Licensing Agreement: Definition, Types, Key Terms

What Is a Licensing Agreement?

A licensing agreement is a written contract that gives you permission to use another party's property under a certain set of conditions. The two parties involved in this agreement are the licensor (the one allowing permission) and a licensee (the one gaining permission).

What Is the Purpose of a Licensing Agreement?

Licensing agreements ensure that you have legal permission to use another person's or business's property. For instance, if you were to use an artist's song in a commercial, you would need to sign a licensing agreement to legally do so. If you were to go ahead and use the song without permission, you may infringe on copyright laws and risk being sued or fined.

You most commonly see licensing agreements for intellectual property, such as patents, trademarks, and copyrighted materials. Common copyrighted materials include music, film, video, and artwork. While a licensing agreement doesn't give you ownership over another entity's property, it does allow you to use it as long as you are following the parameters the agreement outlines.

How Licensing Agreements Work

In order to use another entity's property, you normally have to pay some kind of royalty. You may be able to pay this in an upfront lump sum or come up with a plan to pay based on the sales of the property. For instance, one royalty agreement may say that the licensee has to pay 1% of all sales to the licensor. If a licensee makes $10 per item, then they owe the licensor 10 cents for each item sold.

Specific Types of Licensing Agreements

Lets's break down some common types of licensing agreements:

• Trade secret licenses: Outlines how, where, and when you can use an entity's trade secrets.
• Trademark licenses: Outlines how you may use a trademark.
• Patent licenses: Outlines your right to sell, use, make, distribute, and export a product that's patented.
• Copyright licenses: Outlines your right to reproduce and sell a copyrighted asset.

Examples of Licensing Agreements

There are many uses for licensing agreements. A common one is for the commercialization of technologies, for example, if your small business wanted to use software in your business operations. The software company may require you to sign a licensing agreement in order to use its software. Another example is when franchises have licensing agreements with the headquarters of a restaurant. The licensing allows the franchisee to use the company's branding and marketing materials.

What Does a Licensing Agreement Cover?

Both licensees and licensors like to be thorough in their agreements to ensure nothing is overlooked. Both parties need to know what rights they have regarding this relationship. Licensing agreements cover many factors, including the following:

• Payment This section outlines how the licensee will pay the licensor for use of their property. As stated before, there are many different ways to negotiate royalties. When deciding which method is ideal for both parties, you must consider exchange rates and inflation.
• Intellectual Property Rights This section outlines the responsibility to protect intellectual property and who bears the cost.
• Exclusivity This section restricts when and where the licensor can sell their property. It makes it so the licensee can be the only entity selling this product or service in a set territory. For example, when Apple introduced the iPhone in 2007, it entered into an exclusive agreement with AT&T which only allowed AT&T exclusivity to sell the iPhone in the US market.
• Subsidiary Licensing With subsidiary licensing, the licensee could be granted permission to allow another entity to use the licensed work. For instance, if you're a film producer and license a song, you could still need permission to allow another entity to use the section of your film where the song is playing.
• Quality Assurance When a party licenses something, they want to ensure it's being used in the right way. This section of the agreement describes how the licensee will ensure that this happens. This may include periodic quality assurance checks or giving the licensor the right to monitor sales.
• Additional Clauses These are anything else the two parties want to add. For instance, some licensing agreements include non-disclosure agreements within them. This clause would prevent the licensee from disclosing any proprietary information or processes.

Factors to Consider When Creating a Licensing Agreement

In order to protect yourself and your business, it's important to be thorough when creating a licensing agreement. Both the licensee and the licensor need to fully understand what they are agreeing to. Consider the following advice before you get started:

• Meet with a contract lawyer They have the expertise to help you create a fair licensing agreement that works in your interest. Likewise, they know the formatting and legal terminology to ensure that the document holds up in court if necessary.
• Establish your ownership Before licensing anything, make sure you have the appropriate ownership of it. For instance, if you have a trademark, make sure it is registered. Another thing to check is that no one else is already using the asset and trying to claim ownership over it.
• Be ready for ownership disputes Make sure your contract includes what would happen if someone were to dispute your ownership. For instance, what if someone claims that they have copyright over something that you feel you have the right to license? Likewise, you need to know what course of action to take if someone were to plagiarize work that's under this license.
• Understand what is stated If you are unsure of any part of the contract, make sure you ask. It's important that each line makes sense, so you fully know what you are agreeing to.
• Discuss royalties right away Ultimately, payment is at the center of virtually all licensing agreements. Make sure to discuss how royalties are being paid in different situations that may arise. For instance, if you have a percentage royalty, discuss what would happen if the licensee failed to make the projected sales.
• Be mindful of government regulations How a licensing agreement operates isn't solely up to the parties involved. You also need to follow relevant legislation that may vary based on what you are licensing.
• Think about how taxes will work When paying royalties, you may be able to claim them as a business expense on your taxes. Meet with your tax professional to learn how to properly report these expenses.
• Research the other party Before getting into a licensing agreement, learn more about the other party. Get to know how the public views them before associating your business with them. Likewise, check to see how they operate. Visiting their office and seeing their processes up close are all parts of protecting your own business.
• Think about every possible situation What if a licensee won't pay? What if they go bankrupt? What if the licensor wants to transfer ownership to another party? Being prepared for any scenarios can help the agreement go smoothly.

Having a well-written licensing agreement is important for both licensees and licensors. It is always recommended to consult legal counsel for these matters so that you can work with a professional that specializes in licensing. If your business needs help at any point throughout the process, our team of contract lawyers can help. Whether it be drafting up the entire agreement or reading over your own template, we have the expertise to make sure it's done right.