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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
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.
Image via Pexels by Eprism Studio
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.
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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Meet some of our Product License Lawyers
I'm an experienced trademark attorney and enjoy helping clients protect and grow their brand names through trademark registration and enforcement. I've worked with a wide variety of clients in different industries, including e-commerce, software as a service (SaaS), and consumer goods, to register trademarks for product names, logos, and slogans, both in the US and abroad.
12 Year PQE Lawyer with wide experience in sports, media and tech.
I am an entrepreneurial lawyer in the Seattle area dedicated to helping clients build and plan for the future. I graduated from the University of Chicago Law School and worked in a top global law firm. Now I help real people and businesses get where they want to go. Reach out to discuss how we can work together! Some of the areas of law I work in: Small Businesses, Trusts & Estates & Wills, Tax Law (for individuals, businesses, and nonprofits), Land Use, Environmental Law, Nonprofits
Results oriented business attorney focusing on the health care sector. Formerly worked in Biglaw doing large multi-million dollar mergers and acquisitions, financing, and outside corporate counsel. I brought my skillset to the small firm market, provide the highest level of professionalism and sophistication to smaller and startup companies.
Attorney - I graduated in Law from the University of Wroclaw and in Economics from the Scottish University of Aberdeen; My legal interests include, in particular: contracts, intellectual property, and corporate law, as well as transactional / regulatory advisory along with related risk management (M&A); The industries with which I have worked most often are: IT, real estate and construction, professional sport, industrial chemistry and medicine, oil & gas, energy, and financial services; I possess many years of experiences working with international entities for which I have prepared and negotiated contracts, as well as (due diligence) reports, analyses, litigation documents, and presentations; Apart from law firms, I have also worked for investment banks and big 4 - thanks to that I also gained financial, technological, and consulting experiences; I shall be described by: accuracy, openness, honesty, concreteness, a broad approach to the problem, and ... a lack of bad manners, along with a good sense of humour :)
I have practiced law in foreign jurisdiction for more than 11 years and more than one year in Texas. I am Texas licensed attorney. Practice areas include Corporate: incorporation of business entities, drafting of operating agreements, by-laws, and business contracts; Commercial: business disputes, demand letters, cease and desist lettera, dealing with insurance companies, negotiations, settlements of disputes, commercial real estate, and business litigation Litigation: business disputes, personal injury, civil rights, cross-border matters, maritime matters, drafting of litigation pleadings, motion practice, legal research, white-collar defense.
Mr. LaRocco's focus is business law, corporate structuring, and contracts. He has a depth of experience working with entrepreneurs and startups, including some small public companies. As a result of his business background, he has not only acted as general counsel to companies, but has also been on the board of directors of several and been a business advisor and strategist. Some clients and projects I have recently done work for include a hospitality consulting company, a web development/marketing agency, a modular home company, an e-commerce consumer goods company, an online ordering app for restaurants, a music file-sharing company, a company that licenses its photos and graphic images, a video editing company, several SaaS companies, a merchant processing/services company, a financial services software company that earned a licensing and marketing contract with Thomson Reuters, and a real estate software company.