A licensing contract, or licensing agreement, is a contract wherein one party grants another party the right to sell, produce, use, or display protected material such as a copyright, trademark, logo, or patent. The party that owns the material is called the “licensor”, while the party being granted the license rights is the “licensee”.
Licensing contracts usually involve a fee for the use of the protected material. In some cases, the licensor may exchange another product or services in exchange for the use of the material. Many licensing agreements are the result of cooperation with a licensing agency or a licensing agent.
In order to avoid business conflicts and breaches of contract, a licensing contract should be written very clearly, and should precisely indicate the intentions of each party. A licensing agreement will typically cover:
- Identification of the material to be used (i.e., a logo, trademark, copyrighted artwork, etc.)
- Exclusivity restrictions: this is where the parties define who can and cannot use the protected material, when and where they can use it, and whether the license rights can be transferred to yet another party
- Financial arrangements: this is the most complicated part of the contract, as it can include sales aspects, payment methods, royalty provisions, and many other financial matters
- Other clauses: These can also include contract renewal options, anti-litigation clauses, and provisions regarding assignments of contractual duties
With regards to contractual definitions, the parties will usually rely on market values and prices to determine the financial arrangements. For instance, typical royalty rates are 6-10%; however pricing can often change especially where the products are unique, rare, or have a one-of-a kind market function.
A cross-licensing agreement is one where the mutually use each other’s protected material, usually for marketing or sales purposes. Basically, the parties exchange licenses with one another, as they might fill gaps in the market for one another. Or, the products may be so well-used together that it makes sense to package them together (for example, when bandages are sold with burn ointment, or when paper is sold with pencils).
In a cross-licensing contract, the parties usually don’t exchange money for the usage of the material, though they may work out an agreement regarding sales profits. These can be beneficial for small or start-up businesses that need market exposure.
As in any contract arrangement, a breach of contract can be disastrous for all the parties involved. Some common breaches include:
- Exceeding the scope of contract provisions, especially with regards to exclusivity and the usage of the material
- Failure to pay royalties when deserved by the licensor
- Appropriating the material for one’s own use or benefit (i.e., stealing the protected goods)
- Unauthorized transfer of rights to a third party
However, unlike other areas of contract law, licensing law is one area of law that is highly regulated by both federal and state law. For example, copyright infringement and other unauthorized use or appropriate of protected material can result in heavy criminal consequences for the defendant. This can result in criminal fines and/or possible jail time.
In addition to criminal consequences, a breach of a licensing contract can often expose the defendant to civil liability. Many breach of contract claims involve heavy financial losses for the non-breaching party. Thus, a breach of a licensing agreement can result in a hefty damages award for the non-violating party.
As you may be able to see, licensing contracts can be very complicated because they often cover so many different legal issues. It’s in your best interests to hire a qualified business lawyer for assistance with negotiation, creating, and reviewing a licensing contract agreement. Your attorney can help ensure that your interests are fully represented in the agreement. Also, your attorney can represent you in court if you need to file a lawsuit regarding the licensing agreement.