Licensing Agreements and Their Types

 

 Analysis of Licensing Agreements and Their Types

Licensing agreements are an integral part of business. They set the boundaries for how to deal with intellectual property rights. Without such written agreements, artists and creators might be taken advantage of and business owners might risk infringing rights without intending to do so.

In legal terms, a licensing agreement is a type of contract between two parties. A licensee buys the rights, either partially or in full, to something the licensor possesses. It could be done in order to manufacture goods, establish a brand or logo, or use technology patented by the licensor. Royalty terms are established, whereby the buyer agrees to certain conditions over the use of the intellectual property. Royalties in many instances can range between 4 and 10 percent of the profit earned. This contract also lays out a time frame for the agreement. At the end of the allotted time, if an extension is not agreed upon, all rights will usually revert back to the licensor. In some cases, however, a license agreement might grant perpetual rights.

Licensing agreements, by their nature, are fairly complex documents. There is much to consider on both sides of the deal. When securing the rights to intellectual property, terms typically include any exclusions, such as restrictions set by territory. Royalty rates, how royalties are determined, and advances in payment must also be ironed out. Some licensors may insert quality control measures into the contract. In all, variations exist in each agreement due to the nature of the intellectual property.

What follows is basic information on the different types of licensing agreements.

Joint Ventures

A joint venture (JV) takes place when two or more companies (or individuals) agree to shared rights over an entity. Both parties contribute the agreed-upon equity and join together to form one larger umbrella organization. This includes time, money, and effort to expand the starting idea. In a joint venture, both parties must be on the same page in order for the deal to succeed. If one lags behind or focuses on a short term gain, the integrity of the partnership may not survive the difficulties that can arise as business goes forward.

The terms of such agreements vary a great deal depending on the needs and desires of the parties, and the law governing the agreement usually is determined by the location where the contract is entered into. If one wants to begin a joint venture with a foreign company, it is advisable to study that country’s policies. India, China, and Japan are countries with unique laws and unique operating environments which pose unusual challenges for businesses organized as joint ventures.

Widely known joint ventures include MillerCoors, Sony Ericsson, and Dow Corning.

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Supply Agreements

A supply agreement sets the terms for a supplier and a buyer with regard to product supply, purchase, and sale. The parties agree upon an established figure for how much product is to be manufactured and for how much money.

Both ends of the agreement must fulfill their responsibilities. If the supplier provides less product than agreed upon, the buyer may lose money on missed sales opportunities. On the other hand, if the buyer doesn’t pay the amount due per the contract, the supplier may not have the resources to continue manufacturing. Consequences must be anticipated and the agreement might include detailed remedies in the event that either party breaches the agreed upon terms.

Other items of note found in supply agreements include exclusivity rights, standards for quality control, and how to handle product orders.

 

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Service Agreements

Service agreements are contracts in business in which one party agrees to provide a service to another party. The terms of the agreement often include an employer/employee relationship, whereas one party is hired to handle a job or task. In a service agreement, both parties are bound to the contract.  Sometimes, however, an employer might require a person hired for a specific task or project to procure a bond which provides surety for them employer’s expectations of performance.

A consultant may sign a service agreement that states the terms of the consulting work they are hired to do. Freelance artists often deal with many of these arrangements. Service agreements will vary depending on the different types of services offered.

A typical service agreement describes the services provided, states how often they are to be provided, identifies the roles of each party involved, sets a schedule for monitoring production, lists the fees involved, and includes a course of action in the event of a breach of contract. 

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Teaming Agreements

A teaming agreement sets the terms for two or more companies to pool their resources and obtain a government contract. Often this means a large corporation will act as a contractor for the government while the smaller companies serve as subcontractors on the project. These small companies often face risks when dealing with teaming agreements. It is possible they won’t receive the expected amount of work even after spending time and money preparing the deal.

Teaming agreements need to set clear workload requirements. The amount of work given to the primary contractor as opposed to the subcontractor(s) should fit the needs of all parties. The rights regarding proprietary data must also be established in the contract.

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Final Thoughts

Licensing intellectual property, goods, or services may be a challenging endeavor.  Any party contemplating entering into an alliance with another company or individual should thoroughly research the various licensing agreements mentioned above before signing any deal document. You should be fully informed about what needs to be in a licensing agreement. Indeed, even a Memorandum of Understanding (MOU) or a Non-Disclosure Agreement (NDA) or a document called Head of Agreement should not be signed without the aid of legal counsel. There are nuances in the language specific to the type of product, the product’s field and market, and the nature of each business partner involved that may skew the balance of obligations and rights.