About Nothing

Drill-Bit Manufacturing company, Inc. wants to license its product out to Mexico. Dill-Bit should take certain steps to protect its IPR. Within the Mexico licensing agreement, Drill- Bit manufacturing should lay out what its expectations are and how they should be met.

Drill-Bits success largely depends on the quality of its products. This has been apparent in both the home market and over seas. Its German manufacturer has kept the same standards as in the U.S. which has lead to a licensing agreement that has been completely satisfactory. Drill-Bit must emphasis the importance of this matter in the licensing agreement with Mexico. One problem that can arise is if the Mexican manufacturer does not comply with the integrity of the manufacturing process to maintain quality. This will lead to a gray market. This might happen if the Mexican manufacturer is not able to charge the same premium as in the home market. Since the U.S. licensor might have established such a good reputation of quality in the U.S. market it is able to command a substantial premium for its product there. In the licensing agreement with Mexico Drill-Bit's should therefore make a provision that if its drill bits are not to standard, it will revoke its licensing agreement with Mexico.

Drill-Bits should also concern itself with protecting the company's intellectual property/know-how. This could be done by Drill-Bit (licensor) if they demand that the licensee's employees enter into a confidentiality and non-exploitation agreement in which the licensor could enforce in the event of a breach or threatened breach. Protecting the company's intellectual property is crucial for the success of any business. One other thing that should be mentioned in the licensing agreement is what will happen if the licensee makes any improvements to the licensed product. Who will have control of the new technology?

Payment by the licensee is crucial to the business. It was noted in the facts that temporary shortages of hard currency and exchange controls have lead to delayed payments. Drill-Bit should try to control these risk. Drill-Bit should also concern itself with other currency risk. The two main currency risks are fluctuation risk, and inconvertibility risk. One way that Drill-bit could help control these risk is to include in the licensing agreement that the licensee will pay lump-sum, hard currency payments as soon as possible. Another possibility is to build currency adjustments mechanisms into contractual payment terms through profit margin preservation provisions or unitary index adjustment factors as stated on page 555.

Drill-Bits has made it clear that it does not want the Mexican licensee to sell in competition with the sales of its German licensee to the Middle East, or to Asia. One provision that Drill-Bit could take to help assure that this does not happen is to include a geographic limitation restriction in the Mexican licensing agreement. This geographical limitation would restrict where Mexico could sell its products. It seems that Drill-Bit only wants its Mexican products sold in Latin American countries. It does not want it to compete overseas against one of its other license's. This provision would be a good idea for the moment because it would allow for the Mexican manufactures to charge a different price without affecting other aspects of Drill-Bits businesses. One other area that Drill-Bit could look to is to set quotas. By setting quotas, it would help set goals for the Mexican manufacturer. This would help in avoiding problems in the distribution of the product by the licensee.

General trends and recent developments that have taken place in recent years include TRIPS. TRIPS should provide minimum standards of intellectual property protection and a reliable worldwide system of enforcement. Some good reasons to transfer property rights compared to building a factory in Mexico would be that if a factory was built in Mexico the U.S. company may subject itself to labor laws, environmental laws, tax laws, technology transfer laws, laws governing the appropriate level of foreign ownership of business and many other such laws. For all the reasons mentioned above a transaction in Mexico might be affected.

Question Two:

The 1993 rules will affect Drill-Bit in the sense that it now has to go through a lot more government red tape to create a business in Mexico. Drill-bit will have to first get a permit from the Secretariat of Foreign Relations. This is required