Intellectual property (IP) is one of the most valuable assets a business can own. From trademarks and patents to software, designs, and works of artistry, IP provides businesses with a competitive edge. However, not every business wants to manufacture, distribute or commercially exploit its IP directly. Instead, in these cases, the business will make an Intellectual Property Licensing Agreement, which provides permission to a party to use the IP for royalties or a fee.
This blog article outlines the IP licensing agreement, its importance, the key clauses, and legal considerations every business should understand before signing it.
Introduction
Intellectual property (IP) assets are different from physical property, which cannot be reproduced without the consent of the owner. While this makes protecting ownership an important part of successfully commercialising IP, businesses seek permission to reproduce intellectual property using licensing agreements, to remain the owner of the IP while still receiving value.
An IP License Agreement is a formal agreement between an IP owner (licensor) and other party (the licensee) which allows the licensee to use the IP. The license agreement usually specifies usage terms, location, duration of usage, and other terms for the application of the IP. Examples include –
- A technology company licensing its patented technology and software to other businesses,
- A brand owner licensing its trademarks for operational franchise locations, and
- A designer or artist licensing their original creative works to be commercialized through merchandise.
Licensing agreements permit the transfer of intellectual property ownership and revenue but allow for growth into new markets without the licensor relinquishing ownership.
What is a Licensing Agreement in Intellectual Property?
An intellectual property license agreement is the legal document in which the licensor grants to the licensee rights to use, exploit or commercialize intellectual property owned (in whole or in part) by the licensor.
Important to note –
- Ownership remains with the licensor
- The license will allow the licensee to use it under agreed-upon terms and conditions
- Compensation is usually paid in royalties, payments, or a share of profit.
Licensing can relate to –
- Trademarks (business names, logos, slogans)
- Patents (inventions, processes, machinery)
- Copyright (books, music, films, software, etc)
- Design (industrial/effects product design, etc)
Types of IP Licensing Agreements
There are different structures depending on how much control the licensor wants to retain –
1. Exclusive License
- Only the licensee can use the IP in the agreed territory.
- Even the licensor cannot use it during the term.
2. Non-Exclusive License
- The licensor can license the same IP to multiple parties.
- Most common in software licensing.
3. Sole License
- Only one licensee is granted rights, but the licensor retains the right to use the IP as well.
4. Cross-License
- Two parties license IP to each other, often used in tech or pharmaceuticals.
5. Sub-License
- The licensee is allowed to further license the IP to others, usually with restrictions.
Why is an IP Licensing Agreement Beneficial?
- Income – IP licensing agreements will give companies an opportunity to earn royalties with no operating expenses attached.
- Market Growth – Can allow companies to enter new regions through local licensees.
- Risk Transfer – the licensee pays to make, manufacture and deliver a product, taking some of the financial risk from the licensor.
- Protection – clearly set out terms that would prevent unethical, unauthorised or unfair use or exploitation of a company.
- Collaboration – would lead to collaborative, innovative storytelling practices.
Important Provisions in an IP (Intellectual Property) Licensing Agreement
- Parties
- The identity and contact information of the licensor and licensee.
- License Grant
- License type (exclusive, non-exclusive, etc).
- What are the rights granted (use, reproduce, distribute, sell, etc)?
- Territory and Term
- Where (geographic) in what territory does the license apply?
- For how long is the term?
- Royalties and Payment Terms
- How much is paid for the licensed rights – fixed fee, percentage of sales, or something in between?
- What is the schedule and method of payment?
- Ownership and Rights
- The licensor is the proprietor of the IP.
- Restrictions on the licensee’s ability to modify or create derivative works.
- Quality Control
- Standards are in place for the licensee to follow, which preserves the reputation of the brand.
- Often associated with a trademark or franchise licensing agreement.
- Confidentiality
- Restrictions are in place to protect confidential trade secrets and sensitive business information.
- Termination
- How can the licensing agreement be terminated?
- What happens to the parties’ rights after termination?
- Dispute Resolution
- Terms of jurisdiction and governing law
- Arbitration or mediation clause.
Legal Considerations
- IP Ownership Confirmation – The licensor should have proof of ownership of the IP before licensing.
- Agreement Registration – Some jurisdictions govern IP and/or require registration of licensing agreements with the relevant local offices.
- Compliance with Competition Law – Do not enter into license agreements with terms that would create a monopoly.
- International Licensing – Different countries have different requirements in relation to tax results, royalties, and/or withholding tax
- Tax Considerations – Royalties may attract GST and/or withholding tax, or other considerations, depending on the country of the licensee.
Issues To Avoid
- Not putting a restriction on territory (which can lead to global infringement).
- Unclear methods for calculating royalties.
- Not mentioning sub-licensing and assignment rights.
- A weak termination clause makes it difficult to terminate the agreement.
- Not including quality control standards in trademark licensing.
Conclusion
An Intellectual Property Licensing Agreement is a potent instrument for businesses to capitalize and extend the use of their intangible value while ensuring ownership protection. Because it has been established clearly the terms of rights, duration, territory, and compensation, businesses can minimize disputes and maximize their value.
Whether you are a startup leasing a license for a new app, a brand owner looking to expand your business using franchises or a tech company licensing patents, a well-drafted agreement promotes both adherence and maximizing profit.
Before signing, to protect your rights, it is always preferable to consult a lawyer specialising in intellectual property and take steps to make sure you protect those rights.
Related Services
References
https://ipindiaonline.gov.in/
