Key Takeaways:

  • A licensing agreement allows a party (licensee) to use another's intellectual property (licensor) under specified conditions.
  • Licensing agreements can be used for merchandising, production, and brand expansion without direct ownership transfer.
  • Key components include scope, payments, exclusivity, restrictions, duration, and dispute resolution.
  • Different types of licensing agreements exist, such as exclusive, non-exclusive, sole, cross-licensing, and franchise agreements.
  • Royalties and payments should be well-defined, including upfront fees, minimum guarantees, and ongoing sales percentages.
  • Intellectual property protection, including trademarks, copyrights, and patents, is critical to a licensing agreement.
  • International licensing considerations should include jurisdiction, tax implications, and regulatory compliance.
  • Licensees must follow quality control measures to maintain brand integrity.
  • If disputes arise, pre-established arbitration or legal remedies can prevent costly litigation.
  • Licensing agreements can generate revenue, expand brand reach, and provide market access, but also require legal oversight.

Licensing Agreement Overview

Knowing how to get a licensing agreement can be very helpful when you are looking to allow other parties to use your intellectual property (IP) for merchandising or purely production-related purposes. Such agreements are useful when a party wishes to advertise their brand through tie-in products made by another party, when they have a product idea but no means or desire to produce it, or they have a trade secret process that  they can profit from by licensing it to other parties. A licensing agreement will clearly define how the IP may be used by the licensee and how the licensor will be compensated for it.

License Agreement Basics

A license agreement will vary in detail from agreement to agreement, but the basic details covered by such an agreement will remain essentially the same. The basic license agreement will include:

  • The subject matter. This will entail a detailed description of the trade secret, service, or product to be licensed. Copyright, patent, or trademark number may be included here.
  • Definitions. Any pertinent terms that need definitions will be defined in a definitions section.
  • The purpose. The parties involved in the contract should be named in the contract, and what names they will be referred to throughout the contract (such as “licensor” and “licensee”) should be stated.
  • The license. The contract should also describe the license being granted, including the duration of the license, its geographic extent, what is or isn’t allowed by it (products that can be made, sublicensing, distribution details), and whether it will be exclusive or not.
  • Payments. How payment will be made, including royalties (if applicable), should be described. The payment schedule, sub-license payments (if applicable), and audit rights should also be described.
  • Restrictions. What limitations there are on the license should be detailed. Examples could include if there are to be sub-license restrictions or restrictions on products that can be made.
  • The agreement’s start and finish date. The effective date of the agreement and the end date of the agreement, or what action will trigger the end of the agreement, should be stated. How the agreement can be continued after the end of the agreement and who retains the ownership rights of any products in existence at the end of the agreement are important points to cover.
  • A non-disclosure agreement. If trade secrets or other sensitive information is involved, a non-disclosure agreement pertaining to them should be included.
  • Jurisdiction designation. If a breach of contract occurs or other legal issue arises leading to a court case, where this case is to be heard should be stipulated.
  • Dispute settlement. In a similar vein, how disputes are to be settled should also be stated, including if arbitration or litigation is to be used.

Types of Licensing Agreements

Licensing agreements come in various forms, depending on the level of exclusivity, industry, and purpose. The main types include:

  • Exclusive License – Grants rights to only one licensee, preventing even the licensor from using the IP during the agreement.
  • Non-Exclusive License – Allows multiple licensees to use the intellectual property simultaneously.
  • Sole License – A hybrid model where only one licensee has rights, but the licensor retains some rights.
  • Cross-Licensing Agreement – Both parties grant each other rights to use specific IP, commonly seen in the technology and pharmaceutical industries.
  • Franchise Agreement – Allows the licensee to operate under the licensor’s brand name while following strict business models.
  • Compulsory License – A government-mandated license in which a patent holder must grant use to others under regulated terms.

Each type of agreement has distinct legal and financial implications, making proper structuring essential.

License Agreement Tips

In addition to having the basics of a licensing agreement in place, there are a number of actions you can take to further strengthen your position. These include:

  • Firmly establish ownership. A good contract should clearly state what rights are being granted pertaining to the intellectual property in question. If trademarked IP is being dealt with, it should be ascertained that no other parties are using the trademark and the logo trademark has been registered.
  • Do not overlook definitions. All processes and products pertinent to the contract should be described thoroughly, so that there is no confusion related to the licensing.
  • Define the royalty system. Questions like who gets paid, when do they get paid, what are minimum sales, what happens if these sales are not met, and is there a royalty advance should all be answered in the contract.
  • Explain the quality assurance monitoring process. If the creation of a product is involved, its quality should be monitored both during the design and production processes. The extent of quality assurance checks should be defined.
  • Be aware of government regulations. Some products, such as weapons, have restrictions on where they can be sold and to whom they can be sold. It is important to be up to date on this before an agreement is entered into.

Key Considerations for Royalties and Payments

Licensing agreements should clearly define how the licensee compensates the licensor. Common payment structures include:

  • Upfront Fees – A one-time payment made before using the IP.
  • Royalties – Ongoing payments based on a percentage of revenue, gross sales, or profit.
  • Minimum Sales Guarantees – Ensures the licensee meets specific sales thresholds.
  • Per-Unit Payments – Licensees pay based on the number of products sold.
  • Advance Against Royalties – Licensees pay a pre-determined amount upfront, which is later deducted from future royalty payments.

Careful negotiation of payment terms ensures financial fairness for both parties.

Intellectual Property Considerations in Licensing

Ensuring the protection of intellectual property (IP) rights is critical in licensing agreements. Important factors include:

  • Trademark Licensing – Includes logo, brand name, or slogans for product branding.
  • Copyright Licensing – Covers original works such as written content, designs, or software.
  • Patent Licensing – Grants rights to manufacture and sell patented inventions.
  • Trade Secret Protection – Requires strict confidentiality clauses to protect proprietary business information.

Additionally, licensors should conduct due diligence to verify that their IP is properly registered and enforceable, ensuring a solid legal foundation.

International Licensing Considerations

When licensing intellectual property across international borders, additional legal and financial considerations arise:

  • Jurisdiction & Governing Law – The agreement should define which country’s laws apply.
  • Tax & Duties – Licensees may face withholding taxes on royalties or import duties.
  • Regulatory Compliance – Some industries (pharmaceuticals, defense, etc.) require government approval for IP transfer.
  • Exchange Rate Risks – Currency fluctuations can affect the value of royalty payments.

Businesses expanding globally through licensing must account for these factors to avoid legal and financial complications.

Frequently Asked Questions:

  1. What is a licensing agreement?
    A licensing agreement is a contract where a licensor allows a licensee to use its intellectual property under specific conditions.
  2. What are examples of licensing agreements?
    Examples include software licensing, brand franchising (McDonald’s, Starbucks), and technology cross-licensing between major tech firms.
  3. How do royalties work in a licensing agreement?
    Royalties are typically a percentage of revenue or a fixed fee per unit sold, structured to compensate the licensor for IP use.
  4. Can a licensing agreement be terminated?
    Yes, agreements often include termination clauses, specifying conditions such as non-payment, IP misuse, or contract violations.
  5. What’s the difference between exclusive and non-exclusive licensing?
    Exclusive licensing grants rights to only one licensee, while non-exclusive allows multiple parties to use the IP.

If you need assistance concerning how to get a licensing agreement, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.