Restrictions on export activity due to licensing arrangements

A considerable number and variety of restrictive provisions can be and are included in licensing agreements and contracts. Such restrictions can be classified into two categories: restrictive provisions on exports; and restrictive provisions affecting the export potential and activity of a firm in the developing country concerned. The restrictions that may be placed on exports are: global bans; prohibition of exports to specified countries; permission to export only to specified countries; the requirement of prior approval from the licensor for exports; export quotas; price controls on exports; the restriction of exports to specified products; permission to export only to, or through, specified firms; and prohibition of exports of substitute products.

The use of export restrictions enables the licensor to regulate the competitive impact of the licensee's activities upon his own interests in other markets. The different types of export restrictions vary in intensity and can be used individually or in combination with one another. The most restrictive is the global export prohibition. In such cases, the economic activity of the licensee is limited to his domestic market; and frequently the licensee is also prohibited from selling the products covered by the licence to any third party who would export them. The requirement that the licensee obtain the licensor's prior approval to export is less restrictive, in that the possibility of exporting is not ruled out; but the licensor retains control over exports, and reserves the option of a global ban. As an alternative, approval for exports to specified countries may be provided for in the licence agreement. The extent of the restrictive nature of this provision will depend largely on the relative bargaining powers of the licensor, the licensee, and the government of the licensee's country.

Not all export restrictions are territorial constraints. A licensor can place a ceiling on the licensee's exports by means of an export quota, expressed in physical or monetary terms. This can either be coupled with a territorial limitation or used by itself. In the latter case, the competitive impact of the licensee's export activity is limited rather than directed. In addition, a licensor can use, singly or in connection with some form of territorial constraint, a provision restricting exports to specified products or specified product forms, and a provision prohibiting the exportation of products that are similar to, or substitutes for, the licensed goods. The latter restriction is frequently related to prohibition of the use of a trademark in export sales. Finally, the licensor can attempt to use the licence contract for the purpose of retaining control over the export (as well as of the domestic) price of the licensed product.

Other potential restrictive provisions deal with the tying of purchases of essential inputs to the licensor; restrictions on production patterns; payments of a minimum royalty; restrictions on the use of the acquired technology after the termination of the contract; restrictions on disclosure of the technology used; agreements not to challenge the validity of patents and trademarks transferred; and the mutual exchange, or unilateral grant-back, of technical improvements.

Restrictions contained in licensing agreements are the most common form of restrictive business practice to which developing countries are subjected. The extent to which provisions are restrictive varies from case to case.