Option and Licensing Decisions Hinge on Firms' Capabilities and Motivations
University technology-transfer offices face challenges in structuring and monitoring option contracts purchased by firms seeking to commercialize new inventions.
ANN ARBOR, Mich.—University technology-transfer offices engaged in commercialization activity are well advised to carefully consider the capabilities and motivations of firms before granting option agreements on new inventions, says a researcher at the University of Michigan's Stephen M. Ross School of Business.
Tailoring options to account for firm differences, says Arvids Ziedonis, assistant professor of strategy at the Ross School, can facilitate the licensing of university inventions to industry yet protect against suitors who seek to absorb knowledge about new technology during the option period without subsequently purchasing licenses.
In his forthcoming study in Management Science, Ziedonis examines the licensing decisions made by 258 firms, covering 309 patents licensed from the University of California between 1979 and 1992, in an effort to identify the factors that influence the purchase and exercise of option contracts by companies acquiring commercialization rights to university technologies.
An option contract grants a firm the right to use information disclosed by the university to determine the technological and commercial viability of an invention, but does not permit that firm to produce any products or to incorporate the technology into its own production processes. At the expiration of the option period, a company may petition to renew the option agreement, negotiate a license or abandon further efforts and terminate the transaction.
Firms, Ziedonis says, are more likely to purchase options for inventions that have greater technological and commercial uncertainty because the option period provides an opportunity to learn more about the inventions' potential before making a licensing commitment. However, companies that already possess internal knowledge enabling them to better evaluate an external technology are likely to forgo option agreements altogether and enter directly into license contracts. In areas of rapid technological advance, avoiding the delay and cost of an option prior to licensing can be a strategic advantage for a firm wishing to get a new product to market before the competition does.
The relationship between technological knowledge and the likelihood of licensing tends to be quite different for companies that purchase options prior to making licensing decisions, however. In such cases, firms that hold patent portfolios concentrated in areas related to the university inventions (i.e., high-focus firms) are less likely to subsequently license the university patent at the end of the option period. Ziedonis suggests several explanations for this.
First, he says, high-focus firms may be better able to weed out inventions that lack commercial viability than competitors whose patenting activity is less concentrated in the university patent class. Second, licensing decisions for high-focus firms may be driven largely by a desire to exploit their related knowledge base. If so, the rejection rate by high-focus firms may be relatively high if the commercial potential of the pool of optioned inventions is low. In contrast, companies that option inventions more technologically distant from their patenting focus may wish to explore or enter into new areas, and thus may be more willing to commit to a license. Third, high-focus firms may be better able to "learn" from the information disclosed during option periods and thus less likely to subsequently purchase licenses after the options expire.
"Simply granting options may be insufficient to protect the interest of the university technology-transfer office," Ziedonis said. "Strengthening due-diligence provisions, increasing the monitoring of firm behavior both during the option period and after its expiration or avoiding granting options to firms with strong patent portfolios in the field of the university invention may be necessary."
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