A licensing contract, or a licensing agreement, definition is a type of contract where one party grants another the right to sell, produce, use, and/or display protected material including a copyright, trademark, logo, and/or patent. These contracts usually include a fee for the use of the protected material. 

The party who owns the material in the agreement is called a licensor. The party being granted the license in the contract is the licensee.

In some licensing contracts, the licensor may exchange a product or service for the use of the material. A large number of licensing agreements result from the cooperation with a licensing agency or a licensing agent.

How do Licensing Agreements Work?

As discussed above, in a typical licensing agreement, a party grants another party rights to produce or sell goods or to apply a copyright, trademark or patent that they own. In most cases, the transfer of license rights is done for a monetary fee and the payments are collected in the form of royalties.

There are different types of licensing agreements. One commonly used is a music licensing agreement. When a music artist creates an original song, they own the copyright to that song. They can then choose to license their song for various uses, for example, to a film producer for use in a film. The music licensing agreement defines how their song may be used and who has the rights to use it.

Other examples of common types of licensing agreements may include:

  • A sports team allowing a company to produce merchandise with the team’s logo;
  • A movie company permitted a company to manufacture toys based on characters the movie company owns;
  • A company allowing another company to produce items they own the patent to but are not interested in producing; and/or
  • A company allowing another company to utilize a trade secret.

Licensing agreements are valuable tools for companies that own rights to a valuable product but are not able to manufacture the product.

What is Usually Covered in a Licensing Contract?

There are several topics generally covered in a licensing contract. To avoid conflict and breach of contract, a licensing contract should be written clearly and should specifically indicate the intentions of each party. The structure of licensing contracts usually includes:

  • The identification of the material to be used, such as a logo, trademark, and/or copyrighted artwork; 
  • Any exclusivity restrictions; 
  • Any financial arrangements; and 
  • Other clauses necessary for inclusion.  

Exclusivity restrictions include:

  • Who can and cannot use the protected material;
  • When and where they can use it; and 
  • Whether the license rights can be transferred to another party.

The financial arrangements section may be the most complex part of the contract. It may include:

  • Sales aspects; 
  • Payment methods;
  • Royalty provisions; and 
  • Many other financial matters.

Other necessary clauses for inclusion may be contract renewal options, anti-litigation clauses, and other provisions involving assignments of contractual duties.

In most contracts, parties will rely on market values and prices to determine the financial arrangements. Typically, royalty rates are between 6 and 10 percent. However, pricing can change when products are unique, rare, or have a one-of-a-kind market value or function.

What is a Cross-Licensing Agreement?

A cross-licensing agreement is an agreement where parties agree to mutually use each other’s protected material. This is generally done for marketing or sales purposes. The parties exchange licenses with one another because they might fill gaps in the market for one another. These types of agreements may be beneficial for small businesses or start-up businesses that need market exposure.

Another reason for this type of agreement includes products that are logically packaged together. This can include packages such as when bandages are sold with burn ointment or paper is sold with pencils.

Parties to a cross-licensing agreement typically do not exchange money for the use of material as in a licensing agreement. They may, however, make an agreement regarding sales profits. 

What is Involved in Enforcing a Licensing Agreement?

Licensing agreements are governed by contract and business laws. Because of this, enforcing a licensing agreement may involve various contract remedies. Violations of the terms of a licensing agreement may result in the following contract remedies:

  • Monetary damages;
  • Injunction and other Equitable Remedies; and/or
  • Remedies prescribed by the contract itself.  

Monetary damages occur when the non-breaching party sues to recover their losses associated with the breach. For example, they may sue for profits lost due to copyright infringement.

Another remedy may be an injunction or other equitable remedy. A court may issue an injunction instructing the breaching party to cease the activity that is causing the infringement.

A third possible remedy is one that is included in the contract itself. The licensing agreement may include clauses that dictate how the parties will resolve any disputes.  For example, the parties may sign an arbitration clause stating that they will resolve any disputes arising from the licensing agreement through arbitration instead of litigation.

It is much easier to enforce a licensing agreement that is well-written. If the licensing agreement defines clearly the parties’ rights and duties, it may help prevent disputes from arising.

Many licensing agreements include intellectual property laws. These are laws that govern issues such as:

  • Copyrights;
  • Trademarks;
  • Brand names; and/or
  • Patents.

Violations related to infringement of intellectual property may cause an individual to be subject to criminal charges, not just a civil lawsuit. Criminal penalties may include jail time and/or fines. There are some jurisdictions that also require the seizure of goods produced or distributed through infringement.

What if a Licensing Contract is Breached?

Just as with any contract, a breach of contract can have negative consequences for all parties involved. Common examples of a breach of license agreement include when one party:

  • Exceeds the scope of contract provisions, especially with regards to exclusivity and the usage of the material;
  • Fails to pay royalties when deserved by the licensor;
  • Appropriates the material for their own use or benefit, for example, stealing the protected goods; and/or
  • Engages in the unauthorized transfer of rights to a third party.

Unlike other areas of contract law, licensing law is highly regulated by both federal and state law. One example is copyright infringement or the unauthorized use or appropriation of protected materials which can result in severe criminal consequences for the defendant, including jail time and/or criminal fines.

A breach of a licensing contract may also expose an individual to civil liability. Many breach of contract claims create great financial losses for the non-breaching party. Therefore, a successful breach of licensing agreement claim may result in a large damages award for the non-violating party.

Do I Need a Lawyer for Assistance With Licensing Contract Issues?

Yes, an experienced contract lawyers will be able to assist you with any licensing contract issues. Licensing agreements can be very complex and involve regulation by both state and federal law. Therefore, experienced licensing agreement lawyers are important because they will have knowledge of the many legal issues involved.

A lawyer will be able to assist with the negotiation, creation, and reviewing of a licensing contract agreement. They can also ensure that your interests are fully represented and protected in the agreement. A lawyer can also represent you during any court proceedings that result from the licensing agreement, if necessary.