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A licensing agreement is a written contract between two parties, a licensor and a licensee, that gives permission, under certain conditions, to use another party’s property, like a brand, patent, or trademark.
The licensor benefits from the relationship, too, in the form of royalties; the revenue generated from a licensing agreement.
Licensing agreements can take many forms, including:
Since licensing agreements protect property, scrutiny of any agreement by a professional lawyer is worthwhile. Here are 8 important things to look for in a licensing agreement.
The most important thing to establish is your ownership over anything you are trying to secure a licensing agreement for. For example, in the case of a trademark, you want to ensure it’s already registered in your name.
In that same vein, you must also ensure you are prepared to defend your ownership against claims or disputes. Again, an excellent way to stay prepared is to keep any documentation or evidence of ownership accessible but protected.
Here is an article with examples of licensing agreements.
Performance requirements are sets of stipulations that ensure the original entity’s name is not tarnished and that the brand's standards are kept intact.
For Holiday Inn, their standard is all about keeping their properties well-maintained. They make regular inspections at licensee hotels to ensure hotel owners keep up with the brand standard. If the licensee hotels are not meeting an acceptable standard, they could lose their licensing agreement.
Here is an article about three common types of licensing agreements.
An exclusivity clause or an exclusivity agreement is added to license agreements, in part, to protect their market.
In the case of the Holiday Inn, putting another hotel on the next block of an existing hotel would be counterintuitive. One hotel would just suck business from the other. Under exclusive exclusivity clauses, territory restrictions can protect the market territories around their licensee businesses.
Here is an article about the risks of being a licensee.
Meet some lawyers on our platformIf an affiliate or sub-distributor would be considered in the arrangement, it must be outlined in the license agreement. For example, a subsidiary relationship would allow the licensee to permit a third party to use, or sub-distribute, their property.
For their protection, savvy licensors should ensure expectations of this nature are detailed in the licensing agreement before signing.
Here is an article about the 25% rule for royalties.
A termination clause or a contract termination agreement is included in nearly every licensing agreement, and for a good reason. Licensors need to have the flexibility to cut ties easily if the licensee isn’t holding up their end.
On the other end of the spectrum, if you are looking to be a licensee, consider the implications if you find out the product you agree to sell isn’t a good product after all. It is important to outline agreed-upon exit plans for either party in this section.
Here is an article about what a termination clause should include.
The product liability portion of the license agreement covers which party is penalized if the “use, consumption, storage or transportation of the product cause[s] harm.” If you are looking into a licensee opportunity, make sure the product is something you want to put your name on.
Here is an article about whether licensing an invention is a good idea.
The length of the relationship is another part of a licensing agreement you should be sure to review. It is usually measured in years against a baseline or effective date. A two- to three-year contract is common.
Here is an article where you can find out if you are using the right kind of licensing agreement.
The section of the licensing agreement covering payments and royalties outlines how and when a licensee will pay the licensor to use their property. It is important to flesh this part out at the beginning, as this will set the tone for the entire agreement.
Most licensing agreements define royalties as a percent of sales or a flat payment per unit.
With licensing agreements, the devil is truly in the details, and you want to ensure those details are handled by a seasoned lawyer.
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ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.
Benjamin is an attorney specializing in Business, Intellectual Property, Employment and Real Estate.
I am a software developer turned lawyer with 7+ years of experience drafting, reviewing, and negotiating SaaS agreements, as well as other technology agreements. I am a partner at Freeman Lovell PLLC, where I lead commercial contracts practice group. I work with startups, growing companies, and the Fortune 500 to make sure your legal go-to-market strategy works for you.
Terry Brennan is an experienced corporate, intellectual property and emerging company transactions attorney who has been a partner at two national Wall Street law firms and a trusted corporate counsel. He focuses on providing practical, cost-efficient and creative legal advice to entrepreneurs, established enterprises and investors for business, corporate finance, intellectual property and technology transactions. As a partner at prominent law firms, Terry's work centered around financing, mergers and acquisitions, joint ventures, securities transactions, outsourcing and structuring of business entities to protect, license, finance and commercialize technology, manufacturing, digital media, intellectual property, entertainment and financial assets. As the General Counsel of IBAX Healthcare Systems, Terry was responsible for all legal and related business matters including health information systems licensing agreements, merger and acquisitions, product development and regulatory issues, contract administration, and litigation. Terry is a graduate of the Georgetown University Law Center, where he was an Editor of the law review. He is active in a number of economic development, entrepreneurial accelerators, veterans and civic organizations in Florida and New York.
