Manufacturing License Agreement a Bad Idea?

License agreements imply ongoing payments. The example everyone talks about is Microsoft, which made its initial fortune by licensing makers of personal computers to install copies of Microsoft’s Disk Operating System (DOS) on the computers they made.

Although license agreements sound like a nice way to make money, outright purchases, paid in cash, usually lead to more satisfactory results for both parties. With licensing agreements, disagreements are common. For example, the licensor may argue that the manufacturer did not do enough promotion, or did not report sales properly, and so on.

In a cash transaction, the manufacturer pays considerably more up front, but has no special duty to market the product immediately, deal with the licensor and his or her representatives, or be subject to frequent interrogation by the licensor.

It might appear that with a cash transaction a licensor will get far less cash compared to the full potential of royalty payments. However, since statistically most license deals fail, the cash payment approach is less risky for the licensor and in many instances is probably more rewarding. From a business point of view, this option is well worth thinking about by both parties.

The “Give Up” Clause

In the straightforward Manufacturing License Agreement provided in our kit, we have included a clause for an inalienable right to “give up,” so that if for any reason the manufacturer wants to drop the product or products, he or she can do so without further recourse by the licensor.

If, as the licensor, you believe in your product or products, you should not be too worried about the product reverting to you if things should not work out. If the licensor is unwilling to accept a simple walk-away clause, the manufacturer may lose faith in the deal and decide not to sign the agreement.

In the agreement provided in our kit, both parties retain the right to assign their rights, without prior notification to the other party, but then must continue to be fully responsible for the terms of the agreement if another party takes on the assignment. This clause is intended to protect the financial interests of both parties without punishing them for assigning the rights.

Exclusive versus nonexclusive rights: Manufacturers usually want exclusive rights worldwide. However, that is much more expensive than only taking the rights you will actually use, so give careful thought to what rights you need.

Make at least two copies of any agreement, giving an original copy to each party. As the licensor, ideally you should keep one copy in a separate license folder, where you have all copies of licenses available, and another in your file on the product or products themselves.

Remember that it is far easier to get into a License Agreement than it is to get out of one. If you are the manufacturer, you may well be dealing with the hopes and dreams of the licensor, and those may be unrealistic. If you are the licensor, remember that a licensing agreement is only business to the manufacturer.

When a lot is riding on a license agreement, you are well advised to seek legal advice. Just be sure you can distinguish legal reasons from the business ones. Always take your lawyer’s legal advice, but use your knowledge and expertise if your lawyer starts offering business advice!

About This Article sales-and-distribution-agreements-large This is an excerpt from the forms kit, Sales & Distribution Agreements, published by Self-Counsel Press. The kit contains template agreements for simple sales, consignment and distribution agreements, reseller agreements, and more. It also contains template clauses to deal with issues such as Export Restrictions and Signing Authority.

The kit is suitable for use in Canada and the US.

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