Licensing Agreement Essentials

Ownership Rights Must Be Established

A licensing agreement is a legal document that binds two parties together ­­the licensor and the licensee. Standard agreements grant the latter the right to sell or produce the goods of the former, or to apply a trademark or use technology that is patented and owned by the licensor. In exchange for this permission, a licensee will submit to the various conditions outlined in the document, such as agreeing to pay royalties.

Such agreements cover a wide breadth of different situations where ownership rights must be established. For instance, a retailer may need an agreement with a sports team to combine brands, allowing one to sell merchandise with the logo of the team. Alternatively, a manufacturer might license proprietary hardware from another company in order to get an edge on the competition instead of developing their own from scratch.

Here is a checklist of important licensing agreement terms

– The Parties

While it may seem self-­evident, it saves time to put together legal names, contact information and legal address information in the final agreement. This will save time later by avoiding emails and phone calls to get information that you will need for meetings and other interactions.

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– Whereas Clause

The whereas clause provides background information for the license. It explains why the licensing agreement is being created and can also include what the objective of the agreement is. Not everyone will use such clauses. But it is recommended to have some background explanation in an agreement as memories fade quickly. Having these statements in the document are invaluable if the court must examine it.

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– Definitions

Simple agreements may not need an entire section for definitions as they can be listed inline with the first appearance of the word. More complex licensing agreements that involve export controls (these are the complex regulations that a country uses to monitor the sharing of sensitive science and technology information), a catch all provision, derivative works or sublicensing options should put all definitions together for easier interpretation and drafting. The general terms should be put here as well as frequently used technical terms. It’s recommended to either place them in hierarchical or alphabetical order.

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– Rights Granted

It is important to specify the exact language of the ownership rights granted. For example, you must detail the exact rights that are being given for the intellectual property documented within, such as non­-exclusive, co­-exclusive, patent right only, know­-how right, exclusive right and similar. The terms of non­exclusivity or exclusivity should be detailed as well, in addition to whether this right can be revoked or whether sub-licensing or derivative works are permitted. Each company tends to deal in a uniform way, so it helps to know the language that will be used frequently.

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– Restrictions

In this section, you’ll note the territory, field and rights of the prior licensee or any commercial rights the licensor retains. Some of the information listed here will be found under the Parties section, so you may find this is not necessary depending on your agreement situation.

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– Ability to Grant a Sublicense

 There are several other choices involved between parties when granting the right to sublicense to a third party. You may note that a sublicensee can only be someone with privity with the licensee, an affiliate thereof, or even limited to a certain number.

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– Agreement Terms

This should note when the contract is to begin and, where available, when it ends. It’s also worth including how the contract may be renewed, if that is an option. Additional information like export controls or a catch all provision can be included too.

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– Warranties 

Each parties should given a certain set of basic warranties. For instance, there is the ability to begin the agreement, the standard disclaimer on all warranties, as well as the validity of the intellectual property.

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– Infringement

This section of the licensing agreement will dictate how infringement will be handled if committed. If a third party infringes on the product, there will also be consequences that should be listed here. If there is a means to recover the situation, this should be detailed along with how each party will divide the responsibility. This also covers indemnification of the licensee by the licensor.

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– Definition of the Intellectual Property (IP)

This details the IP, how one pays for it, whether there is one patent or comprised of several tangible materials, and similar factors all need to be written in the agreement.

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– Confidentiality

There is no need to include additional information here if all parties have entered a nondisclosure agreement that will remain effective for the duration of the licensing agreement. However, if this has not yet been done, it is important to add this to the current agreement if needed. If a previous agreement is weak, take the time now to bolster it and ensure the agreement takes precedence above prior documents.

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– Termination

This section may be complex or simple. Put care into your thoughts on why you would need to terminate an agreement, but avoid letting it completely take over your negotiations.

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Additional Notices

Rounding out the checklist are various clauses that usually aren’t customized as the boilerplates works well enough:

Notices – this refers to handling payments, notices and similar things you’ll make or get.

Integration – this says the active document is controlling, regardless of what was previously signed, unless the license explicitly says otherwise.

Modifications – this specifies the way in which you will make amendments to the license, such as whether they need to be in writing or if provisions can be altered orally.

As you can see from this summary of how licensing agreements work, they can be quite complicated. If you are new to them or have limited experience in drafting and reviewing such an agreement, it is best to seek the help of a professional to ensure that your interests are protected.