Know how royalties: are they ever justified?

The sentiments expressed in the final paragraph of this golden oldie re-emerge every few years. The Gowers recommendation led to the UK IPO forming a Business to Business Licensing Committee, on which IP Draughts was a member for several years. The committee quickly concluded that developing a standard licence agreement was impractical.

IP Draughts returned to the theme in the chapter that he wrote in Research Handbook on Intellectual Property Licensing, ed De Werra, Edward Elgar Publishing, and he sketched out some ideas on what an international set of rules for licensing might look like.

Now, he hears that a United Nations committee is looking into this subject, with a view to possibly developing something similar to the UN Convention on the International Sale of Goods. He has seen  a reference to this endeavour on another IP blog, but has been unable to track down the minutes of the relevant UN committee. IP Draughts would be interested in participating in that committee, if and when it gets down to detailed work.

IP Draughts

When patents and know-how are licensed together, a question that often comes up is whether there should be a know-how royalty.

In other words, should the licensee be required to pay royalties on products that are not covered by a licensed patent in the country of manufacture or sale, but whose manufacture or development benefitted from the licensed know-how.

Licensees argue that, unless the know-how provides a clear competitive advantage for the licensee’s product over other products, it should not attract a royalty. This argument is particularly acute where the product can be easily reverse-engineered by a competitor; for example, the chemical composition of many pharmaceutical drugs can be established by a competent chemist once the product is on the market. An additional argument, sometimes, is that the upfront payment is, in effect, a payment for access to the licensed know-how, and that a royalty on the use of know-how…

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