Licensing Agreement Definition - Investopedia

A licensing agreement allows one party (the licensee) to use and/or earn revenue from the property of the owner (the licensor). · Licensing agreements generate ... TableofContents Expand TableofContents WhatIsaLicensingAgreement? UnderstandingLicensingAgreements LicensingRevenues ExamplesofLicensingAgreements SigningaLicensingAgreement AdvantagesandDisadvantages LicensingAgreementFAQs TheBottomLine Investing Laws&Regulations WhatIsaLicensingAgreement? Thetermlicensingagreementreferstoalegal,writtencontractbetweentwopartieswhereinthepropertyownergivespermissiontoanotherpartytousetheirbrand,patent,ortrademark.Theagreement,whichissetbetweenthelicensor(thepropertyowner)andthelicensee(thepermittedparty),containsdetailsonthetypeoflicensingagreement,thetermsofusage,andhowthelicensoristobecompensated.Contracttypesvarybasedonwhatisbeinglicensed.Licensingagreementsalsoalleviateanydisputesrelatedtosales,issuesofquality,androyalties. KeyTakeaways Alicensingagreementallowsoneparty(thelicensee)touseand/orearnrevenuefromthepropertyoftheowner(thelicensor).Licensingagreementsgeneraterevenues,calledroyalties,earnedbyacompanyforallowingitscopyrightedorpatentedmaterialtobeusedbyanothercompany.Someexamplesofthingsthatmaybelicensedincludesongs,sportsteamlogos,intellectualproperty,software,andtechnology.Licensingagreementsallowpartiestocontrolpropertyandenternewmarketswithouthavingtospendthemoneytodoso.Drawbacksofthesedealsincludeestablishingarelationshipwiththewrongcompanyandthepossibilityoflosingacompany'sreputation. UnderstandingLicensingAgreements Licensingagreementsdelineatethetermsunderwhichonepartymayusepropertythatisownedbyanotherparty. Whilethepropertiesinquestioncanincludeamyriadofitems,includingrealestateholdingsandpersonalpossessions,licensingagreementsaremostoftenusedforintellectualproperty,suchaspatentsandtrademarks,aswellascopyrightsforwritten materialsandvisualart. Licensingagreementsarewidelyusedforthecommercializationofnewdiscoveriesortechnologies. Inadditiontodetailingallpartiesinvolved,licensingagreementsneedtospecifyingranulardetailhowlicensedpartiesmayuseproperties,includingthefollowingparameters: Thegeographicalregionswithinwhichthepropertymaybeutilized.Thetimeperiodpartiesareallottedtousetheproperty.Theexclusivityornon-exclusivityofagivenarrangement.Scalingterms, suchthatnewroyalty feeswillbeincurredifthepropertyisreusedacertainnumberoftimes.Forexample,abookpublishermayenteralicensingagreementwithanotherpartytouseapieceofartworkonthehardcovereditionsofabook,butnotonthecoversofsubsequentpaperbackissuances.Thepublishermayalsoberestrictedfromusingtheartisticimageincertainadvertisingcampaigns. LicensingRevenues Licensing revenues,knownasroyalties,areasignificantsourceofrevenueforseveralpubliclytradedcompanies.Forexample,amajorsourceofincomeforthepublicly-tradedcompanyDolbyLaboratoriesisthelicensingofitstechnologytoconsumerelectronicsmanufacturers. Thetermsofroyaltypaymentsarelaidoutina licenseagreement.Thelicenseagreementdefinesthelimitsandrestrictionsoftheroyalties,suchasitsgeographiclimitations,thedurationoftheagreement,andthetypeofproductswithparticularroyaltycuts.Licenseagreementsareuniquelyregulatediftheresourceowneristhegovernmentorifthelicenseagreementisaprivatecontract. Inmostlicenseagreements,royaltyratesaredefinedasapercentageofsalesorapaymentperunit.Themanyfactorsthatcanaffectroyaltyratesincludeexclusivityofrights,availablealternatives,risksinvolved,marketdemand,andinnovationlevelsoftheproductsinquestion. Toaccuratelyestimate royaltyrates,thetransactionsbetweenthebuyingandsellingpartiesmustbewillinglyexecuted.Inotherwords:theagreementsmustnotbeforced.Furthermore,allroyaltytransactionsmustbeconductedatarm'slength,meaningthatbothpartiesactindependently,andhavenopriorrelationshipwithoneother. ExamplesofLicensingAgreements Licensingagreementsarefoundinmanydifferentindustries.Anexampleofalicensingagreementisacontractbetweenthecopyrightholdersofsoftwareandanothercompany,allowingthelattertousethecomputersoftwarefortheirdailybusinessoperations. AnexampleofalicensingagreementintherestaurantspacewouldbewhenaMcDonald's franchiseehasalicensingagreementwiththeMcDonald'sCorporationthatletsthemusethecompany's brandingandmarketingmaterials.Toymanufacturersalsoroutinelysignlicensingagreementswithmoviestudios,givingthemthelegalauthoritytoproduceactionfiguresbasedonpopularlikenessesofmoviecharacters. EnteringIntoaLicensingAgreement Thebargainingpowerofthetwopartiesinvolvedinalicensingagreementoften dependsonthenatureoftheproduct.Forexample,a moviestudiothatlicensesthelikenessofapopularsuperherotoanactionfiguremanufacturermighthavesignificantbargainingpowerinthisnegotiation,becausethemanufacturerislikelytoprofitimmenselyfromsuchanarrangement.Themoviestudiothushastheleveragetotakeitsbusinesselsewhereifthemanufacturergetscoldfeet. Thoseenteringintoalicensingagreement shouldconsultanattorneybecausetherearecomplexitiesthatmaybehardtograspforthosewithoutadeepunderstandingofintellectualpropertylaw. AdvantagesandDisadvantagesofLicensingAgreements Asmentionedabove,licensingagreementsarelegalcontractsthatarewrittenbetweenalicensorandalicensee.Makingsurethere'soneinplaceprovidescertainadvantagestobothpartiesbuttherearealsosomekeydownfalls,too.We'veoutlinedsomeofthekeybenefitsanddisadvantagesoftheseagreementsbelow. Advantages Licensingagreementsclearlylayouttheguidelines,rules,andstipulationsthatcovertheuseofthelicensor'sbrand,patent,ortrademark.Boththelicensorandthelicenseearefullyawareofwhatisexpectedandrequiredofthem.Thisincludeswhenpaymentisdueandhowmuch,anyadditionalroyaltiesthatmaybedueasaresultoftherelationship,thetypeofagreement,thelengthtowhichthelicenseecanusetheproperty,copyrightissues,andthecontract'sexpirationdate. Settingupanagreementsavesalotoftime,money,andhassles.Forinstance,ifsomeonedecidestouseatrademarkwithoutalicensingagreement,theymaybesuedbythepropertyowner,whichcouldresultinlegalbattles,courtfees,andlosttime. Contractsgivelicensorscanretainagreatdegreeofcontrolovertheirpropertyandgivesthemaccesstoothermarkets.Forinstance,alicensorcandictatehowtheirpropertyismarketed.Anditallowsthemtoenternewmarkets—throughthelicensee—withoutactuallyhavingtosetupshopthere. Disadvantages Oneofthedrawbacksofhavingalicenseagreementisdrawingupacontractwiththewrongparty.Insomecases,licensorsmaywanttogetintoamarketsodesperatelythatitdoesn'tdoitsresearch.Thismeansalicensormaybestuckinalengthycontractwithacompanywhoseidealsdon'talignwithitsown.Thesameprincipleappliestothelicensee,especiallywhenitthinksanewproductorbrandmayworkwellinacertainmarketwithoutdoingitsresearch. Bothpartiesarealsoattheriskoflosingbrandpowerand/ortheirreputation.Forexample,ifonecompanycommitsamarketingfaux-pasorisembroiledinascandal,itcanputtheotherpartyatriskaswell.Thismeansthatboththelicensorandlicenseemustconducttheirbusinesseffectively. Enteringintoanagreementincreasescompetitionforthelicensor.Althoughthelicenseeactsonbehalfofthelicensor,itis,infact,indirectcompetitionwiththeirpartner.Thelicenseealsolosesout,too.That'sbecauserelyingonsomeoneelse'sproductmeansthatthelicenseemaycutdownitsownresearchanddevelopment(R&D) Pros Theexpectationsarelaidoutforeachpartyinvolved Savestime,money,andhassles Giveseachpartymorecontrolintherelationship Breakingintomarketswithouthavingtospendtoomuchmoneytodoso Cons Beingstuckinalengthycontractwiththewrongcompany Thepossibilityoflosingbrandpowerorcorporatereputation Increasingcompetition Cuttingdownonresearch&development LicensingAgreementFAQs WhatIsaLicensingAgreementExample? EntertainmentcompanieslikeNetflixenterintolicensingagreementsallthetime.Theonlinestreamingserviceobtainstherighttobroadcastcontenteitherexclusivelyorwithothercompaniesfromthetitle/contentowners.Forinstance,thecompanybehindamajortelevisionseriesmayenterintoalicensingagreement,allowingNetflixtoincludetheshowamongitstitlesforacertainnumberofyears.Inexchange,Netflixwouldagreetoprovideroyaltiestothecontentownerfromfeesitcollectsfromitssubscribers. HowDoLicensingAgreementsWork? Licensingagreementsarelegalcontractsthatarewrittenbetweentwoparties—alicensorandlicensee.Thecontractstipulatesthetypeofagreement,thelengthoftherelationship,paymentsandroyaltiesthataredueandwhen,andtheextenttowhichlicensingisallowed.Licensingalsoallowsbothpartiestoretaincontrolovercertainfacetsofthedeal,includingexclusivityandhowaproductorserviceismarketed.Inessence,thecontractlaysouttheexpectationsofwhatisrequiredofbothparties. HowDoICreateaLicensingAgreement? Thebestwaytocreatealicensingagreementisthroughalawyer.Bygettingprofessionalhelp,youlayouttheproperfoundationforarelationshipwiththeotherparty.Ifyoudon'tdoso,youopenyourselfuptoalotoffinancialandlegalhurdles. HowMuchIsaLicensingAgreement? Thecosttodrawupalicensingagreementcancostanywherefromafewhundredtoafewthousanddollars.Goingthroughalawyermeansyou'llhavetopayanhourlyfee.Asimplecontractmayonlybeafewhours,whileamoreheftydealbetweenpartiesmeansmoredetailsandrevisions. TheBottomLine Ifyouwanttousesomeoneelse'sproperty—especiallyintellectualproperty—you'llhavetoaskthatpartytoenterintoalicensingagreementwithyou.You'llprobablyhavetogothroughalawyertoensurethatyourinterestsandthoseofthepropertyholderaresafeguarded.Youmayhavetospendsomemoneytogettheagreementdrawnup,butbydoingso,yourfinancialassetsandbusinesswillbewelltakencareofandyou'reguaranteeingthattherelationshipwiththelicensorwillbesmooth. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. Upcounsel."LicensingAgreement:EverythingYouNeedtoKnow."AccessedApril9,2021. NIBusinessInfo.co.uk."Howtomanageyourpatents."AccessedApril9,2021. InnovationDevelopment."TheDangersofLicensing."AccessedApril9,2021. CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description RelatedTerms FieldofUse Fieldofuseisarestrictionplacedonalicensegrantedfortheuseofanexistingpatent,invention,orotherintellectualproperty. more HowRoyaltiesWork Royaltiesarepaymentstoanownerforusinganassetorproperty,suchaspatents,copyrightedworks,ornaturalresources.Learnhowroyaltieswork. more WhatIsaLicensee? Alicenseeisabusiness,entity,orindividualthathaslegalpermissiontoconductactivitiesusingsomethingthatanotherpartyownsorcontrols. more IntellectualProperty Intellectualpropertyisasetofintangiblesownedandlegallyprotectedbyacompanyfromoutsideuseorimplementationwithoutconsent. more LicensingRevenue Licensingrevenueisincomeearnedbyacompanyforallowingitscopyrightedorpatentedmaterialtobeusedbyanothercompany. more 25%RuleDefinition The25%rulereferstoaheuristicforgovernmentdebtrelativetoitsbudget,oritmayrefertoaroyaltyincomepaymentscheme. more PartnerLinks RelatedArticles Marriage&Union Marriagevs.Common-LawMarriage:What'stheDifference? 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