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A Business Owner’s Guide to Licensing Agreements
What is a Licensing agreement?
A licensing agreement is a formal legal contract where the owner of one party (the licensor) gives another party (the licensee) the permission to apply a particular brand name or trademark. The property involved in the licensing agreement can be real, personal, or intellectual, that said, intellectual property is the most common that’s used.
What is an Intellectual property?
An intellectual property is protected by law and is loosely defined as any product of the human intellect that the law protects from unauthorized use by other people. It is typically divided into four categories: patent, copyright, trademark, and trade secrets. Here’s a short description of each category so you can get a better glimpse of what intellectual property entails and how it can affect licensing agreements.
While you may be familiar with a patent, it’s best to get into the details so you understand the exact role it plays for your business. A patent grants the patent holder the exclusive right to prevent people from making, using, importing, and selling the patented innovation for a limited amount of time. While it may sound nice to get a patent for your product or idea, there are five requirements for getting patented that you must meet in order to receive the patent.
- Patentable Subject Matter
This requirement addresses the issue of the types of inventions that can be considered for patent protection and states that the categories for patentable subject matter include any process, machine, manufacture, or composition of matter, or improvement thereof. That said, these rules aren’t steadfast, business owners should keep in mind that the laws of nature, physical phenomena, and abstract ideas cannot be subjected to a patent.
The next requirement is that you must be able to prove that the invention is useful. You can further analyze the requirements for considering an invention useful
The novelty requirement states that the invention can’t have been used or known by anyone else in the country or have been patented or described in a printed publication. In other words, the invention must be completely new in order to meet this requirement.
To test for non-obviousness, the subject matter that is looking to be patented can’t have been obvious to a person having ordinary skill in the field during the time that the invention was made.
This requirement is directly related to the specification or disclosure that must be a part of each and every patent application. In order to meet the enablement requirement, the exact specification must describe the particular invention well enough that someone with skill in the field would be able to use the invention without “undue experimentation
A copyright is loosely defined as the exclusive legal right to reproduce, publish, sell, or distribute the matter or form of something.
A trademark is defined as any word, name, symbol, design, or any combination of them used in commerce or retail to identify the goods from one manufacture from another.
The Uniform Trade Secrets Act (UTSA) defines a trade secret as information that derives independent economic value from not being generally known and not being ascertainable by proper means.
What does this information have to do with running a business?
While there are many aspects of running a business that will give every business owner a headache, having to manage their licensing agreements can be another pitfall that can potentially cause a number of issues. This is especially true when the business owner is a franchisee and is part of an already well-established brand.
To give you a better example of what exactly licensing agreements entail, take a look at a few of the following scenarios:
A large restaurant chain reaches a deal to have their merchandise bear a popular basketball team’s logo, so all of their cups, bags, etc. have the logo of the basketball team on them.
Another example is if a popular cereal manufacturer made a deal with a production company that is behind a well-known children’s movie character to have the character appear on their cereal boxes.
In both of the above examples, the companies hoping to strike a deal are able to benefit from the other brands’ popularity to drive their own sales.
But this is just the tip of the iceberg in terms of information regarding licensing agreements, continue reading as we touch on more important points.
Before you starting researching how your brand can benefit from a licensing agreement, make sure your business is running smoothly enough where your shop will be able to handle the extra pressure that will come from a proper licensing agreement. This means having the procedures in place that guarantee your managers aren’t spending all of their time making schedules along with ensuring your employees have a smooth process for receiving schedules. To learn more about how a platform like Deputy can help your business, click on the button below to begin your free trial and to see it in action for yourself.
Benefits of a Licensing Agreement
With all of this information being thrown around, you’re probably wondering why and how licensing agreements can be so beneficial to the companies that enter them. Check out this information regarding how licensing agreements benefit both the licensee as well as the licensor.
- Passive source of income for the licensor
For the person that owns the intellectual property, a licensing agreement provides an opportunity to garner a passive source of income without having to do anything at all (besides signing the contract). The licensee is going to be the one that is doing most of the work to get the profit and the licensor can sit back and get a healthy percentage of anything they make.
- Being exposed to a whole new market
While the licensee will be the one doing most of the work, they have the opportunity to greatly benefit by being exposed to a whole new market that may not have known they even existed beforehand. That’s because when people see a brand they know and trust associated with another brand, they’ll be more likely to give the product a shot.
Entering a Licensing Agreement
If you’ve made the decision to enter a licensing agreement, then congratulations! Licensing agreements are a bold move and can result in large gains for your business. That said, they are still an important business move and you should be sure to thoroughly understand what you’re getting yourself into along with being aware of any issues that can possibly arise. Here are some things to keep your eye on when entering a licensing agreement to ensure you don’t end up negatively impacting your brand.
- Termination clause
A general rule for licensing agreements is that the licensors hold most of the power, this means that they can shape the deals in their favor and guarantee their brands stay safe. This can be seen in termination clauses that can be found in almost every licensing agreement. Termination clauses are there to ensure the licensor is able to end the relationship once they feel like it is no longer to their benefit. Not only that, but licensors are also able to enact a lot of extra steps for the licensee if they were to be the ones that wanted to end the relationship. Before signing on the dotted line, make sure to examine the termination clause to ensure that it isn’t to your detriment and that its requirements are reasonable.
- Quality control and compliance
To get a better idea of quality control and compliance, imagine that you were the licensor and your brand was well-established and world-renowned. Now imagine that a smaller brand approached you about potentially entering a licensing agreement and having your logo on a number of their products. You’ll want to ensure that their products are of the highest quality to ensure there is no negative reflection on your brand. This is why licensors always make sure to include a section on quality control and compliance. This section of the licensing agreement will detail the standards of quality for the product as a test protocol.
A test protocol is a standard for testing set by an industry for each product category. If there is no standard set for a particular product, then the licensee should make sure to get a clear explanation of how the licensed product will be approved.
- Royalties and guaranteed payments
You are going to want to make sure that you receive all of the payments you’re entitled to, so pay close attention to this section. In order to calculate your royalties, you must multiply net sales by the exact royalty rate. To aid you in this, keep in mind that royalty rate is the percentage of net sales to be paid by the licensee to the licensor.
The licensing agreement should also have a section on “minimums”, which are guaranteed periodic minimum royalty payments that are calculated by a percentage of total net sales and royalties that are earned.
A licensing agreement can lead to a very prosperous relationship for the licensee as well as the licensor, but you first must ensure that the deal you’re entering is worth the effort. Keep this blog close by so you can reference it as you go over any licensing agreements that come your way.
You should take some time to analyze Deputy, an employee scheduling platform built to free up your managers’ time so they can focus on bettering your business and increasing your profits. Click the button below to begin your free trial so you can see it work for yourself.