Patent Owners and Lessors

SIC 6794

Industry report:

This classification includes establishments primarily engaged in owning or leasing franchises, patents, and copyrights that they in turn license others to use.

The patent owners and lessors industry deals with the sale of intangible rights in property. This business has often become controversial, as it is sometimes difficult to determine who created the property and who is entitled to transfer rights in it. Another problem has been making a distinction between similar examples of intangible property, such as two similar songs or books.

This industry covers three forms of intangible property: copyright, franchise, and patent. Copyright generally refers to literary or artistic products of an intangible nature; franchise deals with the trademark and goodwill of a business enterprise; and patents concern products and industrial processes.

In general, licensing entails granting permission to perform a specified activity. In the case of this industry, it constitutes permission to use someone else's intellectual property. Copyright, patents, rights in music, and performance rights are all aspects of intellectual property. Rights in these forms of intangible property are protected by law to a similar extent as rights in real property. These licenses are personal to the licensee and thus are not transferable or assignable except by express agreement. They are also generally revocable at any time.

Franchising entails granting rights to operate a business of a uniform type to a franchisee by permission of the franchiser. In general, the franchiser grants an individual, (the franchisee), the right to operate a business under its name. In exchange for a substantial portion of the individual business' revenues and support from the franchiser, the franchisee pays an up-front fee and a portion of revenues and agrees to use specified products and procedures in the operation of the business. According to the U.S. Department of Commerce, 40 percent of all retail sales are from franchise businesses.

The major components of the patent owners and lessors industry include copyright buying and licensing, franchise selling and licensing, music licensing to radio stations, sheet and record music royalties, patent buying and licensing, and performance rights licensing. Each of the various entities that constitute this industry have different organizations and structures.

Copyright Buying and Licensing.
Under copyright law, the writer or originator of literary or artistic productions receives sole and exclusive privilege of the making and sale of copies for a prescribed statutory period. This right could be bought, sold, and licensed, just as any other rights in property. For example, the rights to copy and sell the recording of a song could be sold by the writer to another party. This party might license the rights to the song to a third party, allowing this party to produce and sell copies of the recording in a specified area, such as another country.

Franchise Selling or Licensing.
Under a franchising arrangement, the franchisee receives the exclusive right to use brand names, trademarks, patents, as well as the right to engage in the manufacture, sale, or provision of products or services owned by the franchiser in a specified area for a fee. After the business begins operation, the franchiser continues to provide support in the form of supplies, advertising, and managerial aid in exchange for an operational fee based on the franchisee's revenue. This relationship allows the franchiser to expand its operation quickly without directly investing large amounts of capital. It also allows the franchisee to start a business under the sponsorship of an established firm, capitalizing on its business goodwill, product line, and operating ideas and methods.

This form of enterprise first became popular in the 1960s and was especially important in the growth of the fast food industry. In 2010, there were more than 1,500 franchising companies operating in the United States, with 320,000 franchised outlets. These establishments generated more than 40 percent of all sales by U.S. businesses, according to USA Today. In 2010, McDonald's Corporation had 12,392 U.S. franchise operations, in addition to 13,817 Canadian and foreign locations and about 6,257 company-owned restaurants. Although McDonald's had the most total stores worldwide, Subway had the most franchise operations in 2010, with 32,000 locations in 90 countries.

During the mid-2000s numerous new industries entered the franchising marketplace. Fitness and weight-loss franchises, such as Curves, rapidly increased in numbers, as did specialty coffee houses, including newcomer It's a Grind. Other fast-growing franchises included tech consulting, eBay drop-off stores, children tutoring, and senior care. Tax and accounting services and cleaning services joined fast food as some of the best franchising opportunities in the mid-2000s. According to Entrepreneur's Franchise 500, the top five franchises in 2010 were Subway, McDonald's, 7-Eleven, Hampton Hotels, and Supercuts.

Music and Film Licensing.
The owner of a copyright in music has the exclusive right to perform the work. However, it would be very difficult for an individual owner to police and enforce this right against the numerous radio stations, nightclubs, and other music sources in the United States. Similarly, it would be very difficult for an individual radio station to negotiate directly with the several hundred copyright owners whose works they use each day. These difficulties have been overcome by performing rights societies, which act as clearinghouses for performance rights on behalf of many copyright owners. Thus, the individual stations could buy a blanket license for all of the music represented by a given society for a fixed fee. The society then pays the music creators.

The three most important music copyrighting societies in the United States were the American Society of Composers, Authors, and Publishers (ASCAP); Broadcast Music, Inc. (BMI); and SESAC, Inc., formerly the Society of European Stage Authors and Composers. In 2008 ASCAP collected almost $820 million in royalty fees for its members, whereas BMI distributed $798 million to members in fiscal year 2010.

Throughout the 2000s the industry battled copyright infringement from peer-to-peer networks and bootlegging. Internet file sharing caused major headaches with as much as 90 percent of all downloaded music obtained illegally and totaling up to 2.6 billion downloads per month. The industry won a significant battle in 2005 when the U.S. Supreme Court overturned a lower court's ruling. In Metro-Goldwyn-Mayer Studios v Grokster the U.S. Supreme Court found that Internet file-sharing services can be held responsible if their customers use their software primarily to swap music and movies illegally.

Although file-sharing firm Grokster argued that the company had no control over how their customers used the software, the industry maintained that such file-sharing sites are maintained for the primary purpose of illegally transferring copyrighted materials. Although many recording artists opposed file-sharing networks, some, including Brian Eno, the rock duo Heart, and rapper Chuck D, promoted file-sharing as a viable distribution method. Although the ruling favored the industry, no one expected illegal downloading to disappear. Techies can move operations offshore to avoid U.S. infringement laws or mask their online identity to avoid prosecution.

Counterfeit CDs and DVDs created and sold overseas were also a concern to the industry, with an estimated $3.5 billion in lost royalties in the mid-2000s. According to the European Union, in 2003 more than 32.6 million counterfeit DVDs, CDs, and cassettes were seized. Thailand supplied Europe with the most pirated recording, with 18 percent, followed by Malaysia, Pakistan, and China with 14 percent, 13 percent, and 8 percent, respectively.

Sheet and Record Music Royalties.
A royalty describes the payment made to the holder of the right to use patented or copyrighted property. Royalties are calculated as a percentage of income arising from the commercialization of the owner's rights or property. For each copy of printed or recorded music sold, the copyright owner receives a fixed percentage of the revenues.

Patent Buying and Licensing.
A patent entails granting an individual the privilege of exclusive rights to make and sell an invention for a term of years. The difference between a patent and a copyright is that the former protected the right to exploit a particular process or design in making a physical product and was usually industrial in nature. The latter pertains to ideas and purely intangible creations of the mind and is usually artistic in nature.

As with other property rights, patents can be sold or licensed. For example, an inventor could patent the design of a transmission system and then sell the right to produce the system to a major automobile manufacturer. The manufacturer could in turn allow one of its suppliers to produce the system for a limited time or for limited purposes by granting it a license. Just as patent rights could be bought, sold, and licensed, they could also be leased by being given for use for a fixed period for a fixed sum. In 2008, the United States granted 191,927 total patents. In 2004 the number of trademarks registered to U.S. citizens totaled 97,571. Of all patents issued, 90 percent were utility patents for the invention of a new or improved item. In 2004 there were 2,613 cases in litigation for patent infringement and 2,920 for trademark infringement.

Performance Rights Publishing and Licensing.
Certain performances of copyrighted material are exempt from copyright protection. For example, performance of copyrighted work without any commercial purpose and without the payment of any fee, as long as there is no admission charge or provided that such revenues are donated for educational, religious, or charitable purposes, are exempt. All other performances require permission of the creator. This permission is obtained by requesting a license, which is the right to perform the work for certain purposes and with certain restrictions. Similarly, printed material could not be copied and used by any party, except the creator, unless a license was granted allowing the use of the material for specified purposes.

Copyrights and patents were well-established concepts, tracing their history to the common law of Great Britain. The explosive development of technology and popular culture that began in the mid-1990s and continued throughout the 2000s led to the increased importance of this field. The industry opposed the Digital Millennium Copyright Act (DMCA), which allowed consumers to circumvent digital copyright protect regimes for "fair use" purposes. Under previous legislation, bypassing a digital copyright protection was a federal offense. In 2009 the U.S. Copyright Office released rulings that specified which classes of works were exempt from DMCA restrictions. The Family Entertainment and Copyright Act, passed in 2004, made pirating films by using a camcorder to videotape the film as it played illegal and punishable by three to five years in prison.

© COPYRIGHT 2018 The Gale Group, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. For permission to reuse this article, contact the Copyright Clearance Center.

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