Product License: What it Is and How it Works

Product licenses can generate high profits when the brand and manufacturer align. Even if both parties see eye-to-eye on many issues, they still need to protect their relationship by understanding the law and having the proper contracts in place.

Below, we dive into product licenses, how they work, and how you can get one.

What is a Product License?

A product license, also known as a brand license, is a legally binding document between a licensor and its licensees on branded products. They protect the licensor’s intellectual property rights and establish royalty payment terms. A product licensor is the one who owns the brand, and the licensee is the one who manufactures branded products.

Here is an article also discusses brand and product licenses.

How Product Licensing Works

A business must constantly introduce new products to replace declining ones. Additionally, a company may wish to diversify its product offerings to balance seasonal highs and lows, fill excess manufacturing capacity, or boost profitability.

Since some businesses lack the resources necessary to develop new products on their own, they can acquire an evidence-based product quickly through licensing. Licensing balances risk and reward by allowing you to leverage an established company’s success to distribute your product.

Examples of Licensed Products

There are examples of licensed products all around us, and sometimes, without even noticing. One marketing objective of licensed products is to make the relationship look and function as seamlessly as possible. Otherwise, it can create confusion among customers.

Examples of licensed products include:

• Example 1 . IBM computers selling with Microsoft Windows
• Example 2 . Ralph Lauren allowing their brand to appear on other manufacturer’s products
• Example 3 . Authors receive a fee from published books
• Example 4 . Radio stations pay for licenses to use songs
• Example 5 . Cable and satellite television offer multiple licensing options

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How Do You Get a Product License?

You get a product license by inventing an original product, protecting your intellectual property, and bringing it to market. You will also need to nurture relationships with other professionals in your industry.

Here are five critical steps to take when you want to get a product license:

Step 1. Invent a Product

Take the time to sketch out your invention, build prototypes, and document it. You can create an enhancement to an existing product. Create a business plan to ensure you make sound business decisions.

Step 2. Complete a Patent Search

Use the USPTO’s online patent database to ensure someone else does not hold legal rights to your patent already. Consider filing a provisional patent if necessary. Filing a provisional patent application is wise when time matters.

Step 3. File Your Patent Application

Again, return to the USPTO’s website and submit an online patent application. Collaboration with the patent examiner is required until they issue the patent.

Step 4. Connect with Licensees

Locate and prepare to pitch licensees in your market. You may need to network, run paid advertisements, or contact several licensees before finding one. Spend time developing relationships with potential licensees and familiarizing yourself with their processes.

Step 5. Sign Your Product License

Once you’ve identified the ideal business partner, you should execute a product licensing agreement . Do not hesitate to have it reviewed and edited by intellectual property lawyers for legal protection.

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How to Negotiate a Product Licensing Deal

Entrepreneurs must consider the comparative value of their innovations. They must also include safeguards that allow them to reclaim their rights if licensees fail to uphold their end of the bargain. Further, inventors must consider their business plans and allow for flexibility if those plans change in the future.

Here are a few insightful tricks and tips to help you make the most of the process of preparing for a licensing negotiation:

Tip 1. Stay Organized and Patient

A product license agreement is a lengthy and complex document that requires considerable time to negotiate regardless of which side you’re on. The more calm and collected you appear, the more likely you will find a company interested in collaborating with you.

Tip 2. Research the Licensee’s Background

It is critical to understand the potential licensee’s business focus and their track record of operation in situations similar to yours. The more information you have about the business with which you wish to conduct business, the better.

Tip 3. Use a Non-disclosure Agreement

A non-disclosure agreement ensures that both parties agree not to disclose the other’s confidential information, critical for protecting your product.

Tip 4. Perform Intellectual Property Due Diligence

The most valuable company asset is typically intellectual property. As such, it is critical that you have proper procedures in place to establish and protect it without infringing upon another’s rights and freedoms. An IP assignment agreement can help you address these issues specifically.

Tip 5. Speak with Licensing Lawyers

The wrong product license can limit future profit opportunities. Before initiating your first written contract, it is imperative that you work with licensing lawyers .

How Much Does it Cost to License a Product?

Royalty rates vary by industry, but a good starting point is between two percent and ten percent. Royalty agreements governing payments must benefit both the licensor and the licensee. They are a win-win situation for both the licensor and manufacturer when executed properly.

The manufacturer will need to consider costs to produce a product. They can delineate the terms and conditions of this aspect through a manufacturing contract .

Other Things to Consider When Licensing a Product

Licensing a product requires licensors to think about several aspects of offering a brand for products. Legal mistakes in contracts can result in unwanted consequences while having no agreement leaves you exposed to risk. Knowledge is power in this situation to avoid common pitfalls.

Here are a few other things to consider when licensing a product:

Consideration 1. Performance Requirements

As is the case with franchise agreements , the majority of licensing agreements include performance or diligence clauses. These clauses provide for the termination or the imposition of penalties if the licensee fails to comply with specified requirements.

Consideration 2. Exclusivity Clauses

Exclusivity matters, but it can also be detrimental to small businesses. It guarantees that the licensee will only deal with a single licensor. This situation benefits the licensor because the licensee will devote all of its efforts to promoting a single product and avoid competing products.

Learn more about exclusivity clauses .

Consideration 3. Affiliates

Many licensing agreements provide for affiliates. This strategy expands the reach and total sales of the product. You should consider affiliate use since unrestricted access may result in profit shifting, detrimental to the licensor.

Learn more about affiliate agreements .

Consideration 4. Termination Clauses

Almost every licensing agreement contains a termination clause . Generally, licensors desire the option of terminating their relationship with a licensee. This strategy shields the parent company from liability while minimizing overall exposure.

Consideration 5. Product Liability

Licensing agreements typically include a statement about product liability. It is in both parties best interests to have this stated as plainly as possible. These clauses establish who is legally liable if the product degrades during use, consumption, storage, or transportation.

Get Legal Help with Product Licenses

Do you need legal advice for your next product license deal? If so, licensing lawyers will help you draft the document you need to protect your legal rights.

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