Licensing Agreement Basics

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Practice Areas: Business

Utilizing a licensing agreement, a Licensor, the owner of a particular branded, and often trademarked or copyrighted item, agrees to allow another person or company, the Licensee, the right to use such brand, trademark or copyrighted item for a limited purpose, amount of time and sometimes, in a particular geographic area.  Essentially, licenses protect the proprietary rights of the Licensor in its intellecutal property.

An example of a well-known license is Calvin Klein®, which licenses its trademarked name to manufacturers of underwear, jeans and perfume.  Often, these Calvin Klein® branded items are not produced by the Licensor, but by third party apparel manufacturers who license the brand name.

Regarding technology, an example of a well-known license is Microsoft Office®.  All such products require end-users (such as me and you) to agree to a licensing agreement, whereby we have the right to use the intellectual property, but the licensor maintains the ownership rights.

Customarily, licensing agreements are rather long and complex, covering such items as exclusivity or territorial restrictions, financial aspects, royalty rates, and minimum sale guaranties.

Important Terms of Licensing Agreement

Scope of the License

A license assigns limited rights to intellectual property.  There is no assignment of ownership, just of use.  Ownership is maintained by the Licensor for the term of the agreement and the Licensee is merely granted a use of such intellectual property for a limited scope.  For example, a professional sports team may license its logo and brand name to an apparel manufacturer to produce t-shirts and hats exhibiting such logo and/or brand name.

Types of Licenses

There are three primary types of licenses issued by a licensing agreement.

1, Exclusive.  This is whereby a Licensor will transfer all of the rights to produce, use or market the license to a single Licensee.  Only the Licensee has the right to make use of the intellectual property.  A Licensee will pay more for such a licensing agreement.

2. Non-Exclusive.  This is whereby a Licensor transfers to a Licensee the right to produce, use or market the license, however also retains the right to do duplicate such licensing to other licensees.  Such an agreement will often be less costly to a Licensee, as it will not be the only company producing products using the same license.

3. Sole License.  A less-common form of license, this is whereby the Licensor grants a license to a Licensee and also agrees not to grant any additional license, however, retains the right to itself make use of the intellectual property.

Financial Terms

Central to a licensing agreement are the financial terms.  The Licensor is often paid in two ways.  There is an upfront, one-time license fee paid at the signing of the license agreement.  In addition, recurring payments, called royalties, are paid based upon the net sales (as defined in the licensing agreement) of the licensed item.  Royalties are often calculated by multiplying net sales by the royalty rate.  The royalty rate is the percentage of net sales to be paid by the licensee to the licensor.  Some licensing agreements contain minimums, which are guaranteed minimum royalty payments paid periodically, either monthly or quarterly, etc.  They are more complicated and are based upon a percentage of forecasted net sales and royalties earned.

Duration of the Agreement

The duration of a licensing agreement is very important.  A licensor may wish to license its brand for only a specific period of time.  For example, during the Olympic Games or the World Series.  In order to ensure that the licensee actually manufactures products using the licensed brand, many licensors will demand that a specific target date is met with regard to the marketing of such licensed products.  For example, if a t-shirt manufacturer has licensed NFL®trademarks, the NFL® might insist that the products be made available to the public prior the start of a new season.

Often, the longer the term of the license, the higher the price.   Also, a Licensee should be very wary of seeking a long-term license without first being certain of the projected benefit during the entre duration of the license.  For example, a 10-year licensing agreement where sales of the licensed products drop precipitously after year five is a very bad deal for the Licensee, who will be paying for the license without reaping the initial intended benefit.  It is more beneficial for the licensee to sign a shorter-term license with options to renew.

Uses of the License

License agreements may also prohibit specific use of the license.  For example, it would tarnish the brand if the licensed item were displayed in an immoral or prurient fashion. The types of licensed products being produced might also be required to meet certain minimum quality standards set by the Licensor.  Products failing to meet such standards will not be approved and may not be sold by the Licensee.

Enforcing licenses.

The unlawful use of a license is often referred to as pirating and the licensed products are called pirated goods.  There are strict Federal laws that provide both civil and criminal penalties for the illegal and/or unauthorized use of intellectual properties.  There have been many cases where the person or entity pirating licensed goods has been forced to recompense the Licensor for losses caused by such infringement and/or to pay to the Licensor any profits generated due to such pirating activity.

Licensing Agreements are important in the conduct of business.  Anybody seeking to enter into such an agreement, whether as a Licensor or Licensee, is strongly advised to consult with an attorney before embarking on such an endeavor.  To download a preprinted form off of the Internet without having an experienced attorney review it may lead to unintended consequences that will be far more costly than having initially consulted an attorney.

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