Intellectual property (IP) is likely a business’s most valuable asset. However, they can stand to earn more money by licensing those rights to other companies. If you’re considering licensing IP assets to other companies, protect your business by learning about what they involve.
Let’s get started by looking at what licensing means first:
What Does Licensing Mean?
Licensing is a legal agreement between a licensor and licensee. The licensor grants intellectual property rights to the licensee for profit. IP assets may include patents, trademarks, copyrights, and designs. They are exchanged for financial consideration and used in business relationships. Licensors have the right to earn profits from revenues on licensed materials.
Here is an article that also explains what licensing means.
How Licensing Works
Licensing works by granting another company the right to engage with another brand, service, or product. Companies with limited capital are usually good candidates for making licenses available. Licensing gives them the chance to scale their businesses while supporting a profitable return.
For example, beverage companies grant licensing rights to restaurants. These rights allow the restaurant to promote the vendor’s products and use their logo in marketing materials. They can also make money from beverage sales.
Important Terms Related to Licensing
The licensee receives the right to make and sell the product within a specific geographic area. Additionally, the licensor promises not to sell the relevant product within the given limitations. Therefore, this section of the agreement usually has a term and geographic stipulations attached to it.
The licensee may not receive licensing rights to pass them onto a subsidiary or affiliate. However, these terms are negotiable.
For example, suppose you authorize trademark licensing on your composed music. In that case, you can restrict the licensee from granting permission for use to third parties or subsidiaries.
Licensing must include some form of consideration in exchange for rights. Consideration typically comes in the form of royalty payments, fees, and other expenses. Licensors can tie this exchange into licensee performance to earn even more significant revenues.
The licensor’s most proactive way to protect their legal rights is by requiring licensees to sign a licensing agreement . Licensing agreements are legally binding documents between two parties. They define the scope and depth of the relationship while establishing legal terms and conditions of these rights. Licensees may try to negotiate a non-competition agreement with licensors as well.
Types of Licensing
Businesses can break down licensing types according to their industry, size, and relationship to the licensee. As the licensing relationship increases in complexity, so do the associated agreements. Ensure you have the suitable types of licensing agreements in place but familiarize yourself with them first.
Here are the three licensing types you should know:
Type 1. Patent Licensing
Patents are a form of innovation and highly prized by their owners. However, a patent is worthless without the means for production and distribution. Licensing allows third parties to take advantage of the patent rights while the licensor earns royalty payments.
Type 2: Trademark Licensing
Trademark licenses authorize licensees to use a company’s creative works, including brand names, logos, slogans, and other design elements. These rights allow the licensee to promote the product or service within the given constraints. Contracts should also include acknowledging that a trademark application is on file with the US Patent and Trademark Office (USPTO) .
Type 3. Trade Secret Licensing
Trade secrets give a company its edge. But, more importantly, they are not registered with governments. Trade secret licensing creates the protections necessary to divulge trade secrets to licensees while protecting their rights if a confidentiality breach occurs. You should also include a nondisclosure agreement (NDA) into your trade secret licensing contracts.
Examples of Licensing
If you still have questions about licensing, you aren’t alone; they’re complicated deals! It’s easier to understand how licensing agreements work in practice through use cases of other companies.
The examples below detail licensing in business, marketing, copyrights, and computers:
What Is Licensing in Business?
Licensing in business refers to general licensing rights granted to a licensee. These rights may include intellectual property, trade secrets, and copyrights. The licensor earns a royalty rate based on units sold, while the licensee earns profits through direct sales to consumers.
An example of business licensing is found in manufacturing. Let’s say a company manufactures a patented component that can enhance another company’s products. Since the second company cannot legally use the patented product, they could approach the manufacturer about obtaining business licensing rights.
What Is Licensing in Marketing?
Licensing in marketing affords companies the right to use specific images, slogans, logos, and other trade dress elements. A marketing licensing agreement defines the terms and conditions regarding use as well as compensation rights.
One example is seen in book publishers who use licensing agreements for book cover art. Generally, an artist creates an image for the book cover and exchanges their rights to the image for compensation through licensing. They can also cap the agreement or request additional tiered payments for units sold.
What Is Licensing in Copyright?
Copyrights give licensees permission to use a licensor’s copyrights. These copyrighted works could include music, artwork, and videos. You can also use copyright licenses for distributorships.
For example, suppose you wrote a song that companies want to use commercially. In that case, a copyright license will help protect your rights. You can grant the authorization of your copyright works while placing limitations on how the licensee may use them.
What Is Licensing in Computers?
Licensing in computers can refer to software and hardware licenses. Software licenses grant companies the use of another company’s programs and applications. Hardware licenses are similar except that the licensee can use the licensor’s physical parts and resell them under the same or different name.
As an example, computer processors are not usually made by a computer manufacturer. Instead, they license with another specialized company, such as NVIDIA or Intel, to create these processors. The processor manufacturer, in this situation, is the licensor, and the computer manufacturer is the licensee.
Licensing vs. Franchising
The most significant difference between licensing vs. franchising is that licensing agreements control the licensing relationship under common contract law . In contrast, franchising follows the Franchise Rule and specific provisions contained within a franchise agreement .
Difference 1: Control
Another difference is that licensing offers more flexibility to both parties. For example, licensees have the freedom to operate as separate entities without managerial control. On the other hand, franchises give the franchisor exclusive control over the franchisee’s operations.
Difference 2: Regulations
The Franchise Rule governs relationships between franchisors and franchisees. The federal government mandates and enforces these rules. It ensures that franchisees have the information they need to make an informed decision. Franchisors must provide the franchisee with 23 different types of information about the company.
Licensing only requires the main elements of a contract for validity and enforceability. These rules are usually subject to local, county, and state laws.
Here’s an article that also explains licensing vs. franchising.
Get Legal Help with Licensing
Protect your intellectual property rights during the licensing process by drafting a solid licensing agreement. Licensing agreement lawyers have the experience and insight businesses want to make strategic moves through contracts and contract management. Start by scheduling an initial meeting to discuss your objectives and plans.