What Are Licensing Agreements?

by Fraser Sherman; Updated September 26, 2017

Licensing agreements are a way to make money off intellectual property such as a copyright, trademark or patent -- otherwise known as intangible property. The agreement gives the licensor, who owns the intangible asset, a fee for allowing a licensee to market or use it.

Who Needs a License

A good license agreement can earn money for both parties. A sports team, for example, has a valuable trademark — the team name and logo — but probably doesn't have the time or energy to develop and market jerseys, bobble-head figures, coffee mugs and all the other items that come out with their logo on it. Instead, the team strikes licensing agreements with marketers and manufacturers to do that work for it.

•An actor may license her likeness for a doll or lend her name to a line of jewelry.

•The creators of a TV show might license spin-off novels or Lego figures.

•A greeting card company may negotiate an agreement to use a popular character such as Snoopy or Spider-Man on a card.

•A manufacturer with a patented invention may decide licensing manufacturing rights to a larger firm with greater resources will generate more profits.

•A record label may license its music catalog to an overseas company rather than do the many tasks required to release the music itself.

Licensing agreements are also important in the software world. When you buy an eBook or a word-processing program, you become a licensee. A typical license agreement says you're not allowed to make and sell copies of the product. The agreement may also limit what you can do to alter the software. Likewise, tiny print in the front of most published hard-copy books says you can't duplicate the text of the book — photocopying the entire volume, for instance — without violating copyright.

Warnings

  • A company licensing a product in another country has to research intellectual property law there. If the law doesn't protect intellectual property rights, the licensor has no legal defense against people overseas pirating the software or trademark.

Elements of an Agreement

Scope

The scope of the license spells out questions such as the geographic limits to the agreement. For example a copyright agreement may give a publisher only U.S. rights to a novel, while the foreign rights are negotiated separately. In the software world, the licensing agreement determines how many computers a business licensee can install new software on, or whether the company has the right to modify the code.

Money

Financial terms are a key part of any licensing agreement. Software licenses typically require a one-time fee when you download the program. Books and music generate royalties based on how much the licensee — a publisher or record label — sells of the licensed creation. An agreement to license patented technology for manufacture may involve a guarantee of minimum sales. That way if the licensee doesn't market the technology effectively, the licensor can terminate the agreement.

Time

The license agreement may include clauses setting a deadline for the licensee to bring a product to market. It should also say how long the agreement lasts, and whether renewing it is an option. Some agreements offer an automatic renewal if certain conditions, such as sales figures, are met.

Quality Control

The licensor may take steps to protect the quality of its product. An example would be the licensor requiring the licensee to provide a prototype or samples of the finished goods.

About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.