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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