Are you thinking of licensing out something that you own, but aren’t sure about the various types of licensing agreements? There are a few ways to license intellectual property (or “IP”). To do so, you must first understand the different types of license agreements.
Here, we’ll discuss what a license agreement is and how you can decide which is right for you.
What is a licensing agreement?
A licensing agreement is a legal contract by which one party that owns certain IP allows another party to use that IP. The party who owns the IP (the licensor) receives payment (a royalty) when the other party (the licensee) uses the IP.
Licensing agreements can be broken down by the types of IP they license. They can be further broken down into exclusivity and duration.
How to decide between types of licensing agreements
1. Decide which IP you need to license.
Patents cover science and innovation. Patent licensing agreements are the documents through which a patent owner allows someone else to use their patent.
In practice, patent owners choose to license their patents so that they can have it manufactured and distributed widely. The individuals and businesses that create patentable material (like new inventions) aren’t usually the same parties that can easily manufacture and distribute it. It’s easier to allow someone else to handle the business side of the patent while continuing to earn royalty payments.
These are generally the most complex types of license agreements because of everything involved in obtaining and maintaining a patent.
Trademarks are signifiers of commercial source, namely, brand names and logos or slogans. Trademark licensing agreements allow trademark owners to let others use their IP.
Most often, trademark owners license their trademarks for commercial goods, like clothing, iPhone cases, or food products.
Copyright is the artwork of the IP world. Copyrights exist in, for example, works of visual art, like paintings, or movies, or songs. Copyrights also exist in characters, like Mickey Mouse.
Copyright licensing agreements are often used for consumer goods, just like trademark licenses. They are also used for distributorships, such as with musical works or movies.
Trade Secret Licensing
Trade secrets are unique, in that they are not registered with the government. Patents, trademarks, and copyrights are most valuable when they have been registered with the federal government. Trade secrets are protected only through their secrecy.
Two of the most famous examples of trade secrets are the formulas for Coca-Cola and the recipe for KFC chicken.
Trade secret licensing agreements often come with non-disclosure agreements (or NDAs). NDAs state that the party receiving certain confidential information cannot share it with anyone.
2. Decide whether you’d like your license to be exclusive.
Exclusive licenses are those that create a unique relationship between the licensor and the licensee. In these types of licensing agreements, the licensor agrees that the licensee is the only one who can make use of the IP. These usually cost more for the licensee.
In a non-exclusive license, the licensor may be licensing the IP out to more than one licensee. These types of license agreements usually cost less for the licensee.
In a sole license, the licensor agrees to use just one licensee, but the licensor reserves the right to continue to use their IP, as well.
3. Decide on the duration of your license.
There are also two different types of license agreement durations.
A perpetual license is one where the licensee buys the right to use the IP just once and then can use it for a lifetime. Often, these are the more expensive type of license because the licensor won’t receive ongoing royalties.
Perpetual licenses can be seen most commonly in software.
A term license is organized one of two ways: (1) the licensee can pay a one-time fee for a certain term or (2) the license can pay per use (these are traditional royalties).
Term licenses are much more common across all industries. Although many people don’t think of it this way, when you pay Netflix each month, part of that fee is a license to use their proprietary digital software.
According to BrewLong attorney, Ashely Brewer: “Licensing agreements are like lease agreements. A lot depends on the property involved and the relationship of the parties.”
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As you can see, there are many types of licensing. An experienced IP attorney can help you figure out what type of license agreement you need, as well as what needs to go into that agreement.