Contract basics: license agreement

Contract basics: license agreement

An overview of contracting basics


A license agreement is a business contract. The licensor owns the asset being licensed and the licensee is buying the license. While there are some generally accepted rules in writing a license agreement, the licensor and the licensee are usually free to put together the best deal that each can negotiate.

Oftentimes, one party will have a much stronger bargaining position than the other party. For example, a Twitch streamer might buy a game, and the end-user license agreement of that game might give the streamer the rights to stream the game. In this case, there will usually be little room for negotiation.

Below are some key issues to be addressed in a license agreement.

Grant of Rights

The agreement should clearly identify the property to be licensed (e.g. name of a game, character, design, trademark, etc.), and if applicable, copies of the licensed property should be attached as exhibits to the agreement. The agreement should also determine whether it covers all uses or only certain uses: for example, the licensor may license someone to publish or broadcast a work in certain territories but not others.

  • Exclusive vs. Non-Exclusive. The agreement should state whether the license is exclusive or non-exclusive. In an exclusive license, the licensor is licensing the work only to licensee, and the licensor will not be able to grant the same rights to any other licensee in the territory. In a non-exclusive license, the licensor will be able to grant the same rights to others, provided it does not try to do so on an exclusive basis. In addition, consider the issue of sublicensing, which is whether the licensee is granted the right to allow a third party to use the license.
  • Transfer. Unless restricted in the agreement, licenses can by default be assigned or transferred to another party. For example, if a licensee seeks to sell its own license to a third party, consider what rights the licensor should have to object under the agreement.

Attribution

Licenses can include requirements to attribute the author or source of the materials, and include specific requirements regarding the manner of use. This is common in trademark licenses, which must require specific rules for displaying the trademark with the “registered trademark” symbol in order to maintain trademark validity.

License Term

A license can last forever, or it can be created for a specific time frame. You may also license with renewable terms, such as a five-year license that can be renewed in one-year increments. In most cases, it is to the licensor's advantage to have a shorter rather than a longer term, because if the licensing arrangement is successful, a shorter term will give the licensor an opportunity to negotiate a higher royalty rate before renewing the agreement. For example, the licensor and the licensee may agree to a short initial term with an automatic renewal if certain targets are met, or, alternatively, to a longer term with an automatic termination if specific targets are not met.

Payment Term

Licenses can be paid flat-fee, royalties, or periodic fees (annual payments). In addition, payment terms should also address when payments are to be made.

  • Flat fee. The licensee pays a single fee for the licensed rights regardless of sales.
  • Royalties. Royalties are where the licensee pays the licensor a percentage of revenue, but the definition of revenue can vary considerably from one agreement to another. In negotiating for royalties, it is important to look at both the royalty percentage and the base against which that percentage will be applied:
    • Royalty Percentage. Royalty percentages can range from 2% to 20% of the royalty base. Rates will vary depending on the type of licensed property, the current or anticipated demand for the licensed content or product, and the track record and reputation of the licensor.
    • Royalty Base. Royalties can be based on gross revenue, net revenue, or profits. In most cases, the royalty will be determined by multiplying the royalty rate by the "net sales" of licensed products. The starting point for determining net sales is usually the wholesale price of the licensed products.
  • Periodic fees. The licensee pays a recurring fee for the licensed rights, for example on a monthly or annual basis.

Indemnity & Limitation of Liability

Indemnity is a promise by one party to save the other party from loss or damage. On the other hand, limitation of liability provision limits a party's liability for loss or damages that arise from the agreement.

Licensors and licensees can provide various indemnifications to each other in a agreement. The license can include guarantees concerning the integrity of the intellectual property and can require indemnification against any inaccuracy or loss arising from these guarantees. Note that the licensor can also require that the licensee carry sufficient liability insurance.

Termination

The licensor may want the right to terminate the license prior to the end of the term if the licensee fails to perform certain obligations under the agreement or engages in certain activities outside the scope of the agreement. The agreement will often provide three categories for termination: (1) events that are grounds for immediate termination without any cure period; (2) events that will become grounds for termination if not cured within a reasonable time after notice; and (3) events that are confined to only a portion of the license, and that will become grounds for the termination of that portion unless cured within a reasonable time after notice.

Dispute Resolution

By this point, this type of clause is likely standard in most every contract or license, but consider what happens if everything goes wrong and there is a disagreement about what the terms of the agreement mandate. If both parties agree to litigation, state whether the litigation would take place. And if the parties agree to arbitrate, understand that it largely does not give right to appeal an adverse decision.