What is a licensing agreement and what clauses should you include?

Many businesses generate revenue based on intellectual property (IP) they develop.

Read our guide to intellectual property to learn more about the different types of intellectual property there are.

These businesses sell or license the IP they have developed to others.

When selling IP, typically the business will assign the IP to another business using an assignment agreement or letter.

The assignee then becomes the new owner of the IP.

Alternatively, the owner may license their IP using a license agreement.

Licencing IP allows you to remain the owner of the IP whilst giving permission to others to use the IP.

This guide sets out a number of important clauses in a licence agreement.


Term of Licence Agreement


Unlike an assignment agreement, which is completed when the IP right is assigned to the assignee, a licence agreement needs a term.

This term may be:

  • set (for example, it may specify that the license will only operate for a year); or
  • perpetual (where the parties choose to enter into an agreement that continues indefinitely).

In some ways, a perpetual license agreement may have a similar economic effect to the results of an assignment agreement.

However, it does not change the owner of the IP.

A perpetual licence can also be revoked if the licensee or licensor breaches the terms of the agreement.


Revocable or Irrevocable


The issue of whether a licence is revocable ties into the issue of its term and conditions.

If you enter into a perpetual, irrevocable licence, the economic effect of the contract will be similar to an assignment.

However, an assignment differs in that you will no longer own the IP if you assign it.

A perpetual license allows you to remain the owner of the IP.

If the licence is revocable, then the licensor has more control over the way in which the licensee can use the IP.


Exclusivity and Right of Sub-Licence


It is important to work out whether you wish to provide an exclusive licence or a non-exclusive licence.

For software products, it is unusual to provide an exclusive licence.

If you are licencing the right to use another type of IP, such as a training course, an exclusive licence might make more sense.

Allowing your licensee to sell sub-licences is another issue to consider.


Licence Fee


You will probably want to receive payment for licencing your IP.

There are various ways of arranging this.

For example, you could choose a fully upfront fee or monthly payments.

The type of fee set up you should go for will depend on the other terms of the licence agreement.

For instance, if you are entering into a perpetual, irrevocable licence agreement, you will want to be paid upfront.

Alternatively, you may also want to be paid royalties in addition to a fixed licence fee.

Royalties can be calculated on a number of factors, such as the:

  • number of products sold; or
  • profit generated due to licensed IP.


Modifications and Geographical Limitations


Finally, you will need to decide if you are happy for the licensee to modify the licensed IP, and whether you will allow them to copy or reproduce the IP.

You may also consider whether the licence will be restricted to a certain geographical location.

Check out our guide to licensing and licensing agreements to find out more


Key Takeaways


Assignment agreements assign IP from one owner to another.

Licence agreements allow the owner to retain their rights to IP but allow others to use the IP for their benefit.

License agreements are very common and can be used in a wide variety of circumstances.

Make sure your licence agreement is tailored to your individual circumstances and includes all the relevant clauses.

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