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.
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.
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.
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.
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.
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.