What does this mean for companies?

It means that they should treat licensing as an important corporate activity.
Licensing, of course, can flow in both directions. As well as licensing IP from others, companies can also license their own IP to third parties. Put simply, licensing-out is an important means of generating revenue; licensing-in is an important means of entering new markets.
Licensing can be a simple arms length transaction - whereby a payment is made for the privilege of using someone else's intellectual property without any other commercial relationship being established between the parties.
Alternatively, it can be a means of establishing or consolidating a commercial relationship between parties - as in technology transfer, contract research and franchising.

The royalty calculation

There is no fixed financial basis for licensing: it is a matter of horse trading. However there are certain aspects which are common, such as an upfront payment, a royalty percentage of ex works price, guaranteed minimum annual royalty, and possibly a reducing payment for increased activity.
Thus while the royalty figure can be anything agreed between the parties, there are certain established norms. One well known computation involves dividing the profit margin between the licensor and licensee in accordance with a set formula.
It is also possible to apply a fixed percentage which may be related to the 'average' in the relevant industry, and then add this on to the base price of the product. Typically, for a simple mechanical invention the royalty may be 5-7% of ex-works price.
Higher rates may be appropriate where higher margins can be justified, e.g. for drugs, or where a market has already been established and an 'uplift' on the royalty rate is therefore appropriate

Agreements

The licence agreement should spell out the main features of the licensee/licensor relationship. The basis of the agreement will be intellectual property or similar rights, such as patents, trademarks, designs, know how, etc. and these should be clearly identified.
Some kind of guarantee of performance such as a minimum annual target royalty is usually wise. The licensor and licensee will often wish to consider complicated exclusions such as territorial restrictions, and it is necessary to check whether these come up against US antitrust or EU regulations, or other relevant legislation.
Local laws may also impose restrictions on the movement abroad of royalty revenue, necessitating some creative accounting in order to enable the licensor to derive proper benefit.

Assignations

If you wish to assign (i.e. sell) the idea to a third party then you must bear in mind that once you have transferred the rights to the third party you retain no ownership rights therein and the party you have assigned the rights to will have the right to use the relevant form of IP. If you wish to use the IP yourself to exploit your idea, then you have to give thought to various issues, such as whether or not you have the resources to fully utilise the IP. If you do not have the resources to fully utilise the IP yourself then you can decide to licence the rights to third parties to allow them to use the rights. In doing so they can make payments (often referred to as "royalties") to you for the use of the IP. Assignations are referred to as "assignments" in English law.

Licences

Many parties who generate IP decide to licence the rights to third parties to allow the third party to make use of the relevant IP while paying a royalty to the owner of the IP. If you licence the IP to a third party you retain the ownership of the IP - all you are allowing the third party to do is have the right to use the IP for certain purposes. This can be useful if the owner of the IP does not have the resources or the inclination to use the IP for commercial purposes and is therefore often used by universities to ensure that technology finds its way into the market place.
A licence really entails the owner of an idea giving someone else certain rights to exploit and use that idea. Such rights can be restricted to one country, a group of countries or can even cover the whole world. A licence can also be restricted to certain market sectors and can be exclusive or non-exclusive.
In exchange for the rights to use the IP, the party who is receiving the rights (the "licensee") makes a payment (a "royalty") to the party who owns the IP (the "licensor"). As with most commercial relationships the licence will usually be recorded in writing. Indeed, for an exclusive licensing arrangement, a written licence agreement is required. It is essential however that if you own IP and are thinking of licensing it to a third party that you ensure that the licensee is the most appropriate party to exploit your idea/innovation. It is essential therefore that you undertake an appraisal of the relevant licensee to ensure that it actually has the skills to take your idea to market and thereafter has the ability to actually sell the product.

Licences and assignations can be complicated agreements and therefore advice should be taken from a lawyer with experience in this area of law.

Matching buyers and sellers

There are a number of ways in which licensing opportunities can be promoted and found: trade fairs, licensing consultants, contract research and technology transfer organisations, government and academic research institutions, large organisation surplus technology departments, internet databases, patent searching etc.
There are now also internet sites that provide searchable databases of licensing opportunities, from new technology to photo libraries, and searchable online patent databases provide browsing possibilities for potential licensees It should be pointed out that licensing is a complex area and assistance is desirable, both when it comes to finding and assessing an opportunity, as well as in resolving legal matters.
Members of the Licensing Executives Society, licensing brokers and consultants, patent and trademark attorneys, specialist accountants and solicitors can all offer assistance in this.

Based on an original article by Barry Quest Nov 2000, Derwent IP Matters.