Consortia Licensing: Is this an ideal way to license intellectual property?

The Licensing Handbook Blog ran an interesting posting today on consortia agreements. I am currently in the middle of a consortia negotiation, so the posting caught my attention.

The Licensing Handbook Blog posting responded to a posting by SpendMatters, which had stated that participating in purchasing consortia can be an excellent means of leveraging resources to negotiate better contracts. Jeffrey Gordon of The Licensing Handbook Blog disagreed, citing as a particular concern the challenge of negotiating a consortia agreement for software licenses:

Commodities are an excellent use for consortia buying. They’re ubiquitous (everyone needs toilet paper and almost everyone’s buying the cheapest they can find), relatively easy to source (and hard to screw up), and bulk quantities clearly reduce overall expense.

But what if your consortia wants to offer something else… say, intellectual property? Software, for example. Now I think there’s a problem. The member companies no longer have identical interests. Your organization wants Exchange email… mine wants Groupwise. You want an enterprise license … and I do, too, but my enterprise is 3x bigger than yours. Consortia buying stumbles in the face of diversity of interests. . . .

Gordon ultimately asserts that the key problem with consortia contracts is that you are “ultimately paying for someone to negotiate a deal that’s good for them, not me.”

Having represented clients in negotiations with both group purchasing organizations and consortia, I have mixed feelings myself on the benefits of licensing technology through one of these arrangements.

Can it be cumbersome to do these deals? Yes, absolutely. In my experience, doing a deal with one of these groups has never been a fast process. It has taken weeks and in some cases months longer to finalize the deal than negotiating a deal with each of those companies individually would likely have taken. The experience has required negotiations with multiple negotiators, each of whom was not always in sync with the other, and the individual members have not always been satisfied with the agreement they received at the end of the process. So, from the perspective of ease of negotiation, there is no question that negotiation with a group is far more time consuming than negotiating with an individual company or organization. Moreover, as with any time consuming legal process, the process is inevitably going to generate a large number of legal fees, unless you have an in-house counsel who can handle all of the work internally.

On the other hand, I think there can be an advantage to these deals for the licensor: a consortia or group purchasing deal can provide greater access to a wider community of licensee/buyers than what would have existed if the group had not been in place. A greater number of prospects will inevitably be educated on the intellectual property or product’s value, which will result ultimately in a wider number of licensee/buyers. In my experience, this has translated in higher revenues for the company licensing the intellectual property.

I think that there can be a similar advantage for the licensee: there generally is a cost benefit, since the legal fees, though higher than what might be typical for a one-on-one agreement– will be shared by the members of the group. There is also typically a matchmaking/education benefit, since the licensee will be matched with a licensor that might have been previously unknown to the licensee, and such licensee will become educated on the value of the intellectual property at issue.

So, I think that these deals absolutely can be a win-win for both sides, even when intellectual property is involved, since both the licensor and the members can benefit from the transaction.

As for the idea that either of the parties will come out of the negotiations with a better agreement in place: well, that is the one issue that I take issue with. I agree with The Licensing Handbook Blog on this point. I’m not sure that the over-negotiating that takes place in these deals is really in anyone’s best interest. Consider this example: one member company may have five minor issues with a particular transaction. Perhaps fifty or more issues in the contract get negotiated, but none of those issues included the member’s five minor concerns. Obviously, once the deal is finally reached, neither the consortia or the licensor are going to be willing to do much compromising. Thus, the member company ends up stuck with a deal that doesn’t address its five minor concerns, despite the fact that those five minor issues would have initially been very easy to negotiate with the licensor–perhaps much easier to negotiate than what was actually negotiated. The member company ends up unhappy with the deal, even after the many weeks and/or months of negotiation that took place, since none of its issues were ever addressed.

This is unfortunately can be and often is the reality whenever someone else is doing the negotiation on someone else’s behalf. The ultimate beneficiary of the agreement can end up unhappy with what has been negotiated.

In the end, despite the potential risks from a group licensing arrangement, I think that ultimately they can be beneficial to members and licensors alike. Let’s face it: the name of the game in business is to make money, and if this does the trick for the licensor and the members save a little money in the process, then everyone ultimately comes out ahead.

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