What is a licence agreement and how does it work?

Many businesses in both the service and manufacturing sectors generate revenue based on intellectual property (IP) that they’ve developed. Some businesses then sell the IP they’ve developed, for instance graphic designers or web developers. They will assign the IP to the client in question through a copyright assignment and no longer hold any ownership rights in it. Many other businesses, on the other hand, will licence the right to use the IP to other businesses or individuals. This sort of arrangement works well when the IP in question needs to be regularly improved or amended (such as online software packages), or where the creator of the software wants to provide it to a large number of customers. In such a situation, the owner of the IP will licence it out to his customers. If the IP relates to software, then a software licence agreement will be used.

Set out below are a number of important clauses in a licence agreement.

1. Term of Licence Agreement

Unlike a copyright assignment agreement, where the copyright is handed over to the purchaser and the contract is then complete, a licence agreement needs a term. In some circumstances the parties will choose to enter into a perpetual licence agreement. In many ways this will have a similar economic effect to actually assigning the copyright. The main difference is that a perpetual licence can be revoked if the licensee breaches the agreement if the licence is revocable.

2. Revocable or Irrevocable

The issue of whether the licence is revocable ties into the issue of its term. If you enter into a perpetual, irrevocable licence, the economic effect of the contract won’t be much different to a copyright assignment. If the licence is revocable, then the licensor has more control over the way in which the software can be used.

3. Exclusivity and Right of Sub-Licence

It’s important to work out whether you wish to provide an exclusive licence, or a non-exclusive licence. For software products it’s unusual to provide an exclusive licence, as the exclusivity will be extremely difficult to monitor. If, on other hand, you’re licencing the right to use a type of IP, such as a training course, an exclusive licence might make more sense. Allowing your licensee to sell sub-licences is another issue to be considered. This is akin to setting up a master franchisee/ franchisee system.

4. Licence Fee

Obviously you will want to paid when licencing your IP to the licensee. There are various ways of arranging this, from a fully upfront fee, to monthly payments. The type of fee set up you should go for will depend on the other terms of the licence agreement. For instance if you’re entering into a perpetual, irrevocable licence agreement you’ll want to be paid upfront.

5. Modifications and Geographical Limitations

Finally, you will need to decide if you’re happy for the licensee to be allowed to copy, modify or reproduce the IP you’re providing him with, and whether the licence should be restricted to a certain geographical location.

Conclusion

Licence agreements are very common and can be used in a wide variety of circumstances. Make sure your licence agreement is tailored to your individual circumstances. If you’re looking to find a lawyer who can answer your legal enquiries, contact LegalVision on 1300 544 755