Licensing Agreement Advantages and Disadvantages

An intellectual property licensing agreement is a contract that occurs between two or more parties where the licensor (the intellectual property rights owner) grants the licensee (intellectual property rights receiver) the authorization of use of intellectual property (patents, trademarks, and/or copyrights). There are different types of licensing agreements used depending on many factors, including the type of intellectual property. There are licensing agreement advantages and disadvantages depending on the circumstances. Read about the 7 kinds of intellectual property in out article what is intellectual property.

Read more about the different licensing contracts in our article licensing agreement types. The best way to start the licensing process is by consulting an intellectual property attorney (patent attorney, trademark attorney, or copyright attorney). Hiring an attorney experienced in licensing agreement advantages and disadvantages is highly recommended.

Licensing Agreement Advantages

Licensing agreements can be very beneficial and profitable to all parties involved. Licensors are able to generate passive income from their intellectual property. Licensees are able to begin new business opportunities at a less expensive rate. Some licensing agreement advantages become tangled and result in positive results for all parties. If a licensee is able to improve the piece of intellectual property, there can be even more money to be made by all parties with the new/improved product or goods. More money for licensees means more money for licensors.

Important Tip: It is advised to include an arbitration clause in any licensing agreement. An arbitration clause can be a licensing agreement advantage.

Benefits to Both Parties (Licensor and Licensee)

There are at least two licensing agreement advantages that both the licensor and licensee can benefit from, depending on the circumstances. The two licensing agreement advantages that both licensor and licensee benefit from are risk sharing and when licensing is used to resolve an infringement problem.

• Risk Sharing Between Licensing Parties – Launching a new product into the market is typically a risky proposition for new intellectual property owners. By partnering with another business in a licensing agreement, both parties can reduce the risk against the many possible losses that come with creating a product by sharing the rights to the intellectual property in a licensing agreement.
• Licensing as an Infringement Solution – Rather than outright suing an infringer, a licensing agreement can be the amicable solution that each party is looking for. A licensing agreement diffuses the situation by allowing the alleged infringer to use the piece of intellectual property while the owner receives compensation. This allows both parties to profit while avoiding the expensive process of litigation or court.

Licensing Agreement Advantages Providing Licensor Benefits

There are seven potential licensing agreement advantages for licensors to get benefits. Potential licensing agreement advantages for licensors vary from the ability to leverage the market and skills of the licensees to the ability to generate income.

• Utilization of Licensee’s Network in Foreign Markets – Foreign licensing agreements can be very beneficial to businesses. This allows them to quickly and inexpensively spread their business into new foreign markets that would otherwise be difficult to enter. Entering foreign markets requires much paperwork and money to pay tariffs and overseas shipping. However, with a foreign licensing agreement, licensors gain access to the licensee’s distribution network and are able to sell their products in new geological regions.
• Lower Capital Requirement Costs – Intellectual property is an expensive industry. Being granted intellectual property is simply the beginning; one still needs to manufacture and distribute their product. Licensing your patent is one away to avoid the high manufacturing and distribution costs of setting up your own business. An established business likely will have the organizational structure necessary for the intellectual property owner to make a profit from their invention. 
• Passive Revenue – Royalties is one of the easiest ways to earn money for those who have a piece of intellectual property that is in demand. Royalties are payments made to the owner of the intellectual property by whoever is using their IP on a continuous basis. A licensee is able to sit back and watch someone else sell their invention or use their brand, logo, slogan, etc. thus making them a profit. 
• Knowledge – If the patent, trademark, or copyright owner is not yet ready to create and establish a business, licensing out your intellectual property is likely the best decision. By doing so, one can step back and learn from the business expertise and skills of the licensee.
• Convenient Easy Market Entry – It can take years of dedicated work to establish an organized and profitable business. By licensing out your patent to an already established company, licensors can save time, money, and stress. If one does not have the intention to create a business, that is no problem as long as they have licensing agreements in place. 
• Competitive Perk – By having licensing contracts in place, one may be given an advantage over their competitors in the market. The more licensing agreements, the more distributed your product becomes. This results in promotion of the product in addition to profits.
• Potential for Better Marketing – Who you enter into licensing contracts with can also help with promoting your invention. Each business will likely understand how to reach their audience and will know how to market it better than the licensor might. Local businesses have more targeted audiences while larger corporations are able to reach more consumers.

Licensee Benefits of Licensing Contracts

There are four potential licensing agreement advantages for licensees to get benefits. Potential licensing agreement advantages for licensees vary from protection from lawsuits, leveraging existing intellectual property, no need for product research and development, and of course making money.

• Exempt from Lawsuits – As a licensee, a licensing agreement almost guarantees an exemption from being sued. Because they are not the rightful owner or creator of the intellectual property, they cannot be held liable in most cases. If a piece of intellectual property were to become involved in a lawsuit, the verified owner would be whom becomes involved in court.
• Quick “Ownership” of Established Intellectual Property – Entering into a licensing agreement as a licensee means you are able to enter the market more quickly than if you were to create and manufacture your own product. This contract provides the licensee with control of intellectual property without spending any of their own capital. 
• No Need for Product Research and Development – Entering into a licensing agreement as a licensee removes the need to develop their own product or brand. This eliminates the need for product prototyping, development, testing, manufacturing, and distribution. Skipping each of these expensive steps and directly entering the market is a favorable licensing agreement advantage.
• Ability to Generate Revenue – Using the intellectual property of the licensor as a licensee allows for revenue to be made. Creating a profit makes both the licensor and the licensee happy as it becomes a win-win situation for both parties. 

Licensing agreements in simple terms are just a business contract. Like in any valid contract, each party involved are able to list their terms and conditions and negotiate before entering the agreement. Contracts can include as many terms as necessary, such as an arbitration clause or a late payment clause to ensure protection for all. This ensures both parties to have cooperative goals.

Licensing Agreement Disadvantages

There are several potential licensing agreement disadvantages that can impact both the licensor and licensee when things go wrong with a licensing contract. From damage to reputation from having a bad partner to problems with payments, there are potential disadvantages.

Licensing Agreement Drawbacks for Parties (Licensor and Licensee)

• Potential for Damage to Reputation – Who you enter into licensing agreements with matters. If the your licensee is not conducting business ethically, this may create a domino effect into your business or product. Although you are not liable for their actions, your business or production reputation is. 
• No Revenue Guarantee – When a licensing agreement is signed, the licensor is considerably dependent on the licensee to be successful in however they plan to use the piece of intellectual property. As mentioned before, more profits to licensees means more profits to licensors. The reverse effect is possible as well. There is no guarantee that licensees will generate any profits. This can consequently ruin the reputation of both businesses. This type of relationship also creates a dependency on each other. 
• Potential Royalty Litigation – Royalties can potentially complicate licensing agreements as royalties payments are not automatic. This means licensors may not receive royalties payments for months after they were due. On the other hand, licensors may refuse to validate royalty statements. Licensors maybe also refuse to allow licensees to audit royalty statements for accuracy.
• Potential Unintended Competition – There is a small chance that the licensee and licensor become competitors in their market without intention. This is especially seen today where e-commerce is huge, creating a lose-lose situation. 

Important Tip: It is becoming more common for licensing agreements to contain a geographic barriers clause to establish which markets the parties should focus on and stay in to avoid such situations. 

Potential Licensor Drawbacks to Licensing Contracts

There are several potential licensing agreement disadvantages that can impact the licensor when things go wrong with a licensing contract. In contrast to the licensing agreement advantages listed above, drawbacks include losing control over the intellectual property and payment problems.

• Potential Loss of Control Over Intellectual Property – Licensing intellectual property places your business at a high place of exposure. Such exposure can lure in potential dangers. Because licensors are licensing out their intellectual property, they are no longer in full control as they have little to no control over how licensees conduct operations. Licensees can end up being reckless and putting the intellectual property in the hands of criminals looking to steal, pirate, or misuse the piece of intellectual property. Illegal usage results in loss of profits.
• Potential Payment Problems – As mentioned before, royalties are not automatic payments and are only paid so often. It is common in most licensing agreements for payments to be made just once per quarter. So even if the product is selling well, you may not see the profits incurring for months.

Potential Licensee Drawbacks to Licensing Contracts

There is at last one potential licensing agreement disadvantage that can impact the licensee when things go wrong with a licensing contract. Licensing agreements are generally temporary, so the imminent contract expiration is a potential problem for licensees.

• Contracts Expire – Licensing agreements eventually expire and this should be considered by the licensee. They must think about how much time and money they are dedicating to the brand or product and if it is worth it. Once the licensing contract expires, the licensor is not required to renew or offer another contract with the ex-licensee.