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Licensing Agreement

With your company all in place, do you want to permit a third party to use your property? Well, for this, you would need to have a Licensing Agreement prepared with the help of a lawyer. This is an important document, and it defines the scope of the license and the limits on the rights to utilize the property. It also has the details that specify if the third-person has the rights to sell it or if the license is non-exclusive.

Let us understand all about the licensing agreements in details as shared below.

What is a Licensing Agreement?

The licensing agreement is a legal contract that is formed due to a deal between two parties who are known as the licensee and the licensor. In a standard deal, the licensor usually permits the licensee to produce and sell goods, utilize patented technology that is owned by the licensor, or apply for a brand name or trademark.

In exchange for the permission of the licensor, the licensee obeys a list of conditions related to the utilization of the property of the licensor and also agrees to give some payment that is called royalties. The licensing agreements covered almost every type of situation possible. For instance, a retailer can finalize a deal with a professional sports team for developing, producing, and even selling merchandise that bears the logo of the sports team.

Or there can be a small manufacturer who might license a large firm’s proprietary production technology for gaining a boost in the competition, instead of spending money and time to have their own technology developed. Another example is a greeting card company that makes a deal with the movie distributor for producing a group of greeting cards that would hold the image of one or some of the famous animated characters.

A few of the things that are included in the licensing agreement is:

  • Term of the agreement (Length of how long it would last)
  • Indemnity for infringement
  • Prohibited uses
  • Non Disclosure of Confidential Information
  • Rights to transfer and resell
  • Warranties
  • Ways of terminating the contract

Parts of a Typical Licensing Agreement

Due to the legal grounds of a licensing agreement, some of them are normally very long and complicated documents. But there are some points in it that are the same in all the licensing agreements, and these basic points include the scope of the agreement which bears the following information:

  • Returns and allowances;
  • Minimum inventories needed to be maintained;
  • The rights of quality control and monitoring of the lessor, which includes the procedures to be followed;
  • Time schedules including renewal options, “to market” dates, and the length of the contract;
  • Guarantees of minimum sales;
  • Financial aspects which include royalty rates, how royalties are calculated, and required advances; and
  • Exclusivity or territorial restrictions.

Important Parts of the Licensing Agreement

The most important part of a licensing agreement holds all the details of the financial arrangement. The payments that the licensee provides to the licensor is called the guaranteed royalties on sales and minimum payments. The percentage of the royalties range from 6% to about 10%, and it depends entirely on the specific property involved along with the sophistication and the level of experience of the licensee.

As a matter of fact, every licensor does not need the guarantees, although there are some professionals who advise that the licensors should take the compensation up front as much as possible. There are a few cases where the licensor uses the guarantees for renewing the licensing agreement. In case the licensee meets the sale figures minimum requirements, the contract would be renewed. And if it doesn’t the licensor has the choice of discontinuing the deal.

One of the next vital parts of the Licensing Agreement is the time frame of the complete deal, which is how long the contract would last before it has to be renewed. Many licensors usually request a strict market release date for the products that are licensed to the external manufacturers. Since the licensor does not enjoy any interest if he/she grants the company a license and that company does not market the product. The licensing agreement would also have the requirements regarding the termination conditions, renewal options, and the length of the contract.

Many of the licensing agreements discuss the problem related to quality. For instance, a standard requirement related to the quality in the licensing contracts includes the ways for the disposal of any unsold goods. In case any product that is remaining in the inventory are eventually sold out in the market as cheap knockoffs, it could damage the licensor’s reputation in the industry.

Another example is that the licensor might add conditions within the Licensing Agreement that would need the licensee to give the prototypes of the merchandise, even random samples, and mockups of the packaging throughout the term of the deal. Usually, the most significant way of quality control is obtained when the licensor carefully checks the reputation of the licensee.

Other than those mentioned above, there is another part of the agreement that is important and includes the details about the party that has control of the trademarks, patents, or copyrights. Most of the Licensing Agreements also cover a requirement about territorial rights or the person who is in charge of the distribution in various parts of the world or even just the country.

Along with the different clauses added in the contract for the protection of the licensor, a few licensees can add their own provisions too. For instance, they can emphasize to get a guarantee where the licensor owns the rights to the property, or they can add a clause that prohibits the licensor from entering the competition undeviatingly in specific markets with the licensed property.

Other Points regarding the Licensing Agreement

The contract should have the licensing fee-related details along with any other money-related information like the maintenance fees, lease payments, or the royalty payments. With all the important information and the detailed contract, the license would not pose a threat to any of the parties.

Even though the license agreement appears to be complicated, it does not have to be one. The best way to have it made is by taking the help of a lawyer who helps you in dealing with the legal situations in your company.