The Risks of Foreign Licensing Agreements

Licensing agreements allow one company to authorize another company to use its intellectual property such as product designs, company logos and business models. Foreign licensing agreements are between a licensor in one country and a licensee in another. These agreements allow the licensor to enter a new market, while giving the licensee the opportunity to present a new product in its home market. However, these agreements also contain a substantial amount of risk.

In any legal arrangement between companies in different countries, the parties must agree on which sets of laws they will use to resolve any disputes. One risk is that U.S.-based companies that enter into foreign licensing agreements will erroneously assume that U.S. laws apply to their agreements with their foreign partners. However, foreign companies might not have an extensive business presence in the U.S., and might not be familiar with, or even agree to, U.S. laws. To offset this risk, the U.S-based firm should include a clause in its agreement that explicitly states that U.S. laws will apply.

Companies that license their manufacturing processes to foreign licensees should understand that their foreign partners might not comply with the same labor practices that are standard in the U.S. These procedures include 40-hour work weeks, overtime pay, safe work environments and prohibitions against child labor. When a U.S.-based firm licenses its manufacturing work to overseas "sweat shops", the American company runs the risk of damaging its reputation and brand.

Just as foreign companies might not have the same labor standards as U.S. firms, they might also not have the same product quality requirements. Some foreign manufacturers may use substandard or dangerous materials in their manufacturing processes. These materials can pose hazards to both the workers and consumers. The risks here range from hurting the U.S. company's reputation to landing the company in legal trouble if consumers suffer injuries or other health problems as a result of using the foreign-made products.

Licensors must evaluate the political, social, economic and religious landscapes of certain countries before signing a foreign licensing agreement. One risk of doing business in countries with unstable political environments is that the licensor's foreign operations might be shut down or even taken over by hostile governments. Another, if less severe, risk is that the licensor's products or brands will offend the country's religious sensibilities and fail to reach enough customers in that market to turn a profit.