A licensing agreement is a legal contract between two parties where the property owner or licensor gives permission for another entity (the licensee) to make commercial use of their brand, patent, trade mark, logo, likeness, or intellectual property.
A licensing agreement is a legal contract between two parties where the property owner or licensor gives permission for another entity (the licensee) to make commercial use of their brand, patent, trade mark, logo, likeness, or intellectual property.
The contract would contain details of the license such as the terms of its use and how the licensor would be compensated. Revenue would be generated for the licensor (or the company licensing out their product) in the form of royalties or license fees in exchange for allowing another business to use its IP.
Examples of Licensing
There are several things that can be licensed as part of a licensing agreement.
Music used to advertise or sell a product or service may be licensed with the original artist earning royalties every time their song is played on a TV advert, for example.
Sports team logos, names and even the likeness of their players can be licensed, in particular with games such as FIFA24 or NFL24 released by EA Sports. For example, if your character in the game is called Marcus Rashford with a Manchester Utd football top, team logo and name, then all of these things would have been agreed as part of a licensing agreement.
The club would earn royalties from the revenue earned by the software publisher for using their brand within the game. These are examples of brand licensing.
Software itself can be licensed, with the copyright holders of the software allowing a business to use it for their daily operations and charging a monthly or yearly fee.
With franchises such as McDonald's, there would be a licensing agreement in place between the individual restaurant itself and the McDonald's corporation, allowing the franchisee to use its brand and marketing.
Toy manufacturers would also sign licensing agreements with film studios to allow action figures to have the likeness of popular film characters like Batman, Wonder Woman, etc. This is a further example of brand licensing.
Other types of licensing agreements include operating licenses where a business entity is granted permission to carry out a certain activity such as selling alcoholic beverages; real estate licenses where permission is granted to access certain properties and implied licenses where there is no express permission given, such as a firefighter having the right to enter a burning building without having permission as such from the homeowner – but permission is implied.
What are the Risks Associated With Licensing Agreements?
There are several important factors to consider before signing a licensing agreement. Depending on what's being licensed, these may include:
- Getting stuck in a lengthy contract with the wrong company
- Losing brand power or reputation
- Being associated with a licensee that makes a mistake or is subject to an online backlash or other scandal
- Not understanding the legal implications
- Failure to consult with experts in business or contract law
Pitch deck—a pitch deck is a presentation that summarizes the key features and benefits of your product, as well as the research you have carried out and terms of use for the licensee. It should contain the size and profitability of the market for your product, as well as the solution it provides and any comparison with other competitors on the market and how your product provides a clear USP or unique selling point for your customers.
Royalty—royalties are recurring payments to the owner of a property or creative product that may be copyrighted or patented, paid to the original artist or owner as compensation for another party earning revenue from their work or intellectual property.
Licensor—the licensor is the party or individual giving out the license to use their work. For example, if a musician gave permission for a restaurant chain to use their song in an advert, the musician would be the licensor, handing out the license to their music.
Licensee—the licensee is the business entity or individual who receives the license to use the thing that the other party owns. So in this example, the restaurant chain would be the licensee, receiving the license for the music from the original artist.
Field of Use—field of use refers to the restrictions that are placed on the use of the thing that is being licensed, whether that is a piece of music, software, brand or logo. The field of use defines a particular purpose for the copyrighted property or assets that gives a clear scope for how they can be used and what is off-limits. This gives the licensor reassurance their products or brand are only going to be used for a limited purpose as defined within the agreement.
Licensing revenue—the licensing revenue simply means the money that is earned from the company or individual that allows another business to use their property, music, software, branding, or whatever is being licensed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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