A licensing agreement is a written contract that gives you permission to use another party’s property under a certain set of conditions. The two parties involved in this agreement are the licensor (the one allowing permission) and a licensee (the one gaining permission).
The Purpose of a Licensing Agreement
Licensing agreements ensure that you have legal permission to use another person’s or business’s property. For instance, if you were to use an artist’s song in a commercial, you would need to sign a licensing agreement to legally do so. If you were to go ahead and use the song without permission, you may infringe on copyright laws and risk being sued or fined.
Most common licensing agreements include for intellectual property, such as patents, trademarks, and copyrighted materials. Common copyrighted materials include music, film, video, and artwork. While a licensing agreement doesn’t give you ownership over another entity’s property, it does allow you to use it as long as you are following the parameters the agreement outlines.
Advantages to the licensor include:
- The licensor being able to utilize the licensee’s distribution network to quickly enter into new geographical regions and foreign markets
- The licensor facing lower capital requirements and lower costs due to not having to invest in distribution
- The licensor having the ability to generate passive revenues through royalties
- The licensor being able to gain the expertise and skills of the licensee
Advantages to the licensee include:
- The licensee gaining access to established intellectual property and being able to enter the market more quickly
- The licensee not having to pool resources to conduct research and development to develop their own products or services
- The licensee being able to generate revenues by using the intellectual property of the licensor
A licensing agreement includes several sections and factors, with details that must be negotiated by the parties.
- Exclusivity and Territory
The licensee is granted the exclusive right to make and sell the product in a specific territory. The licensor agrees not to allow anyone else to sell the product in that territory. This part of the agreement usually has a term limit attached to it.
- Subsidiary Licensing
The licensee may or may not be granted the right to allow someone else to make or sell its products. This depends on the specific terms of the licensing agreement.
Many license agreements involve royalty payments for use of a license. This section outlines how the licensee will pay the licensor for use of their property. As stated before, there are many different ways to negotiate royalties. When deciding which method is ideal for both parties, you must consider exchange rates and inflation.
- Monitoring and Quality Assurance
To protect their product, licensors require specific tests and monitoring of sales. The tests might include an initial sample of the product to make sure the quality is acceptable. In addition, the licensor may claim the right to monitor sales to check that products are not being too heavily discounted and that quality is kept high.
Within the license agreement, as with other types of contracts, there may be sub-agreements. For example, the licensor may require a non-disclosure agreement to keep the licensee from disclosing proprietary product features or processes to others. The licensee, in turn, may require the licensor to sign a non-compete agreement, which can keep the licensor from breaking the agreement by allowing someone else to sell the product within the licensee’s exclusive territory.
Having a well-written licensing agreement is important for both licensees and licensors.