Licensing contracts are used by someone who owns intellectual property to give another person permission to use it. The Licensee is the one who wants to use it, and the licensor is the owner.

One form of a licensing contract offers exclusive license, which means that the licensor is the only individual who is allowed to use the property. Limitations on this type of license typically include the media in which they are allowed to use it, the locations where they are allowed to sell it, and the amount of time the license is in effect.

In exchange for this license, the licensor usually pays a royalty. These may be based on the number of units that are sold. These agreements can be complicated and include provisions covering the following:

  • Sales basis, which refers to royalties that are calculated on net sales or gross sales
  • What deductions are allowed to be taken from net sales
  • Whether the license is a one-time license with a single fee paid or an ongoing license with royalties paid as the products are sold
  • If there will be an advance, which is an up-front payment given at the time the agreement is signed. Royalties are typically withheld until the amount of royalties earned catch up to the advance already paid
  • If there will be a guaranteed minimum amount of royalties paid

The Basics of Licensing Agreements

License agreements can be simple or complicated. Every license agreement is a legally binding contract between the licensor and licensee. The licensor grants the right to make goods and sell them using the trademark, technology, or other intellectual property to the licensee. This typically involves several conditions the licensee must meet regarding the use of this property and the payments that will be made.

Licensing agreements typically contain the following basic points:

  • The scope of the license, which may include exclusive use or restrictions on territory
  • Advances, royalties, and their calculations
  • Timelines and schedules for production and marketing
  • Contract length and options for renewal
  • Rights the licensor retains for monitoring quality
  • Minimum inventory, returns, and allowances

Licensing Contract Elements

The financial arrangement is one of the most important parts of a licensing contract. There is usually a guaranteed minimum amount paid and royalties earned on sales. The typical range for royalties is six to 10 percent, and this depends on the type of property and the way it will be used.

Most licensors prefer to get as much as possible paid up front, although some do not require a guarantee. Guarantees may be used as the basis for a licensing contract renewal. The licensor may refuse to renew the contract if minimum sales requirements are not met.

The timeline and scheduling are also important parts of a license agreement. Strict production and marketing dates may be required to avoid the license being granted to a licensee that never produces and markets the product. These provisions usually also cover the contract length, options for renewal, and conditions for termination.

Quality is another element that may be covered in a license agreement. The licensee may be required to provide product prototypes, mock ups, and samples. However, it's in the licensor's best interest to check the licensee's reputation.

Related to quality control is the agreement regarding the disposal of merchandise that is unsold. The licensor should guard against the production of cheap imitations. The license should also spell out who has control of the copyrights, patents, or trademarks associated with the property.

The contract may also specify territorial rights, which regulate the distribution of products in different parts of the world, or within the country.

What to Watch Out For

Because licensing agreements can get complicated and include strict provisions, it's important to look over them carefully before agreeing. The best plan is to find an attorney who is familiar with intellectual property licensing.

Even so, a brand licensing professional can provide additional guidance and prevent problems regarding common pitfalls. These include net sales, royalties, guaranteed payments, and quality control.

Negotiation of Licensing Contracts

Negotiations for a licensing agreement can take a lot of time and you will need patience. This can be especially tricky for small, independent developers negotiating with large companies. You need to know the company's strengths and weaknesses, the company's specialties, and how much and where they typically sell the products.

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