McDonald’s does it. So does Harley Davidson, Microsoft, and Honeywell. These companies generate revenue and expand market presence by licensing their trademarks, copyrights and patents.
Licensing works because it benefits both the owner of the property (Licensor) and the user of the property (Licensee). The Licensor generates revenue and increases market presence, using what it already owns. The Licensee gets to focus on sales of a known brand instead of developing a product or brand from scratch.
All types of intellectual property can be licensed to others. Using geographic or product restrictions, the same rights can be licensed to multiple parties. Licensing arrangements can help a company break into new markets and create a better return on investment.
Licensing relationships typically have four phases:
- Finding a good partner;
- Entering into the relationship;
- Managing the relationship; and
- Managing the end of the relationship.
To find a good partner you have to know what you want. Are you looking to expand sales of an existing product or service into a new geographic territory? Or for someone who will use your brand on different goods? Do you want a partner to use your content in a new way? A good partner will have a market image and goals that are consistent with your company’s image and goals, and will be a good financial risk. In addition, the anticipated marketing channels and territories should be viewed with an eye toward understanding if there are conflicts with your own marketing efforts or with those of another Licensee.
Whether you are the Licensor or the Licensee, there are certain key issues that your agreement should cover to avoid disputes:
- Is the license exclusive or non-exclusive? Exclusive licenses generally mean that only one party gets to use the property. The Licensor typically gives up the right to exploit the licensed property in the defined areas during the term of the exclusive license agreement.
- What is the property being licensed? The property covered by the license needs to be carefully defined, including the rights associated with it. For example, the right to copy and distribute a work (under copyright) does not necessarily include the right to make modifications.
- What are the products or services covered by the relationship? Intellectual property rights can be licensed in connection with particular goods and services. For example, a trademark can be licensed for use only in connection with children’s clothing.
- What is the territory? Is there a geographic limitation on the right to distribute the goods or services? It is common to grant different parties license rights in different geographic areas.
- Are there quality control obligations? The right to control the quality of goods or services delivered under a licensed trademark is essential to preserving the Licensor’s underlying rights.
- What are the payment obligations? Licensing arrangements usually involve the payment of royalties to the Licensor by the Licensee.
- How long does it last and how will it end? Because the manufacture and sale of products typically involves some lead-time, it is important that the parties know the beginning and the end of the relationship, as well as what happens upon termination. For example, can the Licensee sell out its remaining inventory, even if the agreement has terminated?
- Does the Licensor own the underlying rights? Licensors should make sure that they have done as much as reasonably possible to claim ownership, through registration of rights and patent filings, of the rights to be licensed. If there is an infringement, is the Licensor or the Licensee responsible for leading the defense (or offense)?
Licensing relationships generally work best when they are actively managed.
This does not mean that someone needs to be devoted to full-time management of the relationship, but it does mean that you should not just sign on the dotted line and forget about it. Active management means looking for ways to exploit the relationship on an ongoing basis.
It is said that all good things must come to an end, and licensing arrangements are no exception. Even relationships that have been very successful will reach a point where continuing no longer makes sense. By ensuring that customers are taken care of and inventory is properly disposed of, a smooth wind-down will benefit both parties.