Licensing and licensing agreements

Licensing can be a great way to scale your revenues and to commercialise your intellectual property (IP).

After all, if you’ve gone to the effort of creating it, then arguably, that IP owes you a financial return – one that you can manage very efficiently, and often with minimum additional effort or distraction on your part.

What can you licence?

All sorts of things – from copyright licence to product licensing, photos and artwork, sound recordings, published reports and data, trademarks, the right to use patented equipment or processes, the right to use or even to further develop software code and/or to create similar or identical products and services…

… all of these may be eligible for licensing – what you might choose will depend on your business’ offerings and your licensing objectives.

Every business will be creating IP on a very regular basis.

For more information on what counts as licensable IP, take a look at our guide to intellectual property, and its related suite of more detailed supporting materials.

How does it work?

The model works on the basis that one business (the licensee) pays another business (the licensor) a fee (known as a royalty).

In return for this royalty, the licensee business is granted the right to use the licensor’s intellectual property in business activities that are likely to include sales of products or services to the licensee’s own customers.

Who does it suit and what are the benefits?

Licensing suits businesses of all sizes and varieties – even the very new, who may be able to gain a revenue from IP they’ve already created, (like a portfolio of photos or some code), but which they might not be using for their core business purposes or which does not need to be exclusively used by just them.

That IP could be earning them a supportive revenue stream that’s likely to come in handy.

Additionally, a further key benefit for new, small businesses that haven’t a chance to drum up much brand awareness yet, is that licensing IP can help get products in front of a large audience quickly and cost effectively.

And even for businesses that aren’t so new, or small, licensing provides a way for them to really maximise the value of their IP and grab or retain market share.

In this guide, we’ll look at licensing as an approach that is independent of other commercial relationships.

However, licensing often accompanies other regular business transactions, like a franchise, distribution or agency agreement for example and also more straightforward sales terms and conditions.

Most trading contracts contain clauses relating to IP and what customers or trading partners can or cannot do with IP in the products, services or related materials covered by that contract.

IP license: how can a licensee use the IP of a licensor?

When you enter into a licensing relationship, you’ll need to have a contract in place (a licence) that’s agreed by both parties.

While the licensor does give the licensee the right to use their IP, they’re still well within their rights to limit the way in which the licensee uses it.

And it’s within this licence that the licensor can lay out exactly what’s allowed and what isn’t.

The licence should also include how much the license will cost and how long the licensee may have the license for before the need to renew the contract.

Licensing should not dilute the licensor’s IP rights

A well-drafted licence agreement will make very clear that the licensor’s rights in the IP remain unaffected by the presence of a licence, meaning that the drafting should make clear that the licensee does not gain any right over or claim to the licensed rights.

If the licensee makes authorised improvements to the IP, the licence terms should also make clear who owns those improvements.

In many, but not all cases, it will be the licensor who will own the benefit of and rights in the improvements.

But there may be particular circumstances, for example in relation to technological or patentable rights, where the licensee might be entitled to derive rights in the improvements, notably where the improvements might be capable of standing apart from the original rights and separately applied, and/or where the licensee has had to invest substantial resource in producing these permitted improvements.

In these scenarios, while the licensee might retain the rights to the improvement activity, it will probably be required to licence the use of the improvements to the licensor.

This is a regular scenario for collaboration and joint venture relationships.

If you’re considering licences of patented rights or rights relating to code or technology, you should take expert advice about the position on improvements.

It is worth setting down the agreed rules of the relationship right from the outset, not leaving them to chance or subsequent negotiation, when you may have less bargaining power or a need to gain access to the improvements to stay competitive.

How to begin a licensing relationship

Do keep in mind that before you can license your intellectual property out to other businesses, it must be protected.

Take a look at our guide to protecting your intellectual property to find out how you can protect yours.

And then, before you do anything else, it’s important to take steps to protect the confidentiality of your IP, which you may well need to disclose, at least in some detail, ahead of being able to agree a licence agreement.

You can do this by getting a confidentiality agreement, also known as an NDA, signed and in place ahead of substantive discussions about what your licensing relationship will entail and what the IP looks like.

This will enable you to share necessary yet confidential information with your prospective licensee, without the risk of this valuable data being shared, copied, or distributed without your permission.

Once everyone’s agreed on and aware of their confidentiality responsibilities (and once the decision has been made to officially begin a licensing relationship) the licensing contract can be created and signed.

What key terms should a licence contain?

A good licence will typically contain clauses that cover:

1. What IP is being licensed

2. What kind of licence is being granted for the IP

This is important. For example, will the licence be an exclusive one, so that besides the licensor, only the licensee can use the licensed rights. Or will it be non-exclusive?

3. Will there be geographical or other restrictions to the licence?

It’s not uncommon for the licensor to place a ring-fence around the licensed rights, permitting them, for example, to only be used in relation to activities in a particular location, or to a specified customer type or to a defined activity.

4. How long will it last for? And can it be renewed after that – and if so, on what terms?

5. What will the licensee pay for the rights and how will payments be made?

There could be a lot of detail here, for example, the royalties may be tied to a number of relevant units sold by the licensee, it might be an annual and all-encompassing fee, or one that is paid by instalments.

It should also cover penalties for late payments by the licensee.

Will the licensor have the right to increase the royalty during the term of the licence, and if so, when and how will it be set?

6. How the rights will be provided to the licensee

For example, how will code, equipment or designs be delivered?

Will the licensor assist with installations, testing or other actions needed to ensure that the licensee can properly use the IP without damage to the IP or to its own business.

7. Will the rights be updated and if so, by whom and how will the updates be rolled out?

8. Will the licensee be permitted to make authorised modifications to the IP and if so, what modifications will be permitted, will the express consent of the licensor be required for any other modifications and who will own the modifications once they’re complete? Will this impact the royalty fee payable by the licensee?

9. What integrity or use checks will the licensor be entitled to carry out (or instruct a third party to carry out on its behalf), to ensure that the licensee is operating in good faith and fulfilling its contractual obligations, including in relation to protecting against data leaks and breaches of confidentiality, unauthorised usage, policing of infringements, accuracy in sales reporting, etc.?

10. How the licence can be brought to an end – and what events will be treated as a breach that will give a termination right to one or both of the parties?

11. Will the licensor give any warranties (contractual promises) in relation to the IP and the licensor’s ownership of it?

12. The ownership of the IP rights themselves and the details relating to where and how the licensor holds those rights, including whether there are any third-party claims or challenges outstanding in relation to those rights.

It’s not unusual for there to also be wording addressing what the licensee’s remedy will be if there is a successful challenge to the rights that affects how the licensee can continue to licence them.

This section will also usually set out exactly how the licensee is permitted to use the rights, e.g. whether and if so, how, they can be copied, uploaded, disseminated, modified, stored, etc.

13. What liability either party will face to each other under the licence arrangements and whether and how this liability will be limited.

14. Obligations of confidentiality owed by the licensee to the licensor, which may well include requirements about how the licensee must ensure that its relevant staff and operational practices protect and enforce confidentiality about the rights and any data that is also provided in relation to them.

15. Whether the licensor will agree to the licensee being able to assign the licence to someone else and/or what happens if either party undergoes a change of control (e.g. is acquired or takes on a major, controlling investment).

The licence should also contain the standard contractual wording (called ‘boilerplate’), covering for example, what law will govern the agreement and any disagreements that might occur between the parties, excluding third-party rights, describing how the parties will communicate and/or serve official notices on each other, etc.