License Agreements: Different Types and Their Meaning

What is a license agreement?

A license agreement is a contract between the licensor (the owner of the property) and the licensee (the approved party). This specifies how a person or a company (the licensee) may use the intellectual property of another person or of another company (the licensor). A license agreement thus allows owners to resell the right to use their intellectual property to another party. The intellectual property can be, for example, a patent, a copyright or a trademark.

In general, the term “license agreement” is always associated with intellectual property (IP): In order to be able to use someone else's intellectual property profitably, you must conclude a license agreement with the company concerned.

As a result, the owner party generates revenue in the form of royalties by allowing the eligible party to use its property and generate income from it. A license fee is a fee that the licensee pays continuously to the licensor for the right to use the licensor's trademark, product, or technology.

A license agreement sets out aspects such as the terms of use, restrictions and remuneration for the license, and permission to use the owner's intellectual property. The contract also eases any conflicts relating to qualities, royalties or sales.

The different types of license agreements

License agreements can primarily be differentiated according to the different types of intellectual property for which a license is to be issued. In addition, a distinction can also be made between contract duration and the exclusivity of intellectual property. The following is a list of different types of license agreements and their characteristics.

Trademark licensing

Trademark license agreements differ from other license agreements in that they relate to the use of trademarks. A trademark is a legally protected trademark that is used to distinguish the goods, products or services of a company from competing goods, products or services of other companies. It can also be used to clearly identify an entire company or the range of services offered by an entire geographical location (country, region, city) and to differentiate it from competing companies or offers.

Trademark licensing agreements enable the trademark owner to give others permission to use their intellectual property.

examples: consumer goods such as clothing, jewelry, food, packaging

Licensing of trade secrets

Trade and trade secrets include business-related techniques, prescriptions or other information that may be considered confidential vis-à-vis competitors and the public. They are not registered by the government and are only protected by the secrecy of all parties involved. A license for trade secrets always includes a Confidentiality agreement (Non-Disclosure Agreement, NDA). NDAs stipulate that the party receiving sensitive information may not share it with others.

examples: protected recipes such as Coca-Cola or KFC Chicken

Licensing of patents

A patent is an industrial property right for an invention that is granted by public authority. The owner of the patent is entitled to prohibit others from using the invention. The right of ownership is granted for a limited period of time. In a patent license agreement, the owner allows another person or company to use the patent-protected invention in exchange for money.

Patent owners usually choose to license the respective patent in order to market and sell it on a broad basis. Typically, the companies that make the invention behind the patent don't have the resources to manufacture and sell the end product on a large scale. It is easier and more convenient for them to license the patent to another company, which will handle the manufacturing and distribution process.

This type of license agreement is generally the most complex, as it involves obtaining and maintaining a patent.

examples: Technologies

Copyright licensing

Copyright is usually associated with art and works of art. It protects the work of artists and guarantees that only they may perform, market and market the work of art and thus generate income. Copyright licenses are commonly used for consumer goods.

examples: fictional characters such as Mickey Mouse, transfer of music copyrights from the artist to the record label

Apart from the types of license agreements, there are also two different types of terms to choose from for a license agreement:

Perpetuity

Indefinite: The licensee only pays a certain amount once and is then entitled to use the licensor's intellectual property for a lifetime. This type of licensing is of course much more expensive. A common application is software licensing.

runtime: Either the licensee pays a fee each time he uses the licensor's intellectual property, or the licensee pays a specific amount for a specific period of time during which he can use the intellectual property as often as he wants (depending on the type of intellectual property)

Exclusivity

Exclusive: In an exclusive license agreement, the licensor promises that the licensee is the only one who may use the licensor's intellectual property. This creates a special relationship between the two parties and is associated with a higher price due to the exclusivity of the agreement.

Non-exclusive: In a non-exclusive license agreement, the licensor is free to sell a license to more than one party, basically anyone they want. This agreement is usually less expensive for the licensee.

Alone: In the case of an exclusive license agreement, the licensor undertakes to sell only to one licensee, but reserves the right to use the intellectual property itself. The price range is between a non-exclusive and an exclusive license agreement.

Advantages and disadvantages of license agreements

Benefits

1. Income excluding operating costs: License agreements offer the opportunity to generate income without the significant operating costs associated with manufacturing, marketing and sales. Essentially, you're allowing another party (the licensee) to shoulder the burden of production and associated costs while collecting royalties or a share of the profit. This can be particularly beneficial if you lack the resources to bring your product or idea to market yourself.

2. Improved marketing: Licensing your intellectual property or product often means partnering with a company that already has an established presence and expertise in your industry. This can lead to better marketing measures that reach a wider audience and increase awareness of your creation. The licensee's marketing power can help you open up markets that would have been difficult for you to access on your own.

3. Peaceful solution of disagreements: License agreements usually contain provisions that specify how disputes and disagreements are to be resolved. This can prevent litigation and maintain a positive working relationship between licensors and licensees. By setting clear expectations and mechanisms for resolving disputes in advance, licensing agreements contribute to smoother cooperation.

4. Faster market entry: Entering international markets can be complicated and expensive, particularly for small companies or individual creators. Licensing agreements offer a simplified path because your licensee is usually very familiar with navigating foreign markets, complying with local regulations, and adapting to cultural differences. This makes global market access easier and can expand your revenue opportunities.

5. Flexibility in product development: Licensing agreements allow others to use their resources and capabilities to change and improve your product so that it can better adapt to changing market preferences and new trends.

One of the advantages of licensing is the fact that the agreements specify all important parameters of the contract in order to avoid future disputes. A license should clearly set out the rules, guidelines, and specifications for the use of the licensor's property. These include the amount of license fees and the payment schedule, the type of contract, the duration of the rights of use, copyright issues and the date of termination of the license agreement.
For the licensor in particular, the contract offers the opportunity to be represented in other markets without having to set up a business there himself. This saves a lot of time, effort and money.

Drawbacks

1. Complex negotiations: Drafting a fair and comprehensive license agreement can be a time-consuming and complex process. The negotiations between licensors and licensees can include several rounds of talks, legal advice and adjustments to the conditions, which can be very resource-intensive.

2. Lack of control: When you license your intellectual property, you give up a degree of control over its use. While this can be beneficial in some cases, it also means that you may not have the last word on product development, marketing strategies, or other important decisions related to your creation.

3. Exclusivity challenges: While exclusive license agreements offer more control, they can limit your ability to work with other potential partners or licensees. This can be a disadvantage if you identify opportunities with other companies later on.

4. Income dependency of licensees: Your income from licensing agreements depends on the performance and ethical conduct of licensees. If a licensee does not meet its obligations, it may affect your revenue and reputation, even if you are not directly responsible for their actions.

5. Theft of intellectual property: If you transfer your intellectual property to others under a license agreement, there is a risk that it will be misused or used in an unagreed way. If the licensee behaves inappropriately or violates the terms, this could result in unauthorized use of your work that may harm your company or projects.

The biggest disadvantage of licensing can arise when one party signs an agreement with the wrong counterparty.
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If a licensor or licensee does not properly research his partner because either the licensor is too desperate to be represented on the market or the licensee is convinced that a product would work well in a particular market, the licensor could end up with a partner who does not represent the same values and principles and thus damages the reputation of the licensed product.

In addition, the signing of a license agreement increases competition for the licensor for his own property: Even if the licensee acts on behalf of the licensor, he acts as a competitor on the market. The licensee can save on investments in his own research and development department because he relies on someone else's invention/property.