Simply put, licensing is a business tool that commercializes your business’ intellectual property and brand. Through intellectual property laws, the intellectual property owner is able to create a monopoly, restricting third parties from using/commercializing its intellectual property. Licensing creates a controlled mechanism for third parties to use the intellectual property, which creates an additional revenue stream for the intellectual property owner. It can be quite lucrative. In fact, according to the International Licensing Industry Merchandisers’ Association, global license merchandise sales was valued at $262.9 billion in 2016, with an increase of 4% from the previous year.
There has to be a clear business rationale for entering into licensing agreements: expanding into complimentary product/services, entering into new territories, creating further market opportunities/income streams. There are several scenarios where licensing can be beneficial for both the licensor and the licensee, such as:
a) lacks the capability to commercialize its intellectual property;
b) licenses out its intellectual property to recover its research and development costs;
c) wishes to expand into new product/service lines, new markets, new territories; and/or
d) wishes to create new income streams.
a) has limited capabilities and must partner up with a third party;
b) wishes to accelerate its access to new markets/demographics;
c) wishes to fast track its market access by piggybacking off an established brand; and/or
d) complements the licensor’s business.
Where is Licensing Relevant?
In addition to the obvious licensing agreement, there are a number of other commercial agreements that may contain licensing provisions such as:
– manufacturing agreements
– co-branding agreements
– sponsorship agreements
– merchandising agreements
– influencer agreements
– franchise agreements
– distribution agreements
How Are Licensing Deals Legally Governed?
Depending on the type of intellectual property your business is licensing out, there are legislative provisions you must abide by. For example, the Trademarks Act mandates that the licensor must exhibit direct or indirect control over the character or quality of the wares/services. The Copyright Act mandates that any grant of interest must be in writing. There are definitely nuances to each piece of intellectual property legislation that must be abided by. In addition, as with any commercial agreement, contract law is incredibly important.
How Do You Structure Your Licensing Deal?
Contract. Contract. Contract. (And when we say ‘contract’ – we mean WRITTEN contract). Work with a lawyer to ensure that your business is protected from risk and liability and that each parties rights, obligations and restrictions are clearly delineated. Codify what the scope of the license is. Carefully architect the compensation model. Itemize the payment terms. Regulate the sharing of your business’ confidential information through strong confidentiality provisions. Delineate strong quality control measures. Bolster your position through strong representations and warranties. Itemize the events that trigger termination. Understand who is responsible for what if the deal terminates.
Ultimately, smart licensing creates immense opportunities. However, you are entrusting a third party with your intellectual property, which is a very valuable business asset. Take great care in architecting a sound licensing regime that best protects your business.