Last updated June 7, 2024
What is a Licensing Agreement?
A Licensing Agreement is a document artists, creators, and businesses use to allow another party to use their intellectual property (IP) in exchange for compensation. With this contract, you give the other party permission to use your property while retaining your ownership rights.
This contract outlines the terms and conditions of the deal, including how the non-owning party can sell, distribute, or use the intellectual property.
Parties to a Licensing Agreement
The two parties in a Licensing Agreement are the licensor and the licensee.
| Party |
Definition |
| Licensor |
The licensor is the individual or entity that owns the rights to something and grants permission to another party to use that property under certain terms and conditions outlined in the Licensing Agreement.
Popular entertainment companies, like Disney or Warner Brothers, are real-world examples of licensors. In both cases, these companies own intellectual property or franchises that other companies can use for a fee.
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| Licensee |
The individual or entity that receives permission to use something under the terms specified in the Licensing Agreement.
Usually, the licensee pays royalties or fees to the licensor to use the intellectual property.
If Disney is the licensor, examples of licensees could be LEGO, Hasbro, or Mattel. These companies may have Licensing Agreements in order to create and sell products using Disney characters or franchises.
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Key terms to create a Licensing Agreement
In order to effectively create a Licensing Agreement, here are some key terms to keep in mind:
1. Intellectual property
Intellectual property refers to creations of the mind which are legally recognized and protected. Examples of intellectual property can include inventions, literary and artistic works, designs, symbols, names, and images. Typically, intellectual property is protected by trademarks, patents, and copyrights.
Intellectual property is distinct from physical property. The ideas and designs that help create a physical item, not the item itself, are intellectual property. For example, a car is physical property. On the other hand, the car’s designs, technological components, or model name are all intellectual property. However, IP rights can sometimes extend to physical objects, specifically the reproduction and distribution of tangible copies of the work.
For your Licensing Agreement, be sure to state if the intellectual property is licensed as a trademark with the US Patent or Trademark Office or with a state trademark office.
2. Derivative works
A derivative work is a new creation or product based on the existing intellectual property. For example, a movie adaptation of a popular book is considered a derivative work because it takes the original IP and adapts it to a new format.
When creating your Licensing Agreement, determine if the licensor or the licensee will be the sole owner of derivative works.
If the licensor owns any derivative works the licensee creates, the licensee can still use their derivative works for the duration of the contract.
3. License-back
Your Licensing Agreement should include information about a license-back. Granting a license-back means the original owner/licensor can keep using their intellectual property, even after giving an exclusive license to the licensee.
If you choose to include a license-back, our document will include a clause that the licensor has paid the licensee $1.00 for this right.
4. Assignment of license
When creating your Licensing Agreement, make sure to determine if the licensee will be allowed to assign the licensed product to a third party. If so, the third party can use the licensed product in the same way as the original licensee.
Types of Licensing Agreements
There are two types of Licensing Agreements: exclusive and non-exclusive.
- Exclusive use grants the licensee the sole right to use the intellectual property. Under an exclusive use agreement, no other person can use the intellectual property. However, as outlined, if your exclusive Licensing Agreement includes a license-back clause, the original owner can keep using their intellectual property.
- Non-exclusive use allows multiple licensees to use the same intellectual property. In other words, the licensor can enter into several Licensing Agreements for the same idea or product.
What are the benefits of Licensing Agreements?
1. Helps to avoid disputes
Licensing Agreements can help avoid future conflicts by clearly outlining how the IP can be used. With all the finer details, such as allowed uses, payment terms, and contract duration, in writing, both parties will have a physical document to consult in case of confusion or disagreement.
Additionally, these agreements often provide methods for resolving disputes. Our questionnaire will ask if disputes will be settled through mediation or arbitration.
2. Helps generate revenue
Licensing Agreements are a great way to help licensors earn money from their IP without producing or selling products themselves.
A licensor will usually receive royalties from licensees who use their IP. In some cases, the license could be paid for with a lump sum fee at the time of signing. In other cases, the licensee may be required to pay “royalty” payments. Royalty payments are based on the profits a licensee makes from using the intellectual property.
3. Market expansion and brand exposure
Finally, Licensing Agreements help licensors reach new markets without directly entering them. By partnering with established licensees, licensors can expand their brand's presence to a different customer base.
Licensing Agreements are beneficial for licensees because they can help boost credibility and attract more customers by using a recognized brand or technology.
