An exclusive licensing agreement gives a licensee the sole rights to use the intellectual property of the licensor during the length of the agreement between the parties. Similar to an assignment of rights by the property owner, through an all-encompassing exclusive licensing agreement the licensee can produce, sell, and use the property in any manner they desire, without requiring approval from the property’s registered owner.

Before exploring the details of an exclusive licensing agreement, it’s important to understand exactly what a licensing agreement is.

Overview of a Licensing Agreement

A licensing agreement, also known as a license agreement, is a legally binding understanding between two parties that allows one party to use the intellectual property, such as a patent, trademark or copyright, of the other party. Usually, although not always, the party being granted permission by the owner of the intellectual property pays for the privilege for that right, either in an upfront payment or through royalty payments throughout the duration of the agreement based upon a percentage of sales.

Regardless of whether the licensing agreement is an exclusive, limited exclusive or non-exclusive agreement, there are common elements found in practically every licensing agreement. These are:

  • Length of contract: A licensing contract only grants a licensee the rights to the intellectual property of an owner for a period of time as stipulated in the agreement. In some cases, provisions for the renewal of the agreement are contained in the document.
  • Roles and responsibilities: First of all, it is important to include the obligations of each party, including which party retains the rights to the property throughout the term of the agreement.
  • Geographic areas of interest: It is often the desire of the licensor to restrict the rights of the licensee to sell products based on the licensed property in certain geographic areas based on existing licenses or existing non-compete agreements.
  • Length of term of the license: Most licenses are for a limited time or have renewal clauses that may be triggered by the licensee realizing agreed upon sales goals.
  • Financial details: These could include the amount due the licensor at the time the contract is signed and calculations to determine the amount of royalty payments.
  • Quality control standards: This is particularly important if the licensor has established a brand that is held in high esteem and it is important that any product created by the licensee maintain the standard of excellence.
  • Conflict resolution language: In a perfect world, things always go smoothly. In real life, however, issues of dispute may arise between parties to a merchandising license agreement. As is the case when entering into any legal agreement, it’s always wise for both parties to consult an experienced attorney to protect their rights in the event of a conflict.

Unique Features of an Exclusive Licensing Agreement

A major point of concern when considering an exclusive licensing agreement is the parameters of what the exclusive rights entail. It could be that the rights are only exclusive for a particular geographic area or that, in the case of the rights to a manufacturing process or software, there are specific industries in which the licensed product can only be used.

Another issue to be determined is whether the rights are entirely exclusive or co-exclusive. An agreement is co-exclusive if the licensor grants exclusive rights to the property except for its own right to use the property as it sees fit. For example, an owner of a software patent does not have to seek permission to use that software from the party to which it has granted exclusive rights.

The degree of exclusivity to which ownership is retained by the licensor is determined during the negotiations of the license. In the case of a co-exclusive license, language is inserted into the grant clause along the lines of “except as to licensor” or “even as to licensor.”

Countries outside the U.S. tend to view limited exclusivity differently than is the case inside the U.S. Therefore, the best practice in developing a license agreement in a foreign country is to become familiar with how that country interprets ownership rights in co-exclusive licenses in matters of legal disputes.

Exclusive vs. Non-Exclusive Licenses

Finally, it is important to understand the differences between an exclusive license, whether limited or not, and a non-exclusive license. Whereas with exclusive rights to intellectual property, the licensee may sublicense their rights to other parties, in the case of a non-exclusive license, that right does not exist. A licensor may grant non-exclusive rights to as many licensees as it pleases, although market conditions and the concerns of existing licensees may limit the practice.

Essentially, as is the case with any agreement between two parties, the terms, scope of obligations, and compromises made between the two largely depend on the reasons each party is entering into the agreement in the first place.

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