A licensing agreement is a contract between two parties, whereby the first party, licensor, grants the right to use the brand name, patented material, method or asset to the other party (the licensee). The licensee will then be authorised in accordance with the terms of the agreement to use the licensor’s IP for commercial gain. In exchange for the grant authorisation, the licensee typically pays a licence fee.
The purpose of a licensing agreement is simple -- to protect infringement of intellectual property. When the licensee seeks permission from the licensor to use their IP for their benefits, they reduce the risk of copyright infringement.
For instance, a moviemaker must seek the permission of a musician before using their music in the movie. Now, seeking permission doesn’t mean that the moviemaker has ownership of the IP, but that they can use it during the agreement term.
Licensing agreements are prepared to ensure that the licensee doesn’t misuse the IP of the licensor and pays the correct royalty fees.
The licensee will typically make royalty payments to the licensor and these payments need to be monitored and audited. For example, if the licensee is making X dollars by selling/ using the licensor’s IP material to create and sell their own product, they must provide Y percentage of the sales to the licensor.
The licensor will decide whether they offer an exclusive, non-exclusive or sole licensing agreements.
Exclusive Licensing Agreement - This type of agreement covers a license that is unique and limited to one party application. No person or company other than the named licensee can exploit the relevant intellectual property rights. Additionally, the licensor cannot exploit the IP or grant sublicenses under this agreement.
Non-Exclusive Licensing Agreement - In this type of agreement, the licensor has the right to grant licenses to individuals and organizations of his choice. This means there can be more than one licensee exploiting the same intellectual property.
Sole Licensing Agreement - In a sole license agreement, no person or company other than the named licensee can exploit the IP right of the licensor. However, the licensor can continue its use.
Trade secret licenses: Trade Secret licenses are unique and highly confidential. This type of agreement grants the licensee permission to use secret formulas or processes patented by the licensor. However, the licensor still has full control over the secret and can ask the third party to sign a non-disclosure agreement.
Trade mark licenses: Trade mark licensing agreements allow trade mark proprietors to grant rights to a third party to use their trade mark without the transfer of ownership. Most proprietors license their trade marks for commercial purposes, for the licensee to trade under the name or in branded goods.
Copyright licenses: In a copyright license, the licensor grants the licensee the right to use their work (such as music, articles, paintings). Typically copyright licenses apply to use of images or software.
Patent licenses: These licenses are typically complex. Under this license, patent owners have the right to grant someone else the right to use, sell, distribute their patented material. The rights granted maybe split. For instance the licensee may not be able to manufacture the product but may be able to sell the product. It’s beneficial for patent holders to invest in licensing because it allows them to get their patented product manufactured and distributed widely. This means they can focus on doing things they do best, while others market and sell their products, providing them with royalty payments.
Licensing agreement varies for one project to another, however, some common factors that all licensing agreements have are:
It is crucial to insert a straightforward payment clause in the licensing agreement. This clause states how and when will the licensee pay the licensor for the use of their property. The parties should negotiate the terms before finalising a payment method fit for their transaction.
This clause protects the rights of licensees by ensuring only they can exploit the IP of the licensor exclusively. The clause should also states that the licensor no longer has the authority to transfer IP rights to another company.
When this clause is added to the licensing agreement, it outlines that the third party can be granted access by the licensee to use the IP work of the licensor through a sub-licence.
No licensor wants their IP to be used in a bad light. Therefore, licence agreements should include a quality assurance clause. This section allows the licensor to perform quality checks and ensure their IP is used for sale, distribution, etc. in the right way.
In some cases, both parties add additional clauses to ensure maximum legal protection. For example, if a licensor wants that the agreement to remain solely confidential, they can add a non-disclosure agreement within the licensing agreement.
No matter the type of agreement, no party should sign the deal before fully understanding what it entails and the terms of the agreement. This applies to licensing agreements too. Both parties, licensor and licensee must be very thorough when creating a licensing agreement.
It is vital to define precisely what product, service or IP is being licensed and for how long and in what context. Also, it’s important to check that any ownership is registered, and full disclosure is given in terms of exploitation rights by the licensor and licensee. In the case of an exclusive license, you must check whether anyone other than the licensor is currently using their IP.
Before licensing anything, identify what role you have as a licensor or licensee. If you are a licensor, make sure there are no disputes with your registered trade mark. If you are a licensee, you must have clauses in place to protect your ownership during the terms of the agreement.
All licensing agreements are unique, and so are the terms of agreements. However, if the condition of the binding contract is breached by any of the parties, they may face legal disputes and financial penalties. To ensure there are no breaches, sit down with a lawyer and ensure you understand the terms of the contract.
Ultimately, the licensor is licensing their product for monetary profits. So, royalties, commissions and taxes must be discussed openly. Therefore, both parties should define how much royalty the licensor gets in different situations. Also, it’s crucial to lay down what happens if the licensee cannot obtain profit from the sales.
It’s a good idea to consider different scenarios that might cause problems in the future. For instance, what happens:
Before signing a licensing agreement, research the other party. Just like you research a brand’s reputation, credibility before making a purchase, investigate the licensor/ licensee prior to forming business relationships with them. Check online reviews, ratings and how well they operate.
Careful consideration before drafting the agreement ensures everything goes smoothly
As you can see, there are many types of licensing and multiple factors to consider when drafting a licensing agreement. You must seek help from a qualified IP lawyer to draft a well-written licensing agreement.
EAGLEGATE is a leading IP law firm in Australia. With over a decade of legal success, we have helped many businesses license their products/ services for commercial gain.
Our team of lawyers adopt a disciplined approach to analyse all aspects of the business and their intellectual property and accordingly advise you on what all should be included in a licensing agreement. We gather a deep understanding of both the parties involved -- the licensor and the licensee. This helps us protect intellectual property and minimize the likelihood of litigation for both parties.
To schedule a consultation about your IP licensing, contact us today. We are available via phone or email.