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What is a Licensing Agreement?
21 September, 2021 | Bret Gower
Licensing Agreements are a form of contract, usually between commercial parties, that allow another person or business the rights to use something that you own or have the legal rights to use in return for payment. A licensing agreement grants certain rights across a whole range of types of goods and services and uses (let’s call it “property”). Often, they are intellectual property rights, such as copyright or trade mark licenses or software-as-a-service rights, but they can also be licenses for tangibles assets like specialist vehicles, equipment or even land use or occupation rights. Recently we have assisted clients to license the copyright in a series of educational books, and the IP in an asset management software system.
Franchise Agreements are often effectively a form of Licensing Agreement, providing the rights to use the brand or the franchise system or the right to sell a particular range of products, and allow the franchisee use of those intellectual property rights in exchange for the franchise fees payable. Distribution Agreements also often incorporate a licensing component.
In broad terms a Licensing Agreement allows a property owner (“the Licensor”) to leverage their rights to that property so that benefits of the property are shared with the license holder (“the Licensee”) and multiplied by the number of Licensees. Typically, a Licensing Agreement will provide the licensee with the right to use the property on certain terms and to reimburse the Licensor by way of royalties or license fees.
Why would you want to enter into a Licensing Agreement as a Licensor (the property owner)?
As a property owner, a Licensing Agreement can be a powerful way to maximise the returns on property that would be difficult or expensive to maximise via a single entity (themselves). Importantly it allows the Licensor to retain ultimate ownership of the property, and the contract can form a valuable intangible asset in its own right.
We recently help a client license their range of specialist sports goods (both the retail and product brands and the rights to sell the products), enabling them to grow their retail presence from a single store to a national footprint, and significantly increasing sales volumes.
Why would you want to enter into a Licensing Agreement as a Licensee (the user of the property)?
As a license holder, a Licensing Agreement can provide entry to complex markets with high barriers to entry, for example because of the financial and time cost of building a brand (think supermarket or alcoholic beverage brands) at manageable royalty rates. A Licensing Agreement can be a valuable asset for the Licensee too, forming part of their intangible assets and (subject to the terms of the agreement) able to be on-sold.
A good example of the advantages of end-user licensing is the software industry. A software license can allow you to use an industry-specific application, developed at a cost of millions of dollars, for a monthly subscription fee.
What should you consider when entering into a Licensing Agreement?
If you are contemplating a Licensing Agreement you should consider: how the royalty or license fee is calculated and what mechanism triggers it being payable (royalties levels are often triggered by achieving certain sales targets); whether the license is exclusive – by period of time and territory, and by product or property type; whether minimum performance targets apply – either in order to retain the license or to allow license extensions or renewals; whether there are rights to maintenance and support, or upgrades included; whether the license can be transferred or assigned to somebody else and what costs are associated; plus all the usual contractual provisions such as limitations of liability, termination, warranties from both parties, etc.
Getting good advice in the drafting and interpretation of a Licensing Agreement, prior to entering into it, is essential for both the Licensor and the Licensee to properly understand the implications, the risks involved and what their legal position will be under the license. A good commercial lawyer will try to understand your particular industry and get to grips with the giving you the certainty you are looking for.
Smith and Partners Commercial team are experts in these types of agreements and in the first instance you should talk with Associate Bret Gower on 09 837 6893 or email him at firstname.lastname@example.org, he will help you get a sense of the process, timeframes and can outline the budget expectations for you.