Twelve Important Terms to Negotiate in Every License Agreement
By Michael Sheridan, Esquire
Congratulations! A company wants to license your design(s) and/or your product(s). You feel excited, a bit scared, and don’t know where to start when it comes to negotiating the licensing agreement. Well, never fear. This quick reference guide reviews twelve of the most important terms and conditions to negotiate in every licensing agreement. This list is by no means exhaustive, but it will give you a good start on the major terms and conditions.
- Definitions. Definitions in a licensing agreement should never be overlooked or taken for granted. Definitions are one of the most important items to negotiate. Words and phrases like “merchandise,” “net revenue,” “product,” “design,” and “sales” need to be clearly and carefully defined in detail so that there is no doubt in the parties’ minds about what is being licensed. For example, say that you are licensing your designs to be printed on fabric to be sold by the licensee. In this case, the word “merchandise” should always be specifically defined to include a list of the specific merchandise which will bear your designs, such as fabric for use in home crafts, including sewing, quilting, and upholstering, or apparel fabric for women’s leisure wear apparel, etc.
- Exclusivity. The licensing rights granted by a licensing agreement are either exclusive or non-exclusive. From the licensee’s (the one receiving the license) perspective, an exclusive license is more valuable and more desirable than one that is non-exclusive because an exclusive license allows the licensee to use the licensed material in a very broad manner, across multiple different product lines, and, in the worst case, in a manner that may be inconsistent with or damage your brand. Exclusivity, therefore, creates concerns for the licensor (the one giving the license) because the licensor will not be able to use or re-license the licensed material to non-competitors of the licensee and across multiple different product lines. Exclusivity is not the licensor’s friend. If the licensee asks for exclusivity, think twice about entering into that exclusive licensing agreement because once you give an exclusive license, you cannot use the material licensed in any other manner. When in doubt, always grant non-exclusive licensing rights only.
- Geographical Scope. The territory within which the license will be valid and within which the licensee’s products will be sold is considered the geographical scope of the license. The geographical scope should be clearly stated in the licensing agreement. The geographical scope can be very broad, such as “worldwide,” or “throughout the United States, Canada, Mexico, and South America.” It can also be very narrow, such as “within the city limits of you-name-it city.” The geographical scope is largely dependent on where the licensee sells or intends to sell its products. Remember that if the licensee is selling its products online, the licensing rights granted are worldwide.
- Term. The duration or “term” of the license should be clearly stated in the licensing agreement. Typically, the term is defined by a set number of years, commencing on a date certain, and may provide for additional renewal term(s) after the initial agreement term ends. A shorter term is better for the licensor since it preserves future options for the licensed material. The term should also provide that the licensor may terminate the agreement if certain objectively-determined, minimum revenue benchmarks are not met.
- Quality Assurance. The licensor needs to be able to maintain quality control over the products produced by the licensee. This part of the licensing agreement will ensure that this happens, typically by allowing the licensor to inspect the product before it is sold and by giving the licensor approval rights about that product. Quality assurance can also include periodic product checks and sales monitoring.
- Royalties. Perhaps the most important and first term to be negotiated in a licensing agreement is the royalties—the basis for determining how much the licensor is to be paid. Issues related to royalties that should be spelled out in the licensing agreement include:
- Will the licensor receive a one-time up-front royalty upon signing the agreement?
- Is the one-time up-front royalty and advance against future royalties?
- Is the royalty a percentage paid upon the licensee’s net sales or net revenue? What
percentage? (It should be based on verified industry standards).
- What is included in determining “net revenue”? This may relate to the definition of
“net revenue” in the Definitions section of the agreement.
Will the royalty step up when the licensee exceeds certain well-defined revenue or sales goals? If so, what are the step-up royalty rates and the corresponding revenue
- Is there an annual minimum royalty to be paid to the licensor? If so, how much?
- If the agreement allows for sub-licensing, how will this affect the licensor’s
- When and how are the royalty payments to be made to the licensor?
- What happens if the licensor fails to make timely and full royalty payments to the
- Rights to Inspect and Audit. The agreement should contain provisions by which the licensor may inspect and audit the licensee’s company records to determine whether the licensor has been properly compensated under the agreement. This ensures the licensee’s compliance with the terms of the agreement related to the payment of royalties.
- Termination. When things go wrong (hopefully, they won’t) or when the agreement does not generate anticipated revenues (hopefully, it will), unhappy licensors may wish to terminate the agreement. Thus, it is important for the agreement to address the circumstances under which the parties may terminate the agreement and the procedure for terminating the agreement. Most licensing agreements contain a “notice and cure” provision giving the licensee a certain period within which to correct agreement violations following written notice of the non-compliance by the licensor. Some actions which may give rise to the termination of the agreement generally include:
- If the licensee makes and distributes products without the licensor’s approval;
- If the licensee fails to include the proper copyright and trademark notices on any
- If the licensee fails to timely submit royalty statements and/or royalty payments;
- If the licensee becomes insolvent or goes bankrupt;
- If the licensee violates any governmental regulations involving the health and safety
of the general public, or creates other public hazards;
- If the licensee improperly sublicenses the licensing rights granted under the
- If the licensee violates any other term or condition contained in the agreement.
- Intellectual Property Rights. First, ensure that all intellectual property (a/k/a “IP,” or the material/designs to be licensed) is properly registered, including all copyrights and any trademarks. The agreement should contain a provision requiring the licensor to place a copyright and trademark registration notification on all products bearing the licensor’s IP. The copyright and trademark registration notice should be specifically spelled out in the agreement. The agreement should also address who owns the intellectual property of new works and derivative works developed with and based on the licensed IP.
- Governing Law. The licensing agreement should contain a “boilerplate” condition stating which law governs the agreement. Frequently, the governing law is stated as the law of the state and country within which the licensee is located. If, however, the licensor prepares the draft agreement, the governing law is typically stated as the law of the state and country where the licensor is incorporated or located. The agreement should also contain a provision that the law will be applied without regard to issues of the inconvenient forum (in Latin, forum non conveniens).
- Venue. The venue, another “boilerplate” term, is the location for settling any disputes or litigation which may arise out of the agreement or any breach of the agreement. Typically, the venue is described as being located in the local, state, and/or federal courts within the jurisdiction where one of the parties is located. Determining the venue is important because it will require one of the parties to travel to the other party’s chosen court location to litigate any agreement issues, which can be expensive.
- Right to Buy Merchandise. The agreement should contain a provision whereby the licensor may purchase from the licensee product which the licensee manufactures bearing the licensed IP. Typically, licensors pay only the licensee’s cost. Furthermore, the revenue received by the licensee for the sale of products to the licensor should not be included in any net income calculation.
For an excellent example of a licensing agreement checklist, see Donna Bobrowicz’s A Checklist for Negotiating Licensing Agreements, found at: