Download For o-mode Licensing of K

Control Rights over IP
Corporate Venturing
and
Bankruptcy Regimes
Context: Cumulative R&D with
Licensing of Interim Knowledge
• Glaxo, Smith, Kline: 40% of Expected Sale
from Developing Outsourced Drug Ideas cf
• Pfeizer, without such a pipeline, for which
• WAS IT important that GSK participated to
a greater extent in Corporate Venturing, of
say Biotech start-ups, assigning GSK first
right of refusal on licensing their innovation
• If so, through what Specific Control Rights
Given Inalienability of RU’s IPR
• Which Implies that a (controlling) DU only
has this right of first refusal, but NOT that
of appropriating the RU’s IP, ex interim, cf
• As Aghion and Tirole, QJE 1994 assume!!
• Plausible sources of such advantage are:
• Prior Claim to Trade Secret Based License
• More subtly, impact of Restricting Coalition
Formation with Third Parties on Sharing of
And Choice over Licensing Mode
• Surplus from and Choice over Patented vs
Trade Secret Based Knowledge Licensing
• Former allows precommitment to exclusive
knowledge transfer, at the cost of leakage
of non-codifiable aspects to non-licensees
• Latter requires non-lumpsum licensing fee,
to prevent RU from selling her idea to third
parties, competing Development Unit DUs
Knowledge Licensing Model
• At time t= 0, RU puts in privately observed
costly effort e, which results randomly at
• Time t= 1- in a Knowledge level K in [0, 1],
its maximum probability of development as
• Marketable Product of Appropriable Value
V, if and only if Developer Succeeds Alone
• At t = 1, RU chooses, modulo a Controlling
DU’s first Refusal right, its Licensing Mode
Using Trade Secret, or Patent
• In Trade Secret or Closed mode, Licensor
and Licensee Bargain over Structure cum
Level of Licensee Fee, AFTER the contour
of the idea, communicative of the level of
K but not its full content, is provided to DU
• In Patent mode RU and DUs (sequentially)
Make Licensing Offers and Counteroffers:
Rejection of Counteroffer of one DU leads
to RU making her next offer to Other DU
Which Differ Contractually As
• Since Patent Records • With a Trade SecretCodifiable Aspects of
Based Licensing of
K, Licensing Fee is a
Knowledge K, RU has
Lumpsum Amount Fo • Moral Hazard w.r.t. a
• But, knowledge level
Clandestine Sale of K
L*K leaks to the NONto the Other DU also,
Licensee DU as well
• To mitigate against a
• Then at t = 1+, both
Deviating second sale
DU’s choose Efforts
RU gets a Contingent
Ei/j for Development
Share s in a Licensee
Payoffs in Development Stage
• For a Licensee DU is
Max{P(1-Q) - C(P; K)}
P
• For Non-Licensee DU
Max{Q(1-P)-C(Q;LK)}
Q
Where C(X;Y) is strictly
increasing & convex
in X, single-crossing/
decreasing vis-à-vis Y
• Licensee DU chooses
its P = Pc to maximize
{P(1-s) – C(P,K)}, and
• s(K;L) is the Incentive
Compatible Revenue
Share of RU, chosen
• To satisfy No Resale
to Other DU Condition
• s(K;L)*{Pc-Pc(1-Pd)}>
[{Pd(1-Pc) -C(Pd;K)} -
Lead to the Equilibrium Payoffs
• [To(Po;K) - Fo] for the
Licensee DU, same
as [To(Qo;LK)] for the
Non-licensee, where
• {Po,Qo} are arrived at
as Nash Equilibrium
choices in the contest
for development, post
• Exclusive Licensing of
Content of K to a DU
{Qd(1-Pc)-C(Qd;LK)}]
* [Tc(Pc;K)-s(K;L)Pc-Fc]
for the Licensee DU and
[s(K;L)Pc+Fc] to the RU
where Fc +/- is a Lump
Sum to/from RU at t =1;
s(K;L) is decreasing in
{K, L}; Joint Surplus Tc
increases in both {K, L}
With the Characteristics that
For o-mode Licensing of K
• To is increasing in K, and
decreasing in L, so that it
is preferred to the c-mode
for low levels of Leakage
L and, as it turns out, for
lower levels of K, given L
• Po(K;L) is increasing in K,
but Qo(K;L) initially goes
up then decreases with K,
making Tc < To, higher K
Whereas c-mode License
• That’s IC for Exclusivity
may NOT exist, for low
{L, K} but when it does
• Even [s(K;L)*Pc(K;L)] is
strictly decreasing in K so
• An (RU’s) Interim Wealth
Constraint Needing Fc >0
May Bind only for Low K,
when {s(K;L), Fc} satisfy
Nash with Outside Option
Imply that the Licensee DU May
• Prefer O-mode Licensing of K Following it
being Patented, by its wealth constrained
Licensee RU even when To(K;L) < Tc(K;L)
• If given the level of leakage L thus caused
[To(K;L)-Fo] > [{1-s(K;L)}*Pc(K;L)-C(Pc;K)]
• If RU is independent(ly financed ex ante) it
can, we assume, approach its VC financier
to advance any Fc < 0, required to be paid
to Licensee DU for her to Agree to c-Mode
Force Interim Inefficient Choice
of the Licensing Mode on RU
• For a RU Controlled by its Licensee (to be)
DU, via an ex ante (t=0 agreed) Corporate
Venture Contract, which Prohibits the RU
Contingent Revenue Sharing Contracts vis
-a-vis any Third Party until Controlling DU
exercises her right of first refusal, such an
Interim Recourse to an Independent VC is
Infeasible; Unformed Legal Entity Can Not
Promise DU a Legally Binding Fc Contract
To Reduce RUs Payoff When It
• Produces Low Level of Interim Knowledge
K, compared to that to an Independent VC
Financed RU, thus Incentivizing it Ex Ante
to Expend Costlier Effort e (attempting) to
Produce Higher Interim Knowledge Levels
Such a Interim-Inefficient DU Control Right
Constraining “its” RU, in forming Coalitions
Prior to Bargaining over a Licensing Mode
Choice, May Remain Renegotiation-Proof!
Our Earlier Work Has Modeled
• This tradeoff for differing interim innovative
knowledge levels, leakages resulting from
descriptions thereof, without delving into
• How a Control right of a Downstream DU
over its sponsored RU may affect Tradeoff
• With potential impact on the RU’s ex ante
Research Incentive, to Generate Research
Ideas with Higher Development Likelihood
Here, RU’s Wealth Constraint is
• Important for its Ability to Influence Choice
over the Interim Licensing Mode, because
• When the Optimal Choice is Trade Secret
based, RU’s required Revenue share may
imply IT making a positive interim Transfer
to its licensee DU, to prevent IT preferring
licensing post-patenting, if leakage of RU’s
knowledge from it is high enough, thereby
lowering RU’s Open-mode Licensing Fee
Binding for Lesser Innovations
• Precluding Financial Coalition Formation w
Third (VC) Parties at Interim Stage Leads
to RU being more severely Penalized if it
generates lesser Innovations, which she’d
have to Patent, unlike the more Promising
• Can such Control Rights, which lowers the
RU & DU interim surplus for lower (likely to
develop) innovations, survive an ex Interim
Renegotiation- Proofness Norm
• The Answer is Yes, since any Coalition of
an RU with a Potential Third-Party Partner,
who’d advance her moneys to pay her DU
to persuade him to cede them the requisite
revenue share for trade secret-based sale
of her interim knowledge, CAN NOT make
a legally binding promise/contract to pay a
DU more than the maximum of (i) a Nashlike split, and (ii) his Outside Option payoff
In Contrast, when Alternative
• Interim Knowledge Levels represent MultiFaceted Potential Applications of the Core
Interim Innovative Idea, then even if First
Development effort Fails, maximizing the
Licensing fee for an Alternative Application
may enhance both the interim Liquidation
Value, as well as ex ante research efforts
• Different (“Old vs New Economy”) Sectors
are Likely to Differ on these Dimensions of
Main Empirical Implications
• Multi-facetedness of Innovative Ideas, cf
ex ante costliness of (directed) research
efforts, needed to generate these, so that:
• In more Traditional Sectors, Tough Control
mechanisms such as Corporate Venturing
may matter more ex ante, whereas in the
• New Economy Sectors, Softer Bankruptcy
Regimes, allowing Debtor-in-Possession
Finance, may Improve Research Incentive
In Context of Cumulative R&D
• Corporate Venturing May Matter Because
it Enables the Controlling DU to Lower the
Payoff to Its Controlled RU Selectively, at
Lower Knowledge levels, by Influencing
RU’s Interim Choice of Mode of Licensing
• Resulting in Greater, and Overall SurplusEnhancing, Effort Exertion ex ante by RU
• Indeed, as a result we may even Observe
More Patenting (o-mode licensing) by RUs