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Home > Operations Management Checklists > Commercial Aspects of Licensing

Operations Management Checklists

Commercial Aspects of Licensing


Checklist Description

This checklist explains the commercial aspects of a licensing agreement.

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Definition

To license means to give permission to use a certain property in exchange for payment. Such properties can be tangible, such as manufactured products, or intangible, such as intellectual property rights (brand, copyright, trademark, design rights, etc.), or computer software. The parties to a licensing agreement are the owner of the licensed property (the licensor) and the party to whom the license is granted (the licensee).

The licensor and the licensee will usually enter into a licensing agreement which is drafted by the licensor, then negotiated and amended by the licensee.

License agreements can be difficult to understand, and it is advisable for both parties to obtain legal advice to guide them in their negotiations.

Under a licensing agreement, the licensor grants the licensee the right to manufacture certain products or use certain intellectual property rights in a well-defined territory, for a certain period of time, in exchange for a licensing fee. The license can be exclusive or nonexclusive. An exclusive license gives the licensee the sole right to manufacture or use the products in that territory, while a nonexclusive license usually means that there are other licensees using the same rights or manufacturing the same products. Exclusive licenses are, therefore, more expensive and sought after.

Before entering into a licensing agreement, a licensee should thoroughly investigate the market and territory and weigh the advantages and disadvantages of obtaining a license and operating within that market. If the license to be obtained relates to the manufacturing and sale of products, it is advisable to think of the way in which these products will be distributed and sold. A licensor of a top brand will have certain requirements as to how its products are presented and sold. Publicity and marketing will be expensive and should be included in the licensing budget. There will be a difference between the price that the licensee pays to the licensor for a product and the price at which the same product is sold to the consumer. The licensee should weigh these prices carefully in order to assess its profit margin.

For certain products, a royalty fee may be charged to the licensee in addition to the price of the license. This is usually calculated as a percentage of the net takings for the product and will be dealt with in the licensing agreement.

Intellectual property rights usually remain in the ownership of the licensor. The licensee can only use them in accordance with the terms of the license and for the duration of the agreement.

The licensor will include in the agreement certain conditions under which the licensed property can be used. If these conditions are breached, the licensor can revoke the license altogether. It is therefore important that a licensee fully understands such conditions when he enters into the license.

Certain licenses will not allow a licensee to sublicense or assign the license to anyone else without the express written consent of the licensor. This way, a licensor can remain in full control of the distribution of the products in the territory covered by the license.

A licensed product should come with certain warranties given by the licensor. These will be negotiated in depth. However, the licensee should try to obtain as many as it can.

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Advantages

  • Licensing allows a licensor to increase the market for its brand by giving others the right to use it under certain conditions and for a certain price.

  • It also allows a licensee to operate a business and to exploit, for the licensee’s own benefit and profit, a product that belongs to someone else and that would otherwise be too expensive to acquire.

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Disadvantages

  • Negotiating a licensing agreement can be complex and time consuming. It involves thorough research of the market and territory in which the products will be sold or used.

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Action Checklist

  • Study carefully any license you might acquire. Obtain as much information from as many sources as possible before committing to an expensive licensing agreement.

  • Know your market and make sure that you have analyzed the consequences for your own business of entering into a licensing agreement.

  • Be prepared for long and complicated negotiations, which could prove time consuming as well as costly.

  • Economize by negotiating a reasonable rate with your legal advisers, but remember that it is better to incur costs by obtaining legal advice than to enter into a license under terms that you do not understand.

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Dos and Don’ts

Do

  • Involve your solicitors in the evaluation of both the risks and potential benefits of entering into a license.

  • Negotiate your rates and make a contingency plan for any cost overrun.

  • Plan carefully how the license will operate in the territory.

Don’t

  • Don’t be attracted by a license that has not been thoroughly investigated.

  • Don’t overlook the importance of negotiating warranties and indemnities that would protect you in the event that underlying liabilities are discovered.

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Further reading

Books:

  • Nimmer, Raymond T., and Jeff C. Dodd. Modern Licensing Law. 2008–2009 ed. Eagan, MN: West, 2008.
  • Sherman, Andrew J. Franchising and Licensing: Two Powerful Ways to Grow Your Business in Any Economy. 4th ed. New York: AMACOM, 2011.

Articles:

  • Loe, Nancy E. “Avoiding the golden fleece: Licensing agreements for archives.” American Archivist 67:1 (2004): 58–85.
  • Nimmer, Raymond T. “UCITA and the continuing evolution of digital licensing law.” Computer and Internet Lawyer 21:2 (2004): 10–16.

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