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What is a license agreement? It is a written agreement in which the holder of an intellectual property right (the licensor) grants another party (the licensee) permission to use that right, in exchange for remuneration and within agreed limits, without the transfer of ownership. This concerns rights such as a trademark, a patent, a copyright, a design right, or secret know-how. The licensor remains the rights holder; the licensee purchases nothing but acquires a right of use. The contractual agreements determine exactly how far that right of use extends: for which products, in which territory, for how long, and at what price.
The short answer
- A license agreement grants the right to use an intellectual property right without the transfer of ownership.
- It works for trademarks, patents, copyrights, designs, and know-how.
- The core lies in four buttons: exclusivity, territory, duration, and scope.
- Compensation is provided via a royalty, a fixed fee, or a combination with a minimum guarantee.
- You arrange sublicensing, quality control, and enforcement separately, otherwise disputes will arise later.
What exactly is a license agreement?
An intellectual property right grants the holder the exclusive right to use something and to prohibit others from doing so. A trademark holder is the only one allowed to use their trademark, and a patent holder is the only one allowed to use the protected invention. With a license, the holder breaks that exclusive right for another party without giving up the right themselves. The licensee may do what is stated in the contract and nothing outside of it. In this way, the licensor retains control over their right and profits from it, while the licensee gains access to something valuable without having to build or register it.
In many situations, a license can be established without formal requirements, but recording it in writing is advisable. In the case of an exclusive copyright license, a deed is even required to enforce the license against third parties. Without clear agreements, disputes arise as soon as there is money to be made.
License or transfer: the difference
In the case of a transfer, the rights holder sells the intellectual property right, and it disappears from their assets. With a license, they retain the right and, as it were, lease out the use. The transfer of copyright requires a deed pursuant to Article 2 of the Copyright Act, i.e., a signed document. A license can be less rigid, but precisely for that reason, a clear description is important: whoever retains a right wants to know exactly what another party may do with it.
For most SME entrepreneurs, a license is more attractive than a sale. You retain ownership, you can license the right to multiple parties, and you receive a recurring fee instead of a one-off payment.
The four buttons: exclusivity, territory, duration and scope
Each license revolves around four variables that you consciously set:
- Exclusivity. With an exclusive license, only the licensee may use the right, sometimes even to the exclusion of the licensor themselves. With a non-exclusive license, multiple parties may use it concurrently. An intermediate form is the sole right, where only the licensee is added, but the licensor may also continue to use it.
- Territory. Does the license apply to the Netherlands, the Benelux, the EU, or worldwide? You don't just give away an area that is too broad, because you cannot sell it to a second party.
- Duration. A fixed term with an option to extend, or linked to the duration of the IP right. A patent license terminates automatically when the patent expires.
- Scope. To which products, markets, and forms of use does the law apply? A vague scope, such as "for marketing purposes," almost always leads to disputes.
Remuneration: royalties and fixed fees
The remuneration is the reason you license. There are three main forms. A royalty is a percentage of the revenue from the licensed product, often between three and fifteen percent, depending on how unique the right is. A fixed fee is a one-off or periodic amount, useful if revenue is difficult to measure. You often combine both: an upfront amount plus an ongoing royalty, or a royalty with a guaranteed annual minimum so that a passive licensee does not leave you inactive.
Every royalty comes with a reporting obligation and an audit right, allowing you to verify the reported revenue. Without these two provisions, you would never know if the amount is correct.
Sublicensing, quality control and enforcement
May the licensee sublicense the right to third parties? This is only possible if you expressly permit it. Without permission, a sublicense is not valid. For trademark and design licenses, you must also establish quality requirements, as the licensee uses your name or design and could damage your reputation. Finally, regulate who takes action against infringement by third parties and who bears the costs of legal proceedings. With an exclusive license, the licensee has a vested interest in this, so explicitly assign that role.
A practical example
A small brewery holds a registered trademark for a regional beer and wishes to have it sold in Germany by a distributor. Instead of selling the trademark, the brewery grants an exclusive trademark license for Germany for five years, against a royalty of eight percent of turnover with a minimum of ten thousand euros per year. The license includes quality requirements for the brewing process under the trademark, a quarterly reporting obligation, and a prohibition on sublicensing. In this way, the brewery remains the owner, profits from German sales, and maintains control over quality under its name.
Honest recommendation
You don't always need a lawyer. For a simple, non-exclusive license with a limited scope, a fixed fee, and a well-known party, you can often get quite far with a proven model that you carefully fill in yourself. The risks are then manageable.
Have a license agreement drafted as soon as exclusivity, a large territory, sublicenses, or a revenue-based royalty come into play. That is where the pitfalls lie: a vague scope, a royalty without audit rights, no quality control, and no agreement on enforcement. With such agreements, a small difference in wording can amount to thousands of euros over the years. A lawyer familiar with IP contracts ensures that your model holds up should a dispute arise.
If you want to know exactly what needs to be included, read drafting a license agreement. If you are considering outsourcing, check out having a license agreement drafted. Need an agreement immediately? View our license agreement.
Frequently Asked Questions
It is an agreement in which the holder of an intellectual property right grants another party permission to use that right, in exchange for a fee and within agreed limits. Ownership does not transfer; the licensor remains the rights holder and the licensee acquires only a right of use.
With a transfer, you sell the right and it disappears from your assets; the transfer of copyright requires a deed pursuant to Article 2 of the Copyright Act. With a license, you retain the right and only rent out the use, allowing you to license to multiple parties and receive a continuous fee.
With an exclusive license, only the licensee may use the right, sometimes to the exclusion of the licensor themselves. With a non-exclusive license, multiple parties may use it concurrently. An exclusive right is the intermediate form, where only the licensee is added, but the licensor may also continue to use it.
A royalty is a percentage of the revenue from the licensed product, often three to fifteen percent. This is often combined with an upfront payment or a guaranteed annual minimum. Always include a reporting obligation and an audit right so that you can verify the reported revenue.
Only if you expressly allow it. Without permission in the agreement, a sublicense is not valid. Furthermore, sublicenses terminate automatically as soon as the main license expires, so establish that connection.
For a trademark, a patent, a copyright, a design right, and for secret know-how. Specific points of attention apply to each right, such as quality control for a trademark or a reservation requirement for a patent, but the structure of exclusivity, territory, duration, and scope recurs everywhere.
For a simple non-exclusive license with a fixed fee, a good model is often sufficient. Consult a lawyer as soon as exclusivity, a large territory, sublicenses, or a revenue royalty come into play, as that is where the costly pitfalls lie.
