Your Guide To A Licensing Agreement
Individuals and businesses create intellectual property all the time. Sometimes, they agree to allow another person, a business entity or a group to use their intellectual property. To control risk and manage expectations, savvy intellectual property owners often choose to draft and execute a licensing agreement.

Your Guide To A Licensing Agreement

When you think about property, your house and yard likely come immediately to mind. The property, however, is a wide-sweeping legal concept that encompasses many different things. One of them is intellectual property. This component of property applies to anything you or someone else creates. It could be song lyrics, a poem, a logo, an interior design, blueprints, an invention or another product of intellectual and creative pursuits.

If you want to use someone else's intellectual property or wish to grant another person the right to use yours, you probably need to know a few things about licensing agreements. In this guide, we take an in-depth look at these legally-binding contracts. While we give you reliable information, you must remember that this article does not constitute legal advice. It is important to consult with an experienced attorney prior to executing a licensing agreement or any other contract.

What Is a Licensing Agreement?

Individuals or businesses own the intellectual property they create. Unfortunately, they may not be in a position to reach customers with their products. A licensing agreement is often the solution. Simply, a licensing agreement is a contract between two parties that grants one the right to use the intellectual property of the other. The property involved may be a proprietary product, a trademark, a copyright, a patent, trade secrets or something else. The party who grants the license is known as the licensor. The licensee is the party who uses the intellectual property of the licensor.

Licensing agreements exist in a variety of contexts. For example, a small company may grant a license to a retail outlet to sell its products. Alternatively, a large production firm may license the technology of a smaller start-up organization to better meet production needs. Similarly, an author may receive a license to write stories about well-known cartoon characters or action heroes. One can think of countless other examples when licenses are necessary to facilitate commerce or increase business.

How Does A Licensing Agreement Work?

Like all contracts, licensing agreements memorialize a meeting of the minds between two or more parties. These agreements typically have a duration. Upon expiration of the agreement, parties may have the option to renew it. To form a licensing agreement, the parties must each give something up. For the licensor, the sacrifice is usually the exclusive right to use intellectual property. For the licensee, the sacrifice is generally money, although consideration varies from agreement to agreement.

Licensing agreements are legally binding. While you can likely find a form licensing agreement online, you must be sure it passes legal muster. As you likely know, there is no substitute for competent legal counsel. A variety of federal, state and local regulations may affect the validity of the licensing agreement. As such, you should always collaborate with an intellectual property attorney to be certain your agreement is valid and enforceable.

How Do You Form a Licensing Agreement?

Contracts are only effective if they meet the expectations of the parties. While this seems logical, drafting a dependable and accurate licensing agreement is more difficult than it sounds. Whether you are looking to license the intellectual property of someone else or want to grant a license, you should follow a careful plan. Usually, you can negotiate, draft and finalize a licensing agreement by taking four steps.

1. Determine the Subject of the License

Before you license intellectual property, you must be certain you actually own it. After all, if you don't own an idea, media, product or process, you can't license it to someone else. If you are trying to win a license, you must determine that the party with whom you are working owns the property. For registered property, such as trademarks or copyrights, you can likely search the database at the U.S. Patent and Trademark Office to verify ownership.

Once you know who owns the property, you must identify which aspects of it you wish to license. You probably don't want all the trade secrets, marks, copyrights or products another party owns. Or, you may not want to give up your exclusive right to everything you have created. As such, you must narrow the license request to specific pieces of intellectual property. Once you know the precise subject of the licensing agreement, you can proceed to the next step.

2. Identify Motives

Before getting far into negotiations, you must determine how the other party plans to use the intellectual property. If you own the rights to proprietary information or a certain product, you likely don't want to see it misused. You may not want it changed. Often, licensing negotiations end at this stage, as parties frequently have different ideas about the proper use of intellectual property. The important point, though, is to achieve a complete meeting of the minds before moving forward.

3. Outline the Terms of the License

Once all parties agree on the proper use of intellectual property, there are some important details to hash out. For good reason, licensing agreements tend to belong. You must negotiate the length of the grant, restrictions on the use of intellectual property, payment, expiration, indemnification, and other topics. You may also need to clearly define the warranties and representations that are part of the deal.

The use section describes how the licensee may use the intellectual property without violating the agreement. It may either be broad or limited. Also, use covers how licensees can dispose of the license. If licensees cannot assign or transfer the license, the use section of the agreement should clearly restrict these actions.

The length section defines the duration of the licensing agreement. The agreement may continue into perpetuity or may end after a short time. The length section also usually indicates whether the license automatically terminates or renews on its own. The representations and warranties section usually protects both parties. It may state that the licensor owns the property and the licensee has the right to borrow it. Or, it may restrict the licensee from misusing intellectual property during and after the term of the license. There are other representations, warranties, and restrictions that either party may decide to add to the agreement as well.

The indemnification section usually protects licensees from infringement claims brought by third parties. While all licensing agreements don't have indemnification clauses in them, they are often a good way to control risk or manage exposure. Each of these areas is fraught with legal pitfalls. They are also specific to individual licensing agreements. Accordingly, it is a good idea for all parties to the agreement to seek independent legal counsel to protect their best interests.

4. Finalize the Agreement

After negotiating the terms of the license, parties must finalize the agreement. This is usually a simple process, during which both parties sign the contract. Before putting pen to paper, though, you must be sure the contract reflects the intentions of everyone involved.

You should also know about a fundamental tenet of contract law. In most places, ambiguous terms in contracts are construed against the party that wrote the agreement. Therefore, you must be certain the contract is clear and records the complete agreement of the parties. If something is vague and you wrote most of the agreement, a court may rule against you. Also, if a judge finds one part of your licensing agreement to be unenforceable, expect to have the rest of the agreement remain in force.

Most licensing agreements are governed by state law. While the jurisprudence in most states is similar, there are subtle differences. Accordingly, you must make sure you understand the laws where the transaction takes place.

When Is a License Agreement Right for You?

Many individuals, businesses and groups choose to execute licensing agreements to better serve their interests. If you have intellectual property that is useful to another person or an entity, having a licensing agreement likely makes sense. The reverse is also true. If you need access to someone's intellectual property to meet your individual or professional goals, having a well-written licensing agreement is advantageous.

You must know, however, that licensing agreements are rarely simple or straightforward. Instead, they involve complex negotiations and detailed writing. Before you can write an agreement, you must be certain you know exactly what you want. While all contracts require parties to give up certain rights, you want to protect yourself as well as you can.

Once you have executed a licensing agreement, you must be certain you abide by its terms. Litigation for breach of contract claims can cost you a significant amount of time and money. Fortunately, you don't have to go it alone. Unless you have extensive experience drafting licensing agreements, you may want to consider working with a licensed attorney. Since intellectual property lawyers routinely write licensing agreements, they know what pitfalls to avoid. The peace of mind that comes from working with a responsible attorney is impossible to overstate.

Whether you own intellectual property or have some you want to borrow, you need a licensing agreement. Without a well-written agreement, you simply cannot be certain you have the legal protections you need to succeed.