A marketing license agreement is used in business and commerce to provide someone with the authority to use, own, sell, or distribute a specific product. 3 min read
2. How Do Licensing Agreements Work?
3. What Types of Things Can Be Licensed?
Updated November 11, 2020:
A marketing license agreement is used in business and commerce to provide another individual or business with the authority to use, own, sell, or distribute a specific product. A license is used when a company exchanges these rights for payment. Examples include:
- Licenses sold by sports teams to companies that create and sell team merchandise.
- Licenses sold by film companies to those who create products based on the movie's characters.
- Patent licenses sold to give another company the right to make and sell a protected product.
- Licenses that give another company the right to use a process that is considered a trade secret .
Marketing license agreements are useful for companies that have an outstanding product but are unable to manufacture and distribute it. This often provides the optimal return on investment for the smaller company.
What Is a Licensing Agreement?
A licensing agreement is a written contract between two parties that outlines the parameters by which one party can use the property of another party. While the owner of the property in question retains ownership, the other party is purchasing a license in exchange for a flat fee or royalty payments. Licensing agreements are most commonly used for intellectual property assets .
The licensing agreement should name the parties involved and define the scope of the licensed IP, including the ways in which it can be used. Common parameters include use during a specific time period or in a specific geographic region. In some agreements, the payment increases with the number of times the IP in question is reproduced.
Consider the example of a book publisher that enters a licensing agreement for an illustration to use on the cover of a new title. The owner of the illustration allows the licensee to use the image, but restricts it from being used in advertising campaigns and increases royalty fees with every 10,000 copies sold.
Many industries and types of businesses rely on licensing agreements. For example, businesses that use software have a licensing agreement in place with the owner of the software. Fast food restaurants enter licensing agreements with entertainment studios to create and distribute toys featuring popular movie characters.
Marketing licensing agreements are one of the most common aspects of intellectual property (IP) protection .
How Do Licensing Agreements Work?
The more popular the product to be licensed, the more bargaining power its owner has when entering into a licensing agreement. It's important to consult an attorney who has thorough knowledge of IP case history and understands the elements in this type of agreement that allow the copyright owner to receive fair profit from the licensee. Factors involved in a licensing agreement may include but are not limited to:
- Territory and exclusivity: The licensee's rights to manufacture and distribute a product are exclusive in a specific geographic area. No one else will be allowed to sell the product in the specified territory for a specific time period.
- Subsidiary licensing: The licensee may be given the right to sublicense the ability to make and sell the product in question to another business.
- Payments: Most licensing agreements provide for royalty payments, sometimes also including an initial advance. Royalties can either be a flat amount or based on a percentage of sales. It's important to define net sales in the contract and indicate what type of items can be deducted from net sales before royalties are calculated.
- Quality assurance and monitoring: The licensor must plan to monitor sales to protect his or her IP, through period quality checks and assurance that the product is not discounted too heavily.
- Non-disclosure: The licensor agrees that he or she will not reveal trade secrets associated with the product to others.
- Non-compete: In some cases, the licensor must sign a non-compete agreement to keep licensee territory and rights exclusive.
What Types of Things Can Be Licensed?
Most business assets can be licensed, but this type of agreement is most often used for IP assets such as copyrights, trademarks , and patents . Common products that are licensed include:
- Apps and software programs
- Copyrighted works , including derivative works
- The right to perform a copyrighted work publicly
- Patented inventions
- Trade secrets
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