A licensing agreement is a contract between two parties, whereby the first party, the 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 infringement of intellectual property rights.
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 licence 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 its 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 licences: Trade secret licenses refer to the licensing of unique and highly confidential information to another party. This type of agreement grants the licensee permission to use the secret information, such as formulas of the licensor. However, the licensor still has full control over the secret information and can control how the third party uses the trade secret and require the licensee sign a non-disclosure agreement.
Trade mark licences: 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 and services. It is essential under trade mark licence arrangements that the trade mark owner controls use of the trade mark. If it does not do so, the trade mark may become vulnerable to removal for non-use.
Copyright licences: In a copyright licence, the licensor grants the licensee the right to use their copyright rights (known as works - such as music, articles or paintings). Typically copyright licences apply to use of images or software. For instance an End User Licence Agreement (or EULA) is a form of licence agreement that permits a software user to use the software.
Patent licences: Patent licences are typically complex. Under a patent licence, patent owners grant someone else the right to exploit the invention that is the subject of the patent. That is the licensee will typically have the right to manufacture, have manufactured, sell and distribute products that are made in accordance with the patent. The rights granted to the licencee maybe also 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 a properly drafted licence because it protects their rights in the transaction by clearly defining the activities permitted by the licensee but also the royalties that are to be paid to the licensor for the exploitation. This means the patentee can focus on other business, while others market and sell their products, providing them with royalty payments.
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Licensing agreement varies from 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 a 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 agreement before fully understanding what the agreement entails and their obligations under the agreement. In the case of licence agreements both the licensor and licensee should ensure that the licence agreement properly records the nature of the agreement and captures the finer details of the deal struck between the parties.
It is vital to define precisely what product, service or intellectual property is being licensed, the scope of that license and the term of the licence. Also, it is important to confirm that licensor has the right to licence the rights granted under the patent either as an owner of those rights or an exclusive licensee itself. In the case of an exclusive license, it is essential to ensure that no other person holds a competing licence.
Before licensing anything, identify your role in the agreement, either as a licensor or licensee. If you are a licensor, ensure there are no disputes with the rights granted under th e licence and you haven't granted any competing rights or entered into any agreement that would otherwise cause you to breach the new agreement. If you are a licensee, you must have clauses in place to protect your rigths to use the rights granted 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. Ensure there are clauses in place in the licence agreement to determine what rights each party has on breach of the agreement and set down how the agreement can be terminated.
Ultimately, the licensor is licensing their intellectual property rights or products for monetary profits. So, royalties, commissions and taxes must be discussed openly. Both parties should define how much royalty the licensor is paid, how the royalty is calculated, when it is paid and how the calcuation of the royalty can be audited. Also, it’s crucial to lay down what happens if the licensee cannot perform under the agreement and makes no sales.
Consider different scenarios that might cause problems in the future. For instance, what happens:
Before signing a licensing agreement, research the other party and the rights to be licenced. 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 can avoid issues later.
As you can see, there are many types of licensing and multiple factors to consider when drafting a licensing agreement. You should seek help from a qualified IP lawyer to draft a well-written licensing agreement taking into account the specific nature of the agreement between the party.
EAGLEGATE Lawyers is a leading IP law firm in Australia. With over a decade of legal success, our lawyers 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 client's business and their intellectual property and 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 and the intellectual property licensed. Our attention to detail helps protect intellectual property, rights under the agreements and minimizes the likelihood of litigation.
To schedule a free initial consultation about your IP licensing, contact us today.