A licensing agreement is a contract in which you, the licensor, gives someone else, the licensee, permission to do something that they otherwise would not have the right to do. There are many situations in which a small business might use a licensing agreement:
While licensing agreements need to be customized to fit your particular business situation, there are some common terms that most licensing agreements should address.
A licensing agreement should reiterate that the licensor retains ownership of the licensed work, while granting the licensee permission to use the licensed work in certain ways. For example, is the licensee restricted to selling the goods or services in particular channels? Is the licensee required to display your trademark in a particular way? What quality control standards will you impose on the licensee? Can the licensee create derivative works? Who owns any improvements the licensee might make to the licensed work?
Exclusivity and Territory
The licensing agreement should also state whether the license has an exclusive or non-exclusive right to use the licensed work and where (or in what territory). In many situations, an exclusive license will be limited to a particular territory. For example, if you buy a franchise, you will want the exclusive right to operate that particular brand of franchise in a specific territory. But if you are a consultant who creates training materials for others, you might give your clients a non-exclusive right to use the training materials while retaining your own right to use the same or similar training materials with another client.
Like any contract, the licensing agreement should specify not only how much the licensee is paying for the right to use the licensor’s intellectual property, but it should clearly specify how payments will be calculated and when those payments will be made. A royalty based on some percentage of sales is common in many brand or product licensing agreements, but what the percentage should be will vary across industries and with the value of your particular brand or product. If the royalty requires some calculation, the licensor will also want to preserve the right to audit the licensee’s books and records to make sure the licensee is calculating the royalty correctly.
Other licensing agreements may set a flat fee, which might be a one-time fee or paid periodically. This is particularly common with content or copyright licensing and in software licensing.
If the licensing agreement involves the use of the licensor’s brand or trademark, the licensor will probably want to retain some control over how its trademark appears in marketing materials or on the underlying product. In some licensing agreements, the licensor will even want to have to a say in how much is spent advertising the underlying product or even the content and quality of the advertising campaign.
Generally, when you consider licensing your intellectual property, you will want to carefully select the licensee. Their use of your intellectual property should align with your vision and business goals for the licensed work. Because of this, you will typically want the licensing agreement to specify that the licensee cannot assign (or transfer) their right to use the licensed work to someone else.
On the other hand, if you own a fast growing business and have an eye towards one day selling your business to a larger company, then you may want to preserve your ability to transfer your agreements (including licensing deals) to the future ownership of the business.
Indemnification and Infringement
As a licensee, you will want some assurance that the licensor actually owns and has the right to license the licensed work to you. This typically comes in the form of a non-infringement clause in which the licensor promises that the work being licensed to you does not infringe the intellectual property rights of any third parties. If a third party does come along and claim infringement, then the licensor will defend such claims and pay all the related legal fees. On the other hand, the licensor will often want the licensee to indemnify the licensor from any other litigation caused by the licensee’s actions.
For example, if you license the right to use your brand to market a product in a new region, the licensee will want some assurance that a third party won’t come along and claim the brand infringes upon their trademark rights. However, if the licensee cuts corners in the manufacturing process and the product causes an injury, you would want the licensee to be responsible for the product liability litigation. (On a related note, you will also want to make sure the licensee complies with any applicable local laws and regulations.)
Term and Termination
Finally, the licensing agreement should set a limited timeframe or term for how the long the licensing agreement will last and whether the agreement will be renewable under the same or similar terms. And like all contracts, the licensing agreement should address what happens if things don’t work out. Under what circumstances should you be able to terminate the agreement? What actions by the licensee would make your brand look bad or otherwise impair the value of the licensed work?
Intellectual property gives you valuable exclusive rights, and licensing that IP is a great way to monetize those rights. But these contracts can be fairly complex and need to address a wide range of issues. If you are considering ways to monetize your intellectual property, then schedule a consultation today.