A licensing agreement is a legal tool that allows one party to use another’s intellectual property (IP). A large company like Disney or an NFL team may license their characters or team trademarks to other companies to help sell products like clothing, shoes or toys. Licensing agreements are not just for big businesses however. Small businesses can also benefit from these agreements.
Licensing agreements are contracts that involve one party, the licensee, paying another party, the licensor, for the right to use the intellectual property. These agreements generally include details about payment, exclusivity, and territory as well as whether or not the licensee can make sub-agreements. The contract may include provisions about quality assurance so the licensor can make sure the product meets their standards. If the product does not meet the licensor’s test protocols or standards, the contract may state that the product cannot go to market.
How Can I Cake the Most of a licensing agreement?
Although the exact provisions will vary with each business arrangement, these general tips can help to better ensure a successful agreement.
- Make sure the agreement is clear on who owns the IP. The IP owner will also want to make sure the technology or service is properly registered before moving forward with a licensing agreement. Common problems with these agreements can arise when there is confusion about certain terms. You can reduce this risk by making sure the definitions are clear. Review the contract for the definitions of terms like net sales and royalties. Make sure the definitions are in line with your expectations.
- Due diligence. Take the time to look into the other business’ financials before finalizing the agreement. Ask questions if the numbers do not add up or if anything looks concerning.
- Discuss what will happen if things go wrong. What if the licensee or licensor goes bankrupt or cannot meet the obligations specified within the contract? What are the penalties if there is a breach?
Business leaders and IP owners are wise to tailor the exact scope and terms used within a licensing agreement to each business transaction. This will help better ensure your business interests are protected in each deal.