8 Important Things to Look for in a Licensing Agreement

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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.

1. Ownership

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.

2. Performance Requirements

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.

3. Exclusivity Clauses

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.

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4. Affiliates or Sub-Distributors

If 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.

5. Termination Clauses

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.

6. Product Liability

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.

7. Length of the Relationship

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.

8. Payments and Royalties

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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