Field-of-Use Restrictions in Licensing Agreements

Abstract

A widely used clause in license contracts – the field-of-use restriction (FOUR) – pre-cludes licensees from operating outside of the specified technical field. When a technology has several distinct applications, FOUR allow the licensor to slice up his rights and at-tribute them to the lowest-cost producer in each field of use. This can improve production efficiency. With complex technologies, however, the boundaries of fields of use may be difficult to codify, entailing a risk of overlap of licensees ’ rights. We explore how this affects the optimal license contract in a moral hazard framework where the licensor’s ef-fort determines the probability of overlap. We show that depending on the contracting environment, the license agreement may include output restrictions and nonlinear royalty schemes