Legal and Government Constraints on Licensing

Licensing agreements are subject to industrial property laws and antitrust (restrictive practices) laws in all national jurisdictions.¹² But in addition, licensing agreements may be constrained by technology control systems, which are particularly burdensome in Latin America. Furthermore, these control systems are spreading to developing countries in Asia and Africa. Any detailed treatment of national control systems is beyond the scope of this book, but a brief description of the Mexican system will indicate their intent and scope.¹³

Mexico’s Law on the Transfer of Technology, which became operative in 1973, has two main goals: (1) to get better terms for Mexican licensees and (2) to prevent abuses by foreign licensors to the detriment of Mexican licensees and the Mexican economy. All licensing contracts in Mexico must be filed with the Registry of Technology within 60 days after their signing. In turn, the Rfegistry must grant or deny registration within 90 days after receipt of the application and the licensing contract. The absolute maxi­mum duration for licenses is ten years, but the Registry may limit duration to fewer years. Moreover, at the expiration of an agreement, the licensee has continued use of nonpatented technology transferred under the agree­ment.

The Registry is likely to reject licensing contracts that have “unreasona­ble” royalty rates or other compensation arrangements (including minimum royalties), tax clauses obligating the licensee to pay any Mexican taxes on royalties, defense clauses requiring the licensee to bear part or all of the costs of defending the licensed patent against infringement, restrictions on production volume, restrictions on sales prices, grantback requirements of­fering little or no compensation to the licensee for improvements, “tied” purchases of equipment or other goods from the licensor, restrictions on R&D by the licensee, export restrictions, provisions for the jurisdiction of foreign courts or for arbitration outside Mexico in the settlement of dis­putes, and any other provisions that limit the licensee’s freedom beyond the scope of Mexico’s industrial property laws.

The Law requires that compensation to the licensor be “commensu­rate” with the technology package. The Registry determines the commensu­rate compensation by using criteria such as the technology’s age and life expectancy, the contribution of the technology to Mexican exports and the development of local R&D capacity, the contribution of the technology to the licensee’s performance, and alternative sources of the technology. The Registry is particularly suspicious of trademark royalties and of royalties paid by licensees that are affiliates of foreign licensors.

Mexico has also rewritten its industrial property laws in recent years. A patent is valid for only ten years, and compulsory licenses may be awarded to Mexican companies if a patent is not worked through actual manufac­turing in Mexico within three years of its registration. The purpose of the new patent law is to make it impossible for a foreign company to prevent a Mexican company (in which a foreign company can ordinarily have only a minority position) from using its technology patented in Mexico. A new trademark law mandates the use of a foreign trademark jointly with a trademark originally registered in Mexico. The purpose is to enable the licensee to build a market franchise with his own trademark so that he can continue to sell under his own brand name at the conclusion of a licensing agreement. Furthermore, the owner of a trademark registered in Mexico must use the trademark commercially within a three-year period after regis­tration if he is to avoid its automatic cancellation.

Technology control systems similar to Mexico’s have been adopted in several other Latin American countries, including Colombia, Venezuela, Peru, Ecuador, Bolivia, Brazil, and Argentina. All signs point to their adop­tion by developing countries in other parts of the world. In developing countries, therefore, licensors must be prepared to negotiate with host governments as well as prospective licensees. No doubt the new control systems make it more difficult for licensors to negotiate satisfactory agree­ments. But given the pressing need of the developing countries for industrial technology, manufacturers in the advanced countries should continue to find profitable licensing opportunities.

Source: Root Franklin R. (1998), Entry Strategies for International Markets, Jossey-Bass; 2nd edition.