Licensing Agreement: Definition and How to Create One

“Very mindful, very demure.” This viral TikTok catchphrase gained massive popularity, even catching the attention of celebrities and corporations like Netflix.

Seeing the phrase’s success, its creator, Jools Lebron, attempted to trademark it to make it her intellectual property (asset). While her application was denied, if she had succeeded, she could have granted others the right to use it under specific terms, allowing her to earn money and grow her brand. 

What gives you the right to retain ownership while gaining royalties for your work? A licensing agreement. 

If you own an intellectual property and want to unlock its potential with a licensing agreement, keep reading. 

You’ll learn about licensing agreement examples, their benefits and drawbacks, and how to create one.

What is a Licensing Agreement?

A licensing agreement is a legally binding contract in which the owner of an intellectual property (IP), (the licensor), grants permission to another party (the licensee) to use, produce, or distribute it under specific terms. 

For the licensee, this provides opportunities to scale quickly, enter new markets, or form strategic partnerships. Meanwhile, as the licensor, you control how your IP is used, ensuring it aligns with your brand vision and business goals, and earn compensation, often in the form of royalties, fees, or a flat payment.

You can license everything from inventions, art works, words, phrases, brand names, logos, and shapes – anything that has commercial and cultural value.

Example of Licensing Agreement Common to Businesses

Below are key licensing agreements examples widely used across industries: 

1. Trademark licensing

93 percent of McDonald’s restaurants are owned by independent local businesses and yet, you never noticed a difference! This is possible because of trademark licensing agreements. While the franchise owner runs the operations, they have to use McDonald’s brand guidelines to ensure that all of their stores look the same. 

The trademark smile and clown have also been trademarked by McDonalds. 

A trademark licensing agreement is a contract in which the trademark owner grants permission to another party or business to use its brand name, logo, or other brand identifiers for specific purposes. 

In exchange, the licensee typically pays fees or royalties to the licensor.

2. Software licensing

Software licensing agreement allows others to use your product. These are essential for defining the legal use of software and the scope of usage. 

For example, Microsoft offers software licensing that customers must consent to before subscribing to any Microsoft 365 package. For example, Microsoft signed a £2m-plus computer software licensing contract to allow Pembrokeshire County Council for the licensing of Microsoft 365 Productivity Suite software which includes the usage of Microsoft Outlook, Teams, and Office.

Various licensing models, such as subscriptions, open-source, and metered usage, offer flexibility to meet diverse business needs, each with its own advantages and compliance requirements.

3. Creative work licensing

A creative work license is an agreement between the creator of a piece of art, media, or other creative work and anybody who wants to use it. These cover a broad range of media: stock photography and videography, illustrations, music, fonts, and more. 

If you’ve ever seen celebrity images from award functions, they have ‘Getty Images’ whitemarked over them. If you want to use that image, you would have to pay to get permission from the owner of the photograph.

For example, in the image above, the watermark on the right implies that this photograph has a creative work license and usage is restricted. 

This license ensures that the effort creative professionals put into their work is monetized.

4. Copyright licensing

A copyright licensing agreement allows the owner of a copyrighted work such as a book, song, film, or artwork to grant specific permissions to another party to use, distribute, or modify that work. 

This type of agreement is widespread in creative industries, where content creators and companies must share their work legally and securely. For instance, a musician might enter a copyright licensing contract to allow a filmmaker to use their song. 

During an interview with Jess Cagle on SiriusXM on Friday (July 19), Ryan Reynolds shared the story of how he and co-star Hugh Jackman, along with director Shawn Levy, convinced the Queen of Pop, Madonna, to license her 1989 hit ‘Like a Prayer’ for the Marvel Studio movie ‘Deadpool and Wolverine’.  

Similarly, an author could license their book to a publisher for distribution, or a photographer might license an image to a brand for use in an advertising campaign.

5. Patent licensing

Patent licensing agreements operate under the principles of patent law and grants rights to another party to make, use, sell, or otherwise exploit a patented invention. This license is essential in industries like technology, pharmaceuticals, and manufacturing, where companies frequently rely on one another’s inventions to advance their products and services. 

For example, Merck, a global pharmaceutical company, entered into a patent licensing agreement with Bristol-Myers Squibb Company and Ono Pharmaceutical to allow Merk to use its PD-1 antibody technology for their anti-cancer drug, Keytruda. 

As part of the agreement, Merck paid $625 million upfront, along with ongoing royalties based on the drug’s sales.

Why Should You Use a Licensing Agreement?

The cast of “Friends,” who still make around $20 million a year from their time on the hit series as streaming residuals, essentially royalties. Other than passive income, here are benefits of licensing agreements:

Legal protection and enforceability

Licensing agreements provide a formal mechanism for both parties to understand and respect the rights and boundaries associated with the licensed IP. 

For the licensor, this means a safeguard against unauthorized use, reproduction, or infringement of their property, since the agreement formally outlines who owns the IP and under what conditions it can be used. Additionally, these agreements help manage liability by defining each party’s responsibilities for issues like compliance and insurance. 

Clear definition of rights and responsibilities

A well-crafted licensing agreement clearly defines the roles of the licensor and the licensee, setting explicit boundaries on intellectual property use. This helps prevent misunderstandings or conflicts down the line.

The agreement also outlines the financial arrangement, such as royalties, fees, or other payment structures. With this, both parties can plan and operate without disputes over revenue-sharing or costs, promoting smooth operations and trust. 

For example, The Guinness world record for the longest-running videogame licensing agreement went to the agreement between Electronic Arts and FIFA for the FIFA video game franchise. However, this agreement came to a halt at the end of 2022 during the Qatar World Cup due to increased licensing costs. 

Conflict resolution and termination

Licensing agreements often contain clauses for handling disputes, making conflict resolution more straightforward. Many agreements specify processes such as mediation or arbitration to manage disagreements that arise without the need for prolonged litigation. These measures provide an efficient way to resolve issues, saving time and reducing legal expenses for both parties. 

Additionally, termination clauses outline the conditions under which either party can exit the agreement.

For example, if a licensee fails to meet quality standards or violates payment terms, the licensor has grounds to terminate the contract just like in the case of Matter of Saferstein v. Wendy case. 

The petitioner Albert Saferstein and his partner entered into a licensing agreement with Comb Associates to develop and sell a lice comb. After generating substantial revenue, the licensees failed to pay the required royalties, leading Comb Associates to send a notice of termination.

This termination was possible because the license agreement had specific terms for termination and default, which Comb Associates invoked. 

What are the Disadvantages of Licensing Agreements? 

Licensing agreements also come with their share of drawbacks, such as reduced profit shares and loss of control over production and quality once rights are transferred. 

We’ve outlined few more disadvantages:

High legal and administrative cost

Drafting a comprehensive and enforceable licensing agreement requires thorough legal expertise, particularly for complex intellectual property rights that need precise language and coverage. This often means hiring specialized IP lawyers, which can be costly. 

Once the agreement is in place, both parties usually face ongoing administrative tasks like monitoring compliance, managing payments, and handling renewals. These administrative requirements can add up, consuming both time and financial resources.

However, if you regularly create similar licensing agreements, you can use a document automation tool like Docupilot to generate and reuse templates or standardized clauses that legal experts have reviewed. This reduces the need to hire legal experts to create new agreements from scratch, ultimately saving costs.

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💡Pro Tip: Integrate Docupilot with your email delivery tool, set up workflows to ensure the contract is sent to the reviewer and is approved or is set up for negotiation without any unnecessary delays.

Agreements may seem complex and rigid

Licensing agreements are often intricate, with detailed terms and conditions that define every aspect of the licensing relationship. This complexity can make the agreement feel rigid and restrictive for both parties. 

For example, if a licensee wants to adapt the licensed IP for new uses, they may find themselves limited by the original agreement’s scope, and making changes can require renegotiation. For licensors, rigid terms can also be limiting, especially if they later identify new licensees or markets where the IP could be even more lucrative.

However, the licensee can inject some flexibility by adding a “future use clause’ to accommodate potential future use beyond initially agreed scope. The licensor, too, can specify the right to expand the licensing agreement to new markets provided it does not harm the licensee's operations.

3. Potential for lengthy negotiation and dispute resolution 

Negotiating a licensing contract can be a drawn-out process, often requiring multiple rounds of discussion to reach mutually agreeable terms. This process can delay a product’s market entry, impacting revenue generation. 

Additionally, if disputes arise once the agreement is in place, resolution can be lengthy and potentially costly. According to the European Union Court of Justice report, it takes an average of 16.1 months to resolve court cases. That is a long emotionally draining period alongside reduced business productivity.

Thankfully, you can prevent this time wastage by ensuring that your licensing contracts have fair and precise terms.

The Important Clauses to Include in Your Licensing Agreements 

In a World Intellectual Property Organization (WIPO) survey, seven percent of respondents admitted that more than 10 percent of their licensing agreements led to disputes. While the number isn’t staggering, what if you take actions to limit the chances of dispute rather than hope not to be among the seven percent? That’s why you should ensure your licensing agreements include the right clauses.

Some important clauses to include are:

• Grant of license: It’s the foundational clause in a licensing contract that specifies the type of rights the licensor is granting to the licensee. This can be exclusive (gives the licensee sole use of the IP, preventing others, including the licensor, from using it) or non-exclusive (allows multiple licensees to use the IP, offering more flexibility)

• Scope of use: This section is highly detailed, specifying the permitted applications of the IP, the geographical territories in which the licensee can operate, and the license duration. For example, the license might allow the use of a patent in manufacturing only or restrict the use of a trademark to a particular region or market

• Terms and termination: Defines the duration of the licensing relationship (such as a fixed term, or indefinitely with renewal options) and the conditions under which the agreement can be terminated
• Payment and royalty: Specifies how the licensee will compensate the licensor for the intellectual property use, typically structured as a royalty payment. Royalties are usually calculated as a percentage of the licensee's sales or revenue from the licensed IP. Alternatively, the agreement may require an upfront lump sum payment, milestone payments upon reaching certain business targets, or a combination
• Intellectual Property ownership: Reinforces that the licensor retains ownership of the intellectual property, even though the licensee has permission to use it. The agreement may also address the ownership of any improvements or derivative works made by the licensee using the licensed IP
• Dispute resolution: Outlines the process for resolving any disagreements or legal disputes that may arise during the agreement which typically include which jurisdiction’s laws will apply, where disputes will be resolved, and the method of resolution (for example, arbitration or litigation)

How to Create a Licensing Agreement?

While a well-drafted licensing agreement can promote profitable partnerships, a poorly structured one risks costly disputes and missed opportunities.

If you’re unsure where to start, use a contract creation tool like Docupilot. With this tool, you not only get various options for creating easy-to-read agreements, but you can also automatically route them for signing and store them securely for easy access.

In Docupilot, you can create your licensing agreements by starting from scratch or importing a template. A simple option to create from scratch is to use our AI Template Builder.

How to use the AI Template Builder:

Log in to Docupilot and click the AI Template Builder button on the left panel.

In the AI template creator, enter your prompt. For example, to create a trademark license agreement, use the following prompt:

"Create a trademark license agreement allowing a business to license its trademark to another company. Include essential clauses: Grant of License, Scope of Use, Exclusivity, Duration and Termination, Payment and Royalties, Intellectual Property Ownership, Quality Control, Indemnification, and Dispute Resolution."

The AI will generate the agreement with the specified clauses.

Copy the source code, return to the dashboard and create a new template.

Click the “Source” button and paste the code. 

There you have your licensing agreement. You can then use the robust editing tool to personalize and make it on brand.

To ensure the terms are legally binding, you can invite a legal professional to review the agreement using our collaborative feature. 

Simply click on Settings, then under User, add a user and assign them a suitable role.

After finalizing your agreement, you can download it or use the delivery feature to route it for signing. 

Choose from the various signing tools available, such as the Yousign, SignNow, Docusign, and Signable to follow the steps for easy configuration.

With Docupilot’s secure repository, you can access your licensing contracts anytime. You can also organize your licensing agreements into specific folders for easy retrieval.

Make Creating Licensing Agreements Easier With Docupilot

While licensing agreements can open doors to growth and collaboration, they also carry legal complexities that shouldn’t be overlooked. Legal consultation with Docupilot’s contract automation can help streamline the process. 

A lawyer with expertise in intellectual property law can help you navigate potential pitfalls, clarify any ambiguous terms, and safeguard your business from future disputes.

You can save your lawyer approved agreement as a template in Docupilot for future use making contract generation a breeze!

Sign up today and start creating, managing, and automating your licensing agreements with ease.