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Signing the licensing agreement. Learn what it means.

What Is a Licensing Agreement?

Licensing agreements are in the headlines lately, with a new twist. The ChatGPT parent, OpenAI, has signed licensing deals with major media companies, including the Wall Street Journal, the Atlantic, Vox Media, and others. With this type of legal agreement, OpenAI seeks to gain access to training data while pre-empting lawsuits. The media companies, in turn, will be compensated for their work and gain some control over how the data is presented and distributed. But what exactly is a licensing agreement, and why is it so vital?

This article will explore the definition of this agreement, the types of intellectual property (IP) it covers, standard terms, and how it benefits both parties. The examples will focus on a commercial context. Learn how to avoid breaches and discover how contract management software streamlines the management process.

Definition of a licensing agreement

A licensing agreement is a legal contract between two parties, known as the licensor and the licensee. The licensor owns a particular intellectual property (IP) and grants the licensee the right to use this IP under certain conditions. This IP can include patents, trademarks, copyrights, trade secrets, or even business processes. Licensing agreements are designed to protect the interests of both parties while allowing the licensee to benefit from the licensor's innovations, brand recognition, or proprietary technology.

Common terms of a licensing agreement

Understanding the fundamental components of a licensing agreement is crucial for both licensors and licensees. Here are the main elements typically found in these contracts:

1. Type of Intellectual Property (IP)

This clause specifies the intellectual property being licensed (e.g., copyright, trademark, patent, trade secret).

2. Grant of License

The grant of license clause specifies what rights are being transferred. It defines the scope of the license, including any limitations on geography, duration, and usage. This section is vital as it outlines the extent to which the licensee can use the licensor’s IP. This clause may include the following details:

Exclusivity: Whether the licensee has the sole right to use the IP, or if the licensor can grant licenses to others.

Territory: The geographic area where the license is valid.

Duration: The timeframe for which the license is granted (e.g., a specific number of years, or perpetual).

Field of Use: The specific products, services, or applications where the IP can be used.

2. Compensation

Compensation refers to the payment that the licensee must provide to the licensor. This can be a one-time payment, ongoing royalties, or other forms of compensation. Clear terms regarding payment schedules, calculation of royalties, and audit rights are typically included.

3. Intellectual Property Ownership

This section clarifies that the licensor retains ownership of the IP. The licensee is only granted usage rights and does not acquire ownership. This ensures that the licensor’s IP remains protected and cannot be claimed by the licensee.

4. Quality Control and Standards

To maintain the integrity and reputation of the licensed IP, licensors often include clauses that require the licensee to adhere to specific quality standards. This ensures that the licensee’s use of the IP does not harm the licensor’s brand or product quality.

5. Confidentiality and Non-Disclosure

Protecting sensitive information is crucial. This clause ensures that any confidential information shared during the term of the agreement is not disclosed to third parties. It helps in safeguarding trade secrets and other proprietary information.

6. Term and Termination

The agreement should specify conditions under which the contract can be terminated. This could include breach of contract, or failure to meet performance standards. Clear termination conditions protect both parties from potential legal disputes.

7. Dispute Resolution

This clause specifies how disagreements arising from the agreement will be settled. This might involve mediation, arbitration, or litigation.

8. Governing Law

This clause identifies the legal jurisdiction that will govern the interpretation and enforcement of the agreement.

Types of commonly licensed IP

Licensing agreements encompass a wide range of intellectual properties (IP) and other proprietary assets. Here are the primary types of assets that are commonly licensed:

Patents

Patents protect inventions and provide the patent holder with exclusive rights to use, sell, or license the invention for a certain period, typically 20 years from the filing date. Commercial examples typically include software algorithms, electronic devices, engineering processes, pharmaceutical formulations, and medical devices.

Trademarks

Definition: Trademarks protect brand names, logos, slogans, and other identifiers that distinguish goods or services in the marketplace. Famous examples of this include the Nike swoosh or the Apple logo.

Copyrights

Copyrights protect original works of authorship, including literary, dramatic, musical, and artistic works. They give the creator exclusive rights to reproduce, distribute, perform, and display the work.

Trade Secrets

Definition: Trade secrets consist of confidential business information that provides a competitive edge, such as formulas, practices, business processes, designs, instruments, patterns, or compilations of information. One famous example in this IP is the Coca-Cola recipe. However, business processes such as manufacturing methods and logistics strategies can also be covered.

Franchises

Franchising is a specific type of licensing where the franchisor grants the franchisee the right to operate a business under the franchisor’s brand and business model. Think of fast food or service chains.

Designs

Definition: Industrial designs protect the aesthetic aspects of an object, such as its shape, pattern, or color, otherwise known as product design. This does not cover the functional aspects. Examples of this IP can include automotive designs, footwear, or consumer electronics.

Know-How and Technical Information

Definition: Know-how refers to practical knowledge, skills, and expertise not protected by patents or copyrights but are crucial for performing specific tasks or processes. Examples of this may include manufacturing processes that produce goods efficiently or a company’s detailed operational procedures to provide technical support. 

Benefits of a Licensing Agreement

Licensing agreements offer numerous advantages to both licensors and licensees. Below are some common reasons why businesses enter into this agreement.

Revenue, brand recognition, and market expansion for licensors

Revenue generation: Licensing agreements can provide a steady stream of income through royalties or licensing fees.

Market expansion: By allowing others to use their IP, licensors can enter new markets without the need for significant investment.

Brand recognition: Licensing can enhance brand visibility and recognition, especially when collaborating with well-known licensees.

Access to technology and expertise, R&D cost reduction, competitive advantage for licensees

Access to Technology and Expertise: Licensees can leverage the licensor’s innovations and expertise to enhance their own products or services.

Reduced Costs and Risks: Instead of investing in R&D, licensees can use existing IP, reducing development costs and associated risks.

Competitive Advantage: Access to unique IP can provide a competitive edge in the market.

What happens when a licensing agreement is breached?

Breaching a licensing agreement can have serious consequences, depending on the severity of the breach and the specific terms outlined in the agreement. Here's a breakdown of some potential consequences for the licensee:

Termination of the License:

The licensor (owner of the IP) has the right to terminate the agreement, meaning the licensee can no longer use the intellectual property. This can be a major setback, especially if the licensee has built their business around using the IP.

Injunction:

The licensor can seek a court order to prevent the licensee from further misuse of the IP. This can be a powerful tool to stop ongoing infringement.

Monetary Damages:

The licensor can sue for financial compensation for any losses incurred due to the breach. This could include lost royalties, damage to their reputation, or legal fees.

Reputational Harm:

A breach of contract can damage the licensee's reputation for professionalism and trustworthiness, making it difficult to secure future licensing agreements with other parties.

Potential Legal Action for Copyright Infringement:

In some cases, a breach of a licensing agreement involving copyrighted material could also be considered copyright infringement, which can lead to even more severe penalties.

What are some ways breaches can occur?

While most businesses don’t intend to breach their agreements, there are some specific ways a licensing agreement breach might occur.

Exceeding the Scope of Use:

The licensee uses the IP in a way not authorized by the agreement, such as selling a licensed product in a territory to which they weren't granted rights.

Failure to Pay Royalties:

The licensee doesn't pay the agreed-upon fees for using the IP.

Sub-licensing Without Permission:

The licensee allows another party to use the IP without the licensor's consent.

Violating Quality Standards:

If the agreement specifies quality standards for products made with the IP, the licensee failing to meet those standards could be considered a breach.

It's important to remember that every licensing agreement is unique.  The specific consequences of a breach will depend on the terms of the agreement and the severity of the offense.

What you can do to avoid a breach

Carefully review and understand the terms of your licensing agreement before signing.

If any term is unclear, consult your in-house legal team for your rights and obligations.

Meticulously comply with all the terms outlined in the agreement, including scope of use, royalty payments, and any quality standards. If unforeseen circumstances make it difficult to comply with the agreement, communicate openly with the licensor as soon as possible.

How a Contract Management Platform Can Help

In today's business world, companies manage a wide range of licensing agreements, from software subscriptions to complex intellectual property deals. Having this technology is even more crucial to managing licensing contracts when a company's product can be used to train large language models while it seeks to be compensated fairly. Contract management software offers a powerful tool to streamline and optimize this process. More importantly, such contracting technology makes compliance with complex legal terms systematic and automatic. 

Obligation management:

It extracts key dates like royalty payments, reporting deadlines, or renewal dates and sets up automated reminders to ensure you never miss a critical obligation. The best contract management platforms can scan your entire contract portfolio and surface potentially noncompliant clauses for your legal team’s attention. This proactive approach minimizes the risk of breaches and the legal consequences associated with them.

Centralized Repository:

Say goodbye to scattered emails, physical folders, and lost documents. Contract management software stores all your licensing agreements in one central, secure digital location, making them easily accessible for review, retrieval, and reference by authorized personnel.

Enhanced Search and Filtering:

Contract management software allows you to search and filter agreements by various criteria, such as license type, counterparty, expiration date, or even specific contract language, and obtain relevant results in seconds. This saves your legal team valuable time and effort.

Streamlined Workflow and Approvals:

The software can automate the workflow for reviewing, negotiating, and approving licensing agreements. This eliminates bottlenecks and ensures a smoother approval process, saving time and boosting efficiency.

Enhanced Collaboration:

A centralized contract management platform facilitates collaboration between different departments involved in licensing agreements, such as legal, procurement, and product development. Everyone can access the same information in real time, encouraging better stakeholder communication and informed decision-making.

Reporting and Analytics:

A contract management platform can generate reports that provide valuable insights into your licensing obligations. You can track historical data on royalty payments, identify upcoming renewals, or analyze trends. These reports empower you to make informed decisions about your licensing agreements, potentially leading to better negotiation strategies or optimizing royalty structures in future contracts.

Reduced Costs:

Improved organization and automated processes significantly reduce administrative costs and inefficiencies associated with managing licensing agreements, which translates to cost savings for your business.

You may also like: To learn more about the types of clauses that went into the OpenAI's licensing deal with the Atlantic, check out this Decoder podcast episode

The Icertis difference

Looking for a contract management platform that does all the above and more? Today, more than a third of the Fortune 100 trust the Icertis Contract Intelligence platform to transform the contract lifecycle management at their organizations. From automated contract analysis to risk assessment, Icertis uses AI to empower you to extract valuable insights from your contracts, reduce errors, and ensure compliance.

To learn more about how Contract Intelligence can help you manage your licensing agreements, request a demo today.

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