Licensing Agreement. Marketcheese

Licensing agreement is a legal contract between two parties where the owner of the property gives the permission to the permitted party to use their trademark or brand. It is the agreement that is set between the licensor and licensee that contains all the details about how the licensor should be compensated, type of the licensing arrangement and conditions for use.

Licensing agreements are contracts between two parties for a license or a temporary use of property in return for licensing fees. Licensing agreements are most often used for intellectual property such as patents, trademarks, copyrights movies, music, and artwork. The types of contracts used may vary depending on what exactly is being licensed.

License agreements can also be found in other industries. For example in the fashion industry, fast food industry, finance and insurance industry, entertainment industry and many more.

Licensing agreements are often used when commercializing either new technologies or new discoveries. In such agreements it is important to thoroughly describe how licensees can use the property and the parties involved in the agreement. The following parameters also need to be stated:

The period of time within which the parties can use the property
The territory within which said property can be utilized
Terms as well as special terms of the agreement
Scaling terms, for instance, the additional royalty fees can be incurred if the property has already been used several times.

For instance, a musician can enter into a licensing agreement in order to use a certain art piece only on the record cover of their new album, but not on the CD cover. Publishers can also be forbidden from using a certain piece of artwork in advertisements.

Licensing revenues

One of the largest sources of income for various public companies is licensing revenue (also referred to as royalties).

The licensing agreement contains conditions for royalty payments. It describes such limits of royalty payments as duration of the agreement and geographical boundaries. In case if the licensing agreement is a private contract or if the asset owner is the government, the licensing agreements are regulated in a unique way.

In the majority of license agreements, royalties are considered to be either a sale percentage or a per unit payment. Risks involved, available alternatives and market needs are some of the factors that can change royalty rates.

In order to approximate royalty rates, transactions between both parties involved have to be completed voluntarily. Simply put, licensing agreements must not be forced. Moreover, both parties involved in the arrangement must act on their own and have no prior contact with each other.

Examples of licensing agreements

Let us provide an example of a license agreement within a restaurant industry. A great example here could be a McDonald's franchise. A McDonald's franchisee has a licensing agreement with a famous corporation, and this agreement allows them to use the company’s marketing materials and branding. In order for the production to be legal, McDonald's toy manufacturers also sign license agreements.

Entering into a licensing agreement

The bargaining power of the parties involved in the licensing agreement depends on the product; that is, the matter of the agreement. For instance, a movie studio might have much more power when negotiating the probability of a popular character among the audience to be manufactured, because it is highly-likely that the popular character figurine production will bring the manufacturer high profits. In case if the manufacturer refuses to do what the movie studio requests, the latter can find another manufacturer and do business with them instead.

It is extremely important to have a consultation with an attorney prior to entering into a licensing agreement because it may be hard to grasp all the peculiarities of such an agreement without a proper understanding of intellectual property law.

Advantages and disadvantages of licensing agreements

There are certain pros and cons of using licensing agreements for both parties involved.

Advantages. Licensing agreements clearly explain stipulations and rules that cover use of a certain brand. Both parties are aware of those rules and stipulations and of what is expected of them. They are aware of such facts as the amount of rent, rent due date, the type of agreement, if any additional royalties were added, copyright issues, and expiration date of the contract.

Entering a licensing agreement saves licensor and licensee both money and time. For example, if somebody decided to use a certain brand name, without such an agreement, they could be sued by the owner of the brand name, and this, in turn, would result in costly court fees and legal battles.

One more benefit of licensing agreements is the fact that licensors can control their property and have access to a variety of markets.

Disadvantages. There are cases when one can regret having a licensing agreement. Sometimes, licensors can be so desperate that they don't do any research before getting into the market. It makes licensors stuck with a business whose ideas are the exact opposite of its own. The same goes for licensees.

Another risk both the licensor and the licensee have is losing their reputation. In case one of the parties becomes involved in some sort of scandal, it can also easily put the other party’s reputation at risk.

Creating a licensing agreement

In order to create a licensing agreement, one has to contact a lawyer. Contacting a lawyer just before creating a licensing agreement can help you create a stable foundation for a relationship with the other party. Otherwise, it might cost you a lot of worries and trouble in the future.

Licensing agreement cost

Drawing up a licensing agreement may cost from several hundred up to several thousand dollars.

The bottom line

Before using intellectual property that belongs to somebody else, it is important to ask the other party to enter into a licensing agreement. To know what you're getting into exactly, you'll need to contact a lawyer, which can be costly. So you’ll need to be ready to spend money to save yourself the worries and be sure that your relationship with the other party will be smooth.