Scaling a Business Through Strategic IP Partnerships and Brand Licensing

List in-scope Licensed Property (i.e., the intellectual property that is being licensed) with particularity in a schedule. If there is any question about what is excluded, also make that clear. For example, if you are licensing a name to allow a computer hardware company to advertise “Powered by [Brand name] software,” but not a logo that is often used with the brand name, it is prudent to make clear that the license includes the name, but not the logo.

Licensed Products or Licensed Services are products of services that incorporate, display, exploit, or otherwise use the Licensed Property. It is important to make clear that any goods/services that do not bear the Licensed Property are specifically excluded from the agreement and from the definition of Licensed Property. Doing so will preclude future disputes over whether, for example, a licensee has the right to continue selling products that fall within the scope of the license agreement if those products do not include the Licensed Property.

Royalties are the primary means by which licensors are compensated under licensing agreements. Royalties can be structured in various ways, including as a percentage of net sales (or other financial metric) or as a per unit cost (for example when sales prices vary little). Each of these measures can be paired with minimum royalties, tiered royalties based on milestones, or capped royalties. These provisions effectively allocate the risk of failure and the upside return on success.

It is important to clearly specify which sales figures are included—whether gross sales, net sales, MSRP, or units sold—and to define applicable deductions such as returns, discounts, taxes, and shipping costs. Additionally, different royalty rates may apply to distinct product lines, geographic regions, or sales channels, where relevant.

When negotiating financial terms, licensors and licensees should consider factors such as the product lifecycle, market potential, and their respective risk tolerances. Upfront payments provide immediate compensation to the licensor and demonstrate the licensee’s commitment; these non-refundable fees can help offset initial development or legal expenses. Milestone payments link compensation to specific achievements—such as regulatory approvals, commercial launches, or hitting sales targets—thereby aligning financial rewards with progress and performance.

Tiered royalty structures offer flexibility by adjusting rates based on sales volume or revenue thresholds. For example, higher sales may trigger lower royalty rates, incentivizing scale while balancing returns for both parties. Minimum guarantees ensure licensors receive a baseline income regardless of market performance, reducing their risk and promoting accountability from the licensee. Profit-sharing models distribute net profits between licensor and licensee after deducting costs, fostering a collaborative relationship akin to a business partnership.

GMP is the minimum amount that a licensee agrees to pay a licensor regardless of actual sales or revenue generated from the sale of Licensed Products. GMP is typically a key negotiation point as it needs to be a sufficient amount for licensor to commit to the deal and also not so high that it puts the licensee at substantial risk of owing amounts that exceed anticipated sales of Licensed Products and the royalties that would otherwise be owed to the licensor.

Exclusivity provisions may prevent the licensor or the licensee from entering into licensing deals with competitors within, e.g., specified territories or product categories. To compensate for these restrictions, licensors/licensees may negotiate higher/lower royalty rates. Additionally, exclusivity can include a right of first refusal, allowing the licensee the option to license expanded categories or regions before the licensor approaches third parties.

Exclusivity provisions may be considered in a number of instances, including when the licensing deal will create unique market access, marketing power, or capital investment, to avoid brand dilution across overlapping product or service lines, to avoid conflicts across sales channels such as ensuring consistent pricing, messaging, or brand positioning across retail or distribution channels or where the deal contemplates long-term joint product development.

It is prudent to draft quality control provisions that define objective criteria for meeting the required standards, including by referencing brand guidelines, approved prototypes or industry benchmarks. Licensors should ensure that the quality control provisions meet the standards that are associated with its own product or service offerings, and licensees should ensure that the quality control criteria are standards that they are able to meet.

The agreement may also specify what materials and products require prior approval—such as packaging, marketing materials, and product samples—and outline the format, timing, and procedure for submitting and approving those items.

Licensors and licensees must strike a balance between a licensor’s desire to audit at its discretion and a licensee’s desire to limit such rights, which can be disruptive to licensee operations. Licensee may want to limit audit rights to “only those records directly related to the Licensed Technology and Licensee’s obligations under the Agreement” and specify when and/or how often an audit can occur (e.g., once a year unless a breach is suspected). A licensor may want the ability to audit at any time “upon reasonable notice.”

The parties may decide on an approach that limits audit rights to a certain number of times per year, specify a notice period for exercising such rights, and carve out exceptions if instances of material breach arise. The parties should also specify the parameters for audit rights of books and records versus facilities inspections and may provide for notice and cure periods and/or remedies if breaches of the agreement are identified as a result of an audit.

It is prudent to address ownership and use of IP during and after the term of the agreement, both for new IP created during the term of the license agreement and existing IP. The agreement should specify whether existing and developed IP is owned solely by the licensor, the licensee, or jointly, and under what conditions each party may use it after termination. If use of IP is permitted by a party after the agreement terminates, the agreement should make clear that such use will be free from claims of false affiliation or false endorsement due to use of the IP during the term of the license agreement and the consumer associations that may have resulted from such use.

For example, if a software program is co-branded and the licensed IP is removed from the program, the agreement should make clear that the party who has the right to use the software post-termination has a right to do so free and clear and that the licensor is precluded from claims that continued use of the software creates a false association due to it being co-branded during the agreement term.

If the license agreement allows for use of AI to create brand IP, the agreement should address the ownership of AI-generated works, specifying who as between the parties has the right to use AI-generated content during the term of the license agreement and post-expiration. Best practices include making representations that the AI-generated content does not infringe any third-party intellectual property rights as well as the inclusion of indemnities by the party generating and using the AI content.

If the license agreement permits sublicensing of the licensed IP, the agreement should include clear terms on sub-licensor approval, scope, and quality standards to maintain brand control and prevent unauthorized use.

Prior to or early on in negotiations, it is important for the business stakeholders to align on what term length makes sense and whether a sell-off or wind-down period is needed.

The termination language in the agreement should also be clear, and specify when the agreement will expire by its terms and under what conditions the agreement can be terminated for breach. For example: (1) failure to meet promotional obligations or sales milestones, (2) failure to comply with brand usage guidelines; (3) reputational harm or violations of morals clause; (4) bankruptcy or insolvency of either party; and/or (5) at either party’s discretion with notice.

The agreement may provide for immediate termination for high-risk breaches, such as willful misconduct, IP infringement or other actions that cause material brand damage.

Clearly define the channels of distribution allowed during the license term and specifically during the sell-off period. Allowing expanded channels or permitting product donations can help accelerate inventory clearance while maintaining brand control and compliance, but the parties should ensure that any expanded channels align with their brand values.

The parties should carefully consider and clearly define whether disputes will be resolved through mediation, arbitration, or federal or state court. If the primary objective is speed and confidentiality, arbitration may be preferred, whereas if transparency and appeal rights are a primary objective, state or federal court may be the preferred venue for dispute resolution. Irrespective of the chosen forum for most disputes, a common best practice is to include a carve-out for injunctive relief, allowing either party—especially the licensor—to seek immediate court intervention to prevent material brand misuse, brand damage (e.g., breach of morals clause), or IP infringement. The agreement should specify the chosen venue, governing law, and any applicable procedural rules to ensure clarity and avoid future disputes.

When drafting enforcement provisions in a brand license agreement, it’s important to address how third-party infringements will be handled. Best practices include clearly allocating responsibility for monitoring and enforcing each party’s intellectual property rights with that respective party. The agreement should outline procedures for notifying each other of suspected infringement, who may initiate legal action, cost-sharing arrangements, and how any recovery (e.g., damages or settlements) will be allocated. Clear enforcement obligations help ensure the brand IP involved is consistently protected across all markets.

When drafting representation and warranty provisions, it is essential to ensure clarity, accuracy, and proper risk allocation. Licensors commonly warrant that they own or have the right to license the intellectual property, and that the licensed materials (e.g., trademarks or software) do not infringe upon third-party rights. Licensees typically warrant that they will use the intellectual property only as specified in the agreement and comply with applicable laws. Best practices also include specifying any exclusions or limitations on these warranties, and setting clear time frames for breach notification.

For license deals that include software, the licensor may warrant that the software is free from malware or other harmful code, that it functions as described, and that it is compatible with specified platforms or environments. Additionally, licensors should confirm that they have the right to sublicense the software and that it does not violate any third-party licenses. Licensees may be required to warrant that they will not reverse-engineer the software and will only use it in accordance with the agreed terms.