-use restriction (FOUR) -- precludes licensees from operating outside of the specified technical field. When a technology has several distinct applications, FOUR allow the licensor to slice up his rights and attribute them to the lowest-cost producer in each field of use. This can improve production efficiency. However, with complex technologies, the boundaries of fields of use may be difficult to codify, entailing a risk of overlap of licensees' rights. We explore how this affects the optimal license contract in a moral hazard framework where the licensor's effort determines the probability of overlap. We show that depending on the contracting environment, the license agreement may include output restrictions and nonlinear royalty schemes.

• Item Type: MPRA Paper
• Language: English
• Keywords: license contract; usage restrictions; overlap; nonresponsiveness
• Subjects: D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior ; Transaction Costs ; Property Rights; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L24 - Contracting Out ; Joint Ventures ; Technology Licensing

References

Anand, Bharat N. and Khanna, Tarun (2000): The Structure of Licensing Contracts. Journal of Industrial Economics, Vol. 48(1), pp. 103{135.

Bajari, Patrick and Tadelis, Steven (2001): Incentives versus Transaction Costs: A Theory of Procurement Contracts. RAND Journal of Economics, Vol. 32(3), pp. 387{407.

Beggs, A.W. (1992): The Licensing of Patents Under Asymmetric Information. Interna- tional Journal of Industrial Organization, Vol. 10, pp. 171{191.

Bessy, Christian and Brousseau, Eric (1998): Technology Licensing Contracts: Features and Diversity. International Review of Law and Economics, Vol. 18, pp. 451{489.

Bousquet, Alain, Cremer, Helmuth, Ivaldi, Marc, and Wolkowicz, Michel (1998): Risk Sharing in Licensing. International Journal of Industrial Organization, Vol. 16, pp. 535{554.

Caves, Richard E., Crookell, Harold, and Killing, J. Peter (1983): The Imperfect Market for Technology Licenses. Oxford Bulletin of Economics and Statistics, Vol. 45, pp. 249{267.

Cestone, Giacinta and White, Lucy (2003): Anticompetitive Financial Contracting: The Design of Financial Claims. Journal of Finance, Vol. 58(5), pp. 2109{2141.

Choi, Jay Pil (2001): Technology Transfer With Moral Hazard. International Journal of Industrial Organization, Vol. 19, pp. 249{266.

Contractor, Farok J. (1981): International Technology Licensing: Compensation, Costs, and Negotiation. Lexington, MA: Lexington Books.

Dewatripont, Mathias (1992): Implementation Theory: Discussion. In: J.J. Laont (ed.), Advances in Economic Theory. Sixth World Congress, Vol. 1, pp. 324{327. Cambridge: Cambridge University Press.

Dye, Ronald A. (1985): Costly Contract Contingencies. International Economic Review, Vol. 26(1), pp. 233{250.

Gallini, Nancy T. and Wright, Brian D. (1990): Technology Transfer Under Asymmetric Information. RAND Journal of Economics, Vol. 21(1), pp. 147{160.

Guesnerie, Roger and Laont, Jean-Jacques (1984): A Complete Solution to a Class of Principal-Agent Problems with an Application to the Control of a Self-Managed Firm. Journal of Public Economics, Vol. 25, pp. 329{369.

Hart, Oliver and Tirole, Jean (1990): Vertical Integration and Market Foreclosure. Brook- ings Papers on Economic Activity, pp. 205{276. Special issue.

Kamien, Morton I. (1992): Patent Licensing. In: R.J. Aumann and S. Hart (eds.), Hand- book of Game Theory with Economic Applications, pp. 331{354. North Holland: Elsevier.

Kamien, Morton I. and Tauman, Yair (1986): Fees versus Royalties and the Private Value of a Patent. Quarterly Journal of Economics, Vol. 101(3), pp. 471{492.

Katz, Michael L. and Shapiro, Carl (1986): How to License Intangible Property. Quarterly Journal of Economics, Vol. 101(3), pp. 567{590.

Maskin, Eric (1977): Nash Implementation andWelfare Optimality. Mimeo, Massachusetts Institute of Technology.

Mathewson, G. Frank and Winter, Ralph A. (1984): An Economic Theory of Vertical Restraints. RAND Journal of Economics, Vol. 15(1), pp. 27{38.

Rey, Patrick and Tirole, Jean (1986): The Logic of Vertical Restraints. American Economic Review, Vol. 76(5), pp. 921{939.

Rey, Patrick and Tirole, Jean (2007): A Primer on Foreclosure. In: M. Armstrong and R. Porter (eds.), Handbook of Industrial Organization, Vol. 3, chap. 7. North Holland: Elsevier.

Rey, Patrick and Verge, Thibaud (2007): The Economics of Vertical Restraints. In: P. Buccirossi (ed.), Handbook of Antitrust Economics. Cambridge, MA: MIT Press.

Rostoker, Michael D. (1984): A Survey of Corporate Licensing. IDEA: The Journal of Law and Technology, Vol. 24, pp. 59{92.

Segal, Ilya (1999): Contracting with Externalities. Quarterly Journal of Economics, Vol. 114(2), pp. 337{388.

Spengler, Joseph J. (1950): Vertical Integration and Anti-trust Policy. Journal of Political Economy, Vol. 58(4), pp. 347{352.

Spier, Kathryn E. (1992): Incomplete Contracts and Signalling. RAND Journal of Eco- nomics, Vol. 23(3), pp. 432{443.

Taylor, C.T. and Silberston, Z.A. (1973): The Economic Impact of the Patent System: A Study of the British Experience. Cambridge: Cambridge University Press.