Licensing Agreement

Nov 30, 2022
3 min read

Written by Sudipta Bandyopadhyay, Lawyer

On August 28, 2018, Nestle S.A. and Starbucks Corp. entered into a $7.15 billion coffee licensing deal that permits Nestle to market, sell and distribute certain Starbucks coffees and teas worldwide. Nestle can do business at retail and food service outlets outside Starbucks stores. In this deal, Starbucks is the licensor, and Nestle is the licensee. As a licensor, Starbucks will receive royalties from the products Nestle sells, so Nestle has the right to use the license of Starbucks subject to certain conditions.

Definition of Licensing Agreement

According to law, a licensing agreement is a contract between two parties (the licensor and licensee) in which the licensor grants the licensee the right to use the brand name, trademark, patented technology, or the right to produce and sell goods owned by the licensor.

Privileges of the Licensor

The licensor's product gets popularity worldwide through the licensee's distribution, marketing strategies, and network.

Uses by Licensee

Licensee uses licensing agreements to do business with intellectual property in the global market, and their businesses expand. There is no requirement of effort by the licensee to develop or research their product or services.

Types of License Agreements

Exclusive: An exclusive license agreement is a legal contract between two parties that grants the licensee the right to exclusively use an item of intellectual property for a specified period in exchange for compensation.
Non-Exclusive: A non-exclusive license agreement is a legal document between two parties where the licensee gets the licensor's permission to use their intellectual property or trade secrets. The right granted under this type of license is for a fixed period and may be terminated at any point by either side with service of notice.
Intellectual Property Rights: Intellectual property laws protect intellectual property rights in a license agreement.
Copyright: The Copyright Act 1957 says that copyright is a legal right granted to an author or the creator of an original work. Thus, a copyright license agreement is executed to grant the copyrighted work to the licensee. This right is for a specific period in exchange for a royalty amount.
Patent: A patent license agreement allows the licensee to make, use or sell the patent invention or design of the licensor in exchange for monetary consideration.
Trademark and Service mark agreement: Trademark and Service mark agreement is executed to allow the licensee to use the trademark or service mark owned by the licensor as per the terms and conditions of the contract.
Trade secret and confidentiality: Every business and the licensed product it owns has some secrets and privacy. This information has some monetary value. Trade secret and confidentiality protects confidential data or information. Trade secret licenses are enforced to protect privileged information shared with the licensees. These agreements mention confidential information and method of use by the licensing partners.

Essential clauses to be included in a License Agreement

Name of the parties:

The agreement should define the name and address of the parties, i.e., the Licensor, the Licensee, and the companies registered addresses.

Tenure:

The agreement must mention the period the parties will abide by the clauses.

Scope of use:

It lays down the conditions for to use of the licensed property. Every country has its own rules. Sometimes licenses of IP rights are limited to specific regions. Mentioning the areas of business is a must in this agreement.

Licensed Fee

The licensee's fee is for allowing the licensee to use the licensed property. The payment scheme and mode of payment of licensing fees will be declared in such an agreement.

Force Majeure

It is an act of God which is an unforeseeable and uncontrollable situation. Both parties cannot control such a situation. This act prevents the parties from following the clauses of the agreement.

Indemnification

This clause states the duty of the licensee. The duty is to compensate the loss suffered by the licensor caused by the licensee's acts during the agreement period.

Accounting reports

The licensee has to maintain proper records for periodic royalty payments and other expenses, profits, and losses.

Governing laws and dispute resolution

Indian Contract Act 1872 is followed in performing agreements in India. The definition and concept of the license are given in the Easement Act of 1882.

Termination clause

Agreements always include the clauses of termination and the notice period.

Conclusion

License agreements are done to expand business worldwide by using property rights subject to limitations. McDonald, KFC, Amazon, and Spotify are brands that became popular in the world through such agreements. Sometimes, the necessity of money to buy and use licensed products hinders the path of globalization. However, this agreement can give hope to small marginal businesses.

References:

Licensing Agreement (corporatefinanceinstitute)
How to manage your patents (nibusinessinfo)