This article is written by Senjyoti Howlader pursuing a Certificate Course in Advanced Commercial Contract Drafting, Negotiation & Dispute Resolution. This article has been edited by Ruchika Mohapatra (Associate, Lawsikho).
This article has been published by Sneha Mahawar.
Table of Contents
Introduction
A licencing agreement is an agreement between parties, i.e., the licensor and the licensee, wherein the licensor grants the licensee the right to certain rights, e.g., brand name, trademark, patented technology, or the ability to produce and sell goods owned by the licensor. These agreements are commonly used by the licensor to commercially exploit their intellectual property. In this article, we will explore licensing agreements, their advantages and disadvantages, types, and essential clauses of a license. Our main focus will be on the non-transferable and non-exclusive clauses of a license.
What is a license agreement
In a typical licensing agreement, the licensor agrees to provide the licensee with intellectual property rights such as the licensor’s technology, brand name, or product creation know-how. In exchange for the licensor’s intellectual property, the licensee typically pays an upfront fee and/or a royalty fee to the licensor. A royalty fee is an ongoing fee paid for the right of use of the licensor’s intellectual property.
Benefits of a licensing agreement
- The guidelines, rules, and stipulations that govern the use of the licensor’s brand, patent, or trademark are explicitly laid out in licensing agreements. Both the licensor and the licensee understand exactly what is expected of them. This includes when and how much payment is due, any additional royalties due as a result of the relationship, the type of agreement, the length of time the licensee is allowed to use the property, copyright issues, and the contract’s expiration date.
- Setting up a contract saves time, money, and hassle. For example, if someone decides to use a trademark without first obtaining a license, the property owner may sue them, resulting in legal fights, court bills, and lost time.
- Contracts give licensors a higher degree of control over their intellectual property and give them access to new markets. A licensor can, for example, control how their property is sold. It also allows them to reach new markets via the licensee rather than having to establish a shop there themselves.
Advantages and disadvantages of a licensing agreement
- One of the disadvantages of having a licensing agreement is the possibility of entering into a deal with the wrong party. In some circumstances, licensors may be so eager to enter a market that they neglect to conduct due diligence. As a result, a licensor may be trapped in a long-term contract with a corporation whose values conflict with its own. The licensee is subject to the same rule, especially if it believes a new product or brand would do well in a particular area without conducting market research.
- Both parties face the possibility of losing their brand strength and/or reputation. For example, if one company makes a marketing blunder or becomes embroiled in a controversy, the other party may be put in jeopardy as well. This means that both the licensor and the licensee must operate efficiently.
- Entering into a deal boosts the licensor’s competition. Despite the fact that the licensee is acting on behalf of the licensor, it is in direct rivalry with their business partner. The licensee suffers as well. Because relying on someone else’s product means cutting back on the licensee’s own research and development.
Different types of licenses
Licenses are classified into three types: a. non-exclusive licenses, b. exclusive licenses, and c. non-transferable licenses.
Non-Exclusive Licence
The Licensor retains the right to use the licensed property as well as the right to issue further licenses to third parties under a non-exclusive license. As a result, the licensee must expect to compete in the use of the licensed property with both the licensor and other licensees. This is the most common sort of license given to rivals in a given business. These licenses frequently include a “most favoured” provision, which states that if the licensor later licenses another party on more favourable terms, he must also extend these terms to the earlier licensees.
Exclusive licenses
They’re frequently used when the licensee would have to spend a lot of money, time, and effort to exploit the licensed property. If and when commercial success is achieved, exclusivity assures that there will be no competition. Because the licensor has relinquished the right to use the licensed property, the licensor must insist on some type of performance assurance. This assurance is usually in the form of a minimum royalty or a mechanism for the licensor to cancel or convert the license. Occasionally, exclusivity is awarded for only a few years; in other circumstances, exclusivity may be granted for as long as the licensee adheres to the agreement’s minimum royalty conditions.
Non-transferable licenses
Those licenses that aren’t transferable to a purchaser because of their conditions or the law. The Licensee is the exclusive owner of the rights granted to the Licensee under this Agreement. The licensee is not permitted to sublicense, assign, or otherwise transfer or distribute its rights under this agreement. Other acts or omissions that constitute a substantial breach of this agreement, as well as AB’s remedies or causes of action for the same, are not limited. Except by will or under the rules of succession and distribution, the licensee may not transfer this option. This option may not be transferred, assigned, pledged, hypothecated, or disposed of in any manner, whether by operation of law or otherwise, and may only be used by the grantee or his guardian or legal representative during the grantee’s lifetime.
Essential clauses of the license agreement
Every license agreement should contain a framework that provides support for other clauses or systems of clauses in the license agreement.
Term
This defines the period for which the license is granted.
Exclusivity and right of transfer/sub-license
It is important to mention whether the license is an exclusive license or a non-exclusive license. For software products, it is unusual to provide an exclusive license. If you are licensing the right to use another type of IP, such as a training course, an exclusive license might make more sense. Allowing the licensee to sell sub-licenses is another issue to consider.
License fee
This mentions the payment for licensing. The amount, type (fixed, lumpsum, percentage of profit, etc.), and mode of payment, if payments are due, are mentioned in this clause. Royalties can be calculated on a number of factors, such as the following:
- the quantity of products sold; or
- Profit is generated due to licensed IP.
Geographical limitations
This clause sets out whether the licensee will be restricted to a certain geographical location.
Quality control
This clause mentions the right of the Licensor to monitor and set standards for quality control and hence sets the standards to be followed and maintained by the Licensee during production.
Intellectual Property Rights (IPRs)
This clause specifies who owns the IPRs and states whether the licensee is permitted to modify the licensed IP and whether the licensee is permitted to copy or reproduce the IP.
Advertising and promotional materials
A licensor will frequently want approval rights for all marketing, training, and advertising materials. the licensee wants freedom of action and does not want the licensor, who may not be well versed in marketing or local conditions, to have veto power.
Most licensors want full protection
Most licensors want full protection, including insurance coverage, for the activities of the licensees. Most licensees want product liability carried by the licensor. Such provisions are mentioned in this clause.
Governing law and dispute resolution
This clause clarifies the law that will govern the agreement and any disputes that may arise due to the agreement.
Taxes and liabilities
It is equally important to mention who is responsible for what taxes that may accrue. Normally, the licensor wants to have no involvement in sales or employment activities and wants to be held harmless from all such liabilities, but to achieve that, careful attention must be paid to the structure created in the agreement since some jurisdictions may impose pseudo employment taxation in certain licence arrangements and, of course, local business licenses must be paid and kept up-to-date by the licensee.
Conclusion
If the agreement is appropriately drafted with a clear understanding of the parties’ goals and responsibilities, licensing a product or service can be a great way to generate solid revenue flow. A license’s scope is usually limited so that the licensor can focus on select markets or collaborate with many licensees. Before starting a relationship, it’s critical to consider not only solid legal guidance but also good tax advice and market knowledge. It can be a means for an inventor or developer of a product or service to reduce their involvement in marketing and supplying the service or product while still earning a good living if done properly.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:
Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.
