Drafting a license agreement: this is what belongs in it

If you wish to draft a license agreement, you establish in a single document which intellectual property right you are licensing, to whom, with what exclusivity, in which territory, for how long, and for what fee. In addition, you regulate the less visible but equally important components: revenue reporting, audit rights, quality requirements, sublicensing, enforcement against infringement, and grounds for termination. A good agreement not only describes what is permitted but also excludes what is not. Below, for each section, is a list of what should be included and where things go wrong in practice.

The short answer

1. Name the parties and the exact IP right that you are licensing.
2. Set the four buttons: exclusivity, territory, duration, and scope.
3. Choose a fee model and link reporting and an audit right to it.
4. Regulate sublicensing, quality control, and enforcement against third parties.
5. Record the grounds for termination and the consequences thereof.

What to establish first when drafting a license agreement

Start with the basics, which are often rushed through: who are the parties and which right is involved? Describe the IP right as concretely as possible. For a trademark, state the registration number; for a patent, the number and the claims; and for copyright, the specific work. A description such as "our technology" or "our brand image" is too vague and leads to discussion in the event of a dispute about exactly what has been licensed. The clearer the subject matter, the less room for interpretation.

Setting the four buttons

The heart of the agreement consists of four choices you make consciously:

• Exclusivity. Exclusive, non-exclusive, or sole right. With exclusivity, you may exclude yourself from use, so be precise about that.
• Territory. Limit the area to what the licensee actually serves. What you give away, you cannot sell to a second party.
• Duration. A fixed term with an extension option provides you with a natural moment to review the rates.
• Scope. Describe to which products, markets, and forms of use the license applies, and which are explicitly excluded from the license.

Remuneration, reporting and audit rights

Choose a remuneration model that fits the law and your ability to measure revenue. A revenue-based royalty works well for a product that can be counted, while a fixed periodic fee is better for diffuse use. A minimum guarantee protects you against a licensee who takes the license but does not actively exploit it. Link a reporting obligation at a fixed frequency and an audit right to every royalty, so that you can have the submission verified. Without those two provisions, you are effectively paying on trust.

Sublicensing, quality and enforcement

Determine whether the licensee may sublicense. If you allow this, attach conditions to it and stipulate that each sublicense terminates as soon as the main license expires. A trademark or design license entails quality requirements, as the licensee is using your name or design. Finally, arrange for enforcement: who takes action against infringement by third parties, who conducts the proceedings, and how you divide the costs and any damages. With an exclusive license, you often give the licensee their own role in this, because they hold the direct interest.

Termination and other provisions

Specify the grounds for termination: expiration of the term, non-payment, violation of quality requirements, bankruptcy, and a change of control of the licensee. Add a non-use clause allowing you to terminate the agreement if the license remains unused. Regulate what happens to inventory, pending orders, and the cessation of any use after termination. Conclude with confidentiality, liability, and the choice of applicable law and competent court, especially in the case of an international license.

A practical example

A product designer has a registered design for a distinctive lamp base and wants an online shop to produce and sell it. When drafting the agreement, the designer opts for a non-exclusive license for the Benelux for three years, against a royalty of ten percent per unit sold, with a minimum of five thousand euros per year. The agreement includes an obligation to report sales figures quarterly, a right of audit, a prohibition on sublicensing, and the duty to sell off any remaining stock within thirty days upon expiration. In this way, the designer remains the owner of the design and maintains oversight of sales.

Honest recommendation

You do not always need a lawyer to draft a license agreement yourself. For a non-exclusive license with a small territory, a fixed fee, and a trusted party, you can use a solid template and fill it out carefully. Just make sure you consciously configure the four buttons and do not forget the reporting.

Do seek assistance as soon as the license is exclusive, spans multiple countries, permits sublicenses, or includes a revenue royalty. The biggest risks when drafting it yourself are an overly vague description of the right, a scope that leaves everything open, a royalty without audit rights, and the absence of grounds for termination. A lawyer familiar with IP contracts will check whether the template suits your situation and whether it will hold up if the licensee becomes difficult.

If you want to understand the basics first, read what is a license agreement. If you are considering outsourcing, check out having a license agreement drafted. Need an agreement immediately? View our license agreement.

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