Mastering Licensing Agreements: Terms and Negotiation Strategies
What is a licensing agreement?
An Intellectual Property (“IP”) license is a legally enforceable agreement by which an IP owner (the licensor) authorises another party (the licensee) to exercise some of the licensor's rights in the IP, while retaining ownership and control of the IP.
Both parties may benefit from the arrangement. For instance, a licensor may use the licensee’s means of production, whilst the licensee may use the licensor’s known brand. For more information on licensing IP, check out our article on Licensing Intellectual Property: the what and the why.
Terms to consider
When a business is negotiating licensing agreements, there are a number of important considerations to take into account:
Grant of rights:
A licensing agreement usually begins with a “grant of rights” section which names the parties involved, the IP being licensed, the degree of exclusivity and more.
This is important to include because a parent company may have several entities, so it should be made clear which entity the agreement applies to. Furthermore, by precisely specifying what IP is being licensed, the degree of exclusivity and the overall nature of the licensing agreement, the parties can clarify the scope and terms of their agreement.
NOTE: the more prescribed and specific an agreement is, the less room for potential disputes once the licensing agreement is in effect.
Degree of Exclusivity:
A licensing agreement may be exclusive, sole or non-exclusive.
In an exclusive agreement, the licensee is the only party who can use the licensed IP. Since this agreement prevents the licensor from granting or exploiting the relevant IP rights, this form of license tends to be the most expensive.
In a sole agreement, the licensee is given a continued right to use the licensor’s IP, along with the licensor, with the sole exception being granting the IP rights to other parties.
In a non-exclusive agreement, the licensee is able to use the IP, but the licensor reserves the right to exploit the IPR themselves and grant the license to other interested parties as well.
When determining which degree of exclusivity may be best appropriate, it is important to consider your product/service, territory as well as budget. If you reasonably believe your product/service will thrive regardless of competition from other businesses using the same IP, then consider a non-exclusive agreement. However, if you consider it essential that your product carries an exclusive use of the IP, a sole licensing agreement may be the better option.
Term:
This is the term or length of the agreement. This must be thought through realistically as this will vary in accordance with the product being sold using the licensor’s IP.
As a start-up, the term is essential; it should cover the creation, growth and sale of the product or service. As timings may vary with the development of your business and the growth of your product, it may be best to obtain as long a term as possible, with the ability to renew.
Territory:
This is a clarification of where the licensee can use the rights granted. Licensors may add geographical restrictions by country, continent or region. A Subway franchisee will likely want to be the only Subway in the immediate area. Without specifying the territory the licensor may allow another Subway franchisee to set up shop next door.
As a start-up, you should consider the extent of your business. Where do you plan to sell and how far do you believe you can expand your business? Thinking about this before negotiations will help you get a clearer idea of the kind of agreement you want.
Compensation:
This is usually a one-time payment and/or an earned royalty fee with an annual minimum. For a one-time payment, the licensing party will pay the licensing fee up-front for the use of the agreement for the agreed term under a royalty fee payment method. The licensor may receive a percentage of net sales on products sold that used the licensed IP.
Parties should decide whether an annual minimum payment is required, include clear terms about the timing and frequency of such payments, and whether an accounting report should also be provided. It is important to note that licensors with known brands may require both an upfront fee and a royalty fee.
Termination:
This defines circumstances where the agreement may be terminated. During negotiations, both parties should decide upon a list of circumstances which may trigger termination, such as the licensee failing to pay royalties. There is no obligation to terminate but it may be in the party’s best interests to do so.
Negotiation considerations
It would be prudent to assume that potential disputes regarding the licensing agreement may arise. Therefore, it is key you negotiate well to secure a licensing agreement that is clear and beneficial to all parties involved.
It is always advisable to speak to a lawyer, potentially a contract expert, as they will often help create a fair licensing agreement which protects you in any event. However, potential negotiation considerations may include:
Go in with a win-win attitude:
Ultimately, keeping a positive attitude may allow you to secure a long-term lucrative business relationship which may provide the flexibility needed as a startup.
Be patient:
Licensing agreements can take months to negotiate since there are so many aspects to agree upon.
NOTE: It may be helpful to begin by agreeing on broad terms. By starting with terms that are easily agreeable to both, a business relationship can start building, which may make it easier when negotiating tougher terms later on.
Be flexible:
Manage your expectations - remember there will never be a perfect contract.
Both businesses are looking to further their own interests, so you have to be prepared to compromise at times.
Be prepared to enter into sub-agreements:
It would not be unusual for parties to want to add additional clauses or agreements. For example, a licensor may require the licensee to enter into a Non-Disclosure Agreement (NDA) preventing the licensee from disclosing any proprietary information. For an insight into NDAs check out our article on What is a Non-Disclosure Agreement (NDA)?
Carry out your due diligence:
Consider: What are the company’s strengths? Weaknesses? What are the company’s licensing goals?
Prior to negotiations, prepare a list of must-haves and potential things you are happy to give up. Try and proactively think of the key terms a licensor may not budge on.
You can have the upper hand from a position of knowledge, especially when everyone in your team is reading from the same script. NOTE: It is good to approach a licensor by gaining the support of someone already working within that company.
Email less:
Conversations are better had face-to-face or on the phone, and potentially with other parties.
Sometimes lawyers should get involved:
Generally, the more experienced the negotiators are, the longer they can wait before involving their lawyers.
However, lawyers should observe the discussions being held, being prepared to step in if a party unknowingly puts himself in jeopardy. Furthermore, lawyers can represent sincerity in seeing a licensing agreement through to fruition and can assist with drafting documents.
Be dispute ready:
This applies to any contract you may enter into. Making sure that clear set procedures are in place to deal with potential disputes arising from the agreement is imperative to ensure a smooth process throughout the term of the agreement.
‘He who can walk away from a deal controls it’:
Be prepared to walk away from the table if they are not offering you what you want.
Have secured reasonable alternatives at all times of negotiation if it does not work out.
Conclusion
Although negotiating licensing agreements can be stressful and time-consuming, by familiarising yourself with the information in this article, you should be able to gain a solid understanding of common terms and negotiation considerations of a licensing agreement.
Useful sources
Licensing Intellectual Property Part 1 - the what and the why
Licensing Intellectual Property Part 2 - Practical Steps
Licensing Intellectual Property Part 3 - An insight into sub-licensing
Author: Neha Tavra -
Author: Neha Tavra -
DISCLAIMER
This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.
Sources
Quiles Law, 'Licensing: The Basics ' (Quiles Law, 10 May 2019) <https://www.esports.law/blog/licensing-the-basics> accessed 22 August 2022
Quiles law, 'Licensing Agreements: Components and Concerns' (Quiles Law, 28 May 2019) <https://www.esports.law/blog/licensing-agreements-components-and-concerns> accessed 22 August 2022
David Wanetick, 'Strategies for Negotiating Licenses' (Intellectual Property Expert Group) <https://www.ipeg.com/strategies-for-negotiating-licenses-2/> accessed 22 August 2022
European Patent Office, 'Negotiating a licensing agreement' (European Patent Office) <https://www.epo.org/learning/materials/inventors-handbook/dealing-with-companies/licensing.html> accessed 22 August 2022
Stephen Key, 'How to Negotiate a Licensing Agreement Like a Pro' (INC, 6 March 2015) <https://www.inc.com/stephen-key/how-to-negotiate-a-licensing-agreement-like-a-pro.html> accessed 22 August 2022
