Key Takeaways

  • A manufacturing license agreement (MLA) allows an inventor (licensor) to grant production rights to a manufacturer (licensee) for a patented product or intellectual property.
  • MLAs may cover various intellectual property types, including patents, industrial designs, trademarks, and utility models.
  • Exclusive, non-exclusive, and sole licenses define how many manufacturers can produce the product.
  • Trademark usage provisions help maintain brand consistency and quality control.
  • Royalty structures and audit rights ensure fair compensation and transparency.
  • Territorial provisions limit where products can be manufactured and sold, helping protect market exclusivity.
  • Additional considerations include intellectual property ownership, confidentiality clauses, dispute resolution methods, force majeure events, and compliance with international export control regulations such as ITAR.

A manufacture license agreement is a crucial document that you need for your business. After an inventor patents a product, the journey begins in getting that product to consumers. Certain inventors will accomplish this by creating products on their own. With that, not all patent owners desire or have the means to handle various aspects of marketing and manufacturing. This is where a license manufacturing agreement comes into play.

An MLA is a contract between the manufacturer and inventor. Such a contract creates an agreement between two individuals, the licensor and licensee, where a licensor bestows a copyrighted license to the licensee. Intellectual property rights including the following:

  • Industrial designs
  • Patents
  • Trademarks
  • Utility models

Under the license grant, the licensee can manufacture a product within defined territories, usually within a nation. The contract also allows third parties to create an inventor’s product in return for royalty payments or a lump sum amount. Also, there are no specific regulations for MLAs. Rather, both parties are free to negotiate the conditions and terms of the contract to get the best deal attainable.

A licensor will try to get the most money from the deal out of a certain design, while a licensee tries to maintain low costs. An inventor may opt to make the product by himself or via a third party to make the product for his business. When demand peaks and cash flow is not readily available to meet high production demand, an inventor can license the product. Licensing is also a great option for inventors who do not want to take on the burdens of marketing, manufacturing and reaching out to consumers.

Inventors should consider the pros and cons associated with manufacturing vs. the licensing of a product to determine the best route for his business goals.

You should use a manufacturing license agreement if:

  • You have the right to a product, which another party can manufacture.
  • You want to obtain the right to manufacture products owned by other parties.

Starting Licenses

Licenses can be established in three ways:

  • Sole license
  • Non-exclusive
  • Exclusive license

Exclusive licenses give a licensee full rights to a product, and the licensor cannot sell rights to other manufacturers. A non-exclusive license means that licensors can sell non-exclusive licenses to many other manufacturers as he pleases. Sole licenses allow licensors the chance to manufacture and sell by themselves, but they could not issue licenses to any other party.

Grant of Rights and Scope of License

The grant of rights section clearly outlines the extent of the licensee’s authority to use the licensed intellectual property. This typically specifies:

  • Whether the license is exclusive, non-exclusive, or sole.
  • The specific products or components covered by the agreement.
  • Permitted uses, such as manufacturing, distributing, marketing, and selling the licensed product.
  • Restrictions on sublicensing or transferring rights to third parties.

It is important that this section explicitly defines whether the licensee may modify, improve, or adapt the licensed product and under what conditions.

Trademark Usage

Trademarks comprise a brand or visible device that makes it different from other businesses. You may register a trademark via the United States Patent and Trademark Office (USPTO). Trademarks include the following:

  • Logos
  • Words
  • Graphics

If trademarks are in use, you should include a quality control section in an agreement. This ensures that the trademark is not changed in a way that no longer resembles the licensor’s product. The provisions should be created for a licensor to approve marketing materials or packaging to make sure the trademark remains unaltered.

Confidentiality and Intellectual Property Ownership

Most manufacturing license agreements include clauses to protect proprietary information and intellectual property ownership. Confidentiality provisions typically require both parties to:

  • Maintain secrecy regarding designs, technology, processes, and business strategies shared under the agreement.
  • Limit the disclosure of confidential information only to necessary personnel.
  • Define the duration of confidentiality obligations, which may extend beyond the termination of the agreement.

The agreement should also clarify ownership of any improvements, derivative works, or enhancements made by the licensee during the term of the agreement.

Royalty Section

If you employ a royalty system, this ensures royalties for a determined amount. A licensee makes up differences if a minimum is not reached. Moreover, auditing rights should be added as well. This gives a licensor the chance to look over a licensee’s records to ensure expenditures and royalties are in accordance with the agreement.

When including various provisions in an agreement, keep in mind the following verbiage:

  • Brand Name: Under this provision, you would insert the name associated with the intellectual property.
  • Designs: This means any design that was prepared and created by the licensor that the licensee can manufacture.
  • Exclusive: This entails the product name can be used by the licensee at the exclusion of other parties and within the designated territory of the contact.
  • Intellectual Property: This describes any trademarks, designs, or products within the agreement.

Payment Terms and Reporting Requirements

In addition to specifying royalty rates, the agreement should detail:

  • Payment frequency (monthly, quarterly, annually).
  • Minimum royalty guarantees, if applicable.
  • How sales are calculated (gross sales, net sales, or units sold).
  • Accepted payment methods and currencies for international deals.
  • Reporting obligations, including regular sales reports or certified statements of royalties owed.
  • Rights of the licensor to audit the licensee’s financial records to verify accuracy.

Audit clauses often allow the licensor to inspect financial records once per year or more frequently if discrepancies are found.

Territorial Provisions

When reading a contract, ensure that you know where you are allowed to use a product. Often, you may only be allowed to use a product within a certain designation, such as a city or nation. Failure to adhere to this provision could result in the violation of the agreement and potential legal action and/or revocation of the license.

Dispute Resolution and Governing Law

A well-drafted manufacturing license agreement typically includes provisions for resolving disputes. Common mechanisms include:

  • Mediation or arbitration before litigation.
  • Specifying the governing law (e.g., the laws of a particular U.S. state or foreign country).
  • Designating the jurisdiction and venue where disputes will be resolved.

These provisions help avoid uncertainty and can lead to faster, less expensive resolution of conflicts.

Compliance with Export Control Laws

If the licensed products or technologies are subject to export control regulations (such as the International Traffic in Arms Regulations (ITAR) or Export Administration Regulations (EAR)), the agreement should address compliance requirements. This may include:

  • Obtaining necessary licenses from regulatory authorities.
  • Restricting the transfer of controlled technology to foreign persons without proper authorization.
  • Defining responsibilities for securing export approvals.

Noncompliance with export laws can lead to severe penalties, including fines and revocation of licenses.

Term, Termination, and Renewal Conditions

The agreement should specify:

  • The initial term of the contract (e.g., three years, five years).
  • Conditions under which the agreement may be renewed.
  • Grounds for termination, such as failure to pay royalties, breach of contract, insolvency, or failure to meet minimum production quotas.
  • Notice periods required for termination by either party.
  • Post-termination obligations, including the cessation of production, destruction or return of confidential materials, and payment of outstanding royalties.

Having clear termination terms helps both parties manage expectations and reduce legal risks.

Frequently Asked Questions

  1. What is the purpose of a manufacturing license agreement?
    A manufacturing license agreement allows an inventor or IP holder (licensor) to authorize another party (licensee) to manufacture, distribute, and sometimes sell a product in exchange for royalties or other compensation.
  2. What should be included in a manufacturing license agreement?
    Key components include the scope of rights granted, payment terms, royalty structures, confidentiality provisions, intellectual property ownership, territorial limitations, compliance obligations, and termination conditions.

  3. What is the difference between exclusive, non-exclusive, and sole licenses?Exclusive license: Only one licensee has rights to manufacture and sell the product.

    Non-exclusive license: Multiple licensees may be granted rights.

    Sole license: The licensor retains rights but grants rights to one licensee.

  4. How are royalties calculated in a manufacturing license agreement?
    Royalties are typically based on sales figures (gross or net sales), units produced, or a flat fee. The agreement should specify the calculation method, minimum guarantees, and payment schedules.
  5. Do manufacturing license agreements need to comply with export control laws?
    Yes, if the product involves controlled technology or defense articles, the agreement must comply with export regulations like ITAR or EAR. Noncompliance may lead to significant legal consequences.

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