What Is a Cross-Licensing Agreement?

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A cross-licensing agreement grants one company the right to use another company's patents, in exchange for the other company receiving the right to use the first company's patents. A cross-licensing agreement can include several companies. The companies can perform research and development and sell new products without worrying about violating the other firms' patents.

Significance

A cross-licensing agreement can include several companies. The companies can perform research and development and sell new products without worrying about violating the other firms' patents.

Antitrust Concerns

Federal regulators may consider a cross-licensing agreement to be a violation of antitrust laws. When the largest companies in an industry sign cross-licensing agreements with one another, they agree not to sue each other but still have the right to sue any new competitor. The definition of a joint venture includes cross-licensing agreements and regulators examine joint ventures to see if they create a monopoly.

Net Income

A cross-licensing agreement allows a company to use patents without paying royalties, unlike a standard patent license. The company gives up the right to collect royalties on its own patents from the other company. A company can subtract the cost of the royalty payments it makes from the value of the royalty income it receives to calculate whether signing a cross-licensing agreement with another firm is profitable. A company can also compare the cost of a lawsuit, including damages if it loses the lawsuit, to the cost of giving up its royalty income.

Company Size

Cross-licensing agreements are most valuable for large corporations. A smaller firm won't have enough of its own patents to license to the other company as an incentive. A smaller firm also has fewer products and researchers to manage, so it has a smaller risk of violating another company's patents. In some industries, such as computer chip manufacturing, it is difficult to create a new product that an existing firm's patents do not cover.

Leverage

A cross-licensing agreement gives a company leverage over its rivals. The cross-licensing agreement may grant the company the right to cancel the agreement if the other company infringes on a patent that the agreement does not cover. Canceling the agreement requires each company to start paying royalties or stop selling products in which it may have invested a large amount of money to produce.

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