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10 Tips of Licensing Agreements You Should Take Into Consideration

The year 2011 marks the beginning of one of the world’s longest and most prominent disputes over a case of patent infringement when the internationally known company, Apple, accused Samsung of violation of law concerning copying product designs and software features. Since product features and designs are considered a determining element of competitive advantage in cell phone manufacturing, for Apple, protecting the right of its patent was not only significant for its monetary benefits, but it was a symbol of maintaining Apple’s supremacy.  

The initial ruling of the jury was for Samsung to pay $1 billion as compensation for copying iPhone and iPad designs. This compensation was later reduced to $450 million by the federal court and after that to $399 million by the appeal court; Until finally, in 2016, the Supreme Court reversed this ruling and asked the lower court to determine the penalty for patent infringement. Not only did the legal case cost millions of dollars for both companies, but it also took almost seven years, going between constant initial proceedings and appeals.

Such legal disputes can only bother big companies. Yet, they can cost a fortune for smaller businesses that do not have the time and resources to deal with a legal proceeding and direct them to bankruptcy. However, there is no legal issue without a legal solution. Here, the answer is an initiative called licensing. “A license is an agreement through which a licensee leases the rights to a legally protected piece of intellectual property from a licensor — the entity which owns or represents the property — for use in conjunction with a product or service.”

Types of licensing agreements

Depending on the general conditions and the needs of the licensee, it is possible to draft a licensing agreement in different ways. There are mainly three types of licensing agreements:

  • Exclusive licensing: An exclusive licensing agreement limits the utilization right of the respective intellectual property to the licensee. This means that the licensor does not have the right to give utilization permission to a third party. Moreover, the licensor cannot use the said property until the contract ends. In some countries, according to domestic laws and regulations, the parties to an exclusive licensing agreement are bound to register these agreements in the Patent Office (or equivalent authority) to prevent illegal exploitation by third parties. 

The exclusivity term is usually employed when the exploitation of intellectual property requires a significant investment of money and effort, so the licensee needs to make sure that there will be no competition in the future by using this property. The exclusivity of rights can be agreed upon for a particular period of time or as long as the licensee meets the agreement’s requirements.

  • Non-exclusive licensing: A non-exclusive licensing agreement poses no limitations for the licensor, meaning that it does not prevent the licensor from using the licensed property or permitting third parties to use the same property. In this case, the competition is between licensee, licensor, and all the third parties that become licensees afterward, that mostly operate in the same industry. As a result, there are usually terms that bind the licensor to provide all the licensees with the same rights and privileges (most favored clause).
  • Solo licensing: finally, solo licensing prevents the licensor from licensing others to use the same property, but the licensor’s right to personal utilization of intellectual property is preserved. However, practically this is not a popular option for businesses.

If you are not sure about how to run your business, maybe the article mentioned below can help you decide:
Franchise or License: Pros and Cons

Important tips to consider in licensing agreements

  1. Granting rights: Granting certain rights is the basis of all licensing agreements. This requires the specification of parties to the contract and their subsidiaries so that there will be no problems regarding the illegal exploitation by third parties.
  2. Definition of property: Although the main idea of all licensing contracts is the same, they differ in several ways, including the property in question. The agreement must describe the nature and the features of the intellectual property that the licensee will use. The most common forms of intellectual property, which typically are the subject of licensing agreements, are as follows:
    1. Patent licensing: grants the right to use, manufacture, sell and distribute a patented product.
    2. Trademark licensing: grants the right to use a trademark.
    3. Trade secrets licensing: grant the rights and determines how to use trade secrets that belong to another entity.
    4. Copyright licensing: grants the rights to financial exploitation and reproducing of a copyright-protected product.
  1. Exclusivity scope: As explained before, the written licensing agreement should determine whether the licensor or licensed third parties are eligible to use the licensed product during the course of the contract.
  2. Territory scope: The agreement also specifies the geographical scope in which the license is valid. Many licensing agreements provide general permission to use the product; however it is not uncommon to set territorial boundaries. In this case, the license may apply in a region, a country, or a continent. It is also possible for the exclusivity term to depend on the territorial scope. For example, when a licensor grants worldwide exclusive utilization rights to licensee but maintains the self-use right in the home country. 
  3. Term of agreement: In deciding over the duration of a licensing agreement, parties should apply a realistic view to the market’s requirements. Preparing essential setup, manufacturing phase, and product distribution are steps of a timely process that the licensee must go through in order to benefit from the license. Therefore, the contract term should make it possible for the licensee to perform all these steps.
  4. Compensation: The compensation from the agreement (royalties) is the licensor’s share of profit. While all licensing agreements determine royalties to be paid to the licensor, they do not employ the exact same mechanism to do so. Some agreements determine a pre-set amount to be paid as a one-time payment or on an annual basis.

In other cases, the compensation is based on each product unit sold or a percentage of the sale. This method is more favorable to both licensor and licensee since the duration of the agreement does not affect the profit per unit on any side.

  1. Post-agreement product improvement: Technology development can cause unavoidable effects on the product or production chain. This can happen to both licensor and licensee and consequently change the conditions under which the agreement was negotiated. To deal with these changes, parties have to provide terms regarding disclosure and granting rights in case of such improvements. In this situation, parties may renegotiate the agreement or adopt an amendment to the original contract.
  2. Termination: Like any other contact, the licensing agreement will automatically come to an end if not renewed after the originally anticipated term. The termination clause declares the process through which the agreement can be terminated before the end of the agreement term. Termination rights can provide parties with the ability to end the agreement for certain reasons or without them. In any case, a party usually earns the termination right when the other breaches terms of the agreement and fails to perform contractual obligations.
  3. The right to take action against third-party infringement: There is always a possibility of third parties violating confidentiality and acquiring information that causes problems in the way of performing a licensing agreement. Thus, the agreement can also include provisions to determine how to legally enforce rights against third parties.

In most licensing agreements, this right initially belongs to the licensor; however, if the licensor fails to perform necessary steps to protect intellectual property in a reasonable period of time, the licensee can start legal action and usually is eligible to receive the respective compensation.

  1. Right to challenge by licensee: By entering a licensing agreement, both licensor and licensee implicitly declare that they recognize the validity of the patent or any other type of intellectual property in question. It means that the licensee cannot question the validity of the property in order to refuse to pay the royalties. In addition, it is not possible for the licensor to deny the validity of intellectual property in an exclusive licensing agreement.

Licensing agreements can be complex and hard to follow like any other contract. Furthermore, any mistakes in these agreements may result in costly intellectual property infringement proceedings. If you are a business owner trying to develop your work through licensing agreements, our lawyers in Legamart are here to help you.

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