A manufacturing and distribution license agreement is an agreement or contract between the individual or entity who invented a product and the company who will be manufacturing or building and distributing that item. This is a necessary agreement to enter into when an inventor chooses to not build their product, themselves.

As there are not any state or federal guidelines or regulations regarding these agreements, the involved parties are free to negotiate the terms of the contract however they choose. This may mean that the manufacturer receives a flat rate for their services, or it may mean that they are paid royalties or a percentage of the profits.

Why to Use a Manufacturing and Distribution License Agreement

Ensuring that a solid manufacturing licensing agreement (MLA) is in place is vital to protect the rights and intellectual property of the inventor, while also protecting the financial compensation and rights of the manufacturer. Perhaps your business started out on Etsy, creating homemade jewelry or home décor. For a while, you were able to create the items yourself out of your home. But, due to the wonders of word of mouth and social media, your business has grown beyond the point that you are able to handle all of the incoming orders, on your own. So, it’s time to outsource to a small manufacturing company.

While a growing company is a good problem to have, as the creator of your brand, you want to protect it. You want to protect your intellectual property, trademarks, and marketing strategies. By having an MLA in place, you will be able to have peace of mind as you grow your company. If you are the owner, or head, of a manufacturing company, you want to protect your resources and ensure that you will be paid fairly and timely for your work.

An MLA will spell out the payment expectations and protect you against any lack of sales on the part of the licensor. (For example, if you are being paid on a royalty structure, an MLA will provide assurances that those royalties are met. If, for some reason, they are not, then the licensor will be responsible for completing payment.)

Additionally, an MLA can protect your manufacturing company from competing with other manufacturers, should you be entering into an exclusive agreement. This will provide you with security, knowing that you are the sole manufacturer of this product.

Types of Licenses

There are three types of licensing agreements:

  • Exclusive License: when a licensor (the inventor) and a licensee (the manufacturer) enter into an exclusive license agreement, it means that the inventor cannot sell the rights to their invention to another manufacturer. Should you choose to draft your own exclusive license agreement, you can find templates here.
  • Nonexclusive License: this type of license agreement allows the licensor to sell the rights to his product for manufacturing purposes to multiple entities. This is often used when geography or a manufacturers capacity may be an issue. An example of a nonexclusive license is Girl Scout Cookies. You may have noticed, if you have purchased cookies in different parts of the country, that they are a bit different from one region to the next. That is because the Girl Scouts of America has nonexclusive licensing agreements with several different cookie manufacturers throughout the country.
  • Sole License: this license is used when the inventor is going to be manufacturing the product themselves. In turn, they are not then permitted to sell licensing rights to another manufacturer.

What Should Be Included

There are many things that can (and, should) be included in an MLA. Including:

  • As a lot of legal jargon is used in contracts (they are, after all, legal documents), it is best practice to provide clear definitions of terms and phrases that are not part of everyday speech.
  • Concise responsibilities of both the licensor and licensee.
  • Payment expectations (is the manufacturer being paid a flat rate or percentage of sales? If being paid via a percentage of sales, what is the responsibility of the licensor should those sales expectations not be met?).
  • The timeframe under which this MLA is valid.
  • A confidentiality or nondisclosure agreement.
  • Intellectual property use and protection. (If a trademark is being used, assurance that the manufacturer will not alter the trademark.)
  • Final approval of all packaging and marketing approval by the licensor prior to shipments or distribution. While it’s a legal contract that will certainly contain a lot of legalese, it’s important that the agreement can be easily amended to allow for certain eventualities, such as growth beyond what the manufacturer can handle, lack of sales, or the sale of the company.

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