Licensing agreements: Tools for entrepreneurial success

When used correctly, a licensing agreement can be used for the betterment of a business.

When well drafted, licensing agreements can provide benefits to both the licensor and the licensee. A licensor is the creator or inventor of the product. The licensor uses licensing agreements to protect its rights in the product. A licensee is the company that receives the license from the licensor, allowing for the ability to use the product. Entrepreneurs can make use of these agreements for the betterment of their business. As a result, it is helpful to have a basic understanding of licensing agreements.

Licensing agreements defined

Black's Law Dictionary defines licensing agreements as:

[A] written contract between the owner/licensor of a patent, copyright, trademark, know-how, service mark, or other intellectual property, and a licensee to use, make or sell copies of the original. Franchisers promote sales of goods and services through licensing agreements. Commercialization of technology is a major purpose for licensing agreements. These contracts typically (1) limit the licensee's scope or field, (2) make the license exclusive or nonexclusive, (3) demand royalties or other compensation if further licensing occurs by the licensee.

Essentially, a licensing agreement protects the legal rights of an owner or creator of a product or piece of property when the owner or creator allows others to use it. There are many forms of licensing agreements. Some examples include:

  • Patent licensing agreements. Essentially anything that is patented could be licensed for use by a third party. The Association of Corporate Counsel notes that a well drafted patent licensing agreement can lead to "substantial income for the licensor and tremendous business opportunity for the licensee."
  • Trademark licensing agreements. A trademark licensing agreement is designed to provide other manufacturers with the right to use the trademark, and trademark only. Examples are many and include using clothing apparel's trademark on a line of perfume or using popular children's characters with food products.
  • Software licensing agreements. These documents are designed to protect software. Provisions within the agreement can include how many computers the software can be installed on and whether or not the licensee can make copies. Remedies may include return of software and any copies thereof at the cost of the licensee.

Putting together a licensing agreement can be difficult. Arguably, the most important step towards ensuring success is completion of due diligence. Licensors must take the time to research and develop the product before moving forward with a licensing agreement.

It is also important to structure these legal documents wisely. They should be tailored to each unique situation and the use of a boilerplate online document is not recommended. The Association of Corporate Counsel also states that poorly drafted license agreements can result in "significant confusion and angst." This can be avoided by seeking the counsel of an experienced business transactions and contracts lawyer.