How to Avoid Being Trapped in a Bad Licensing Agreement

If you’re an inventor or small business owner, you may be tempted to sign a licensing agreement without really understanding what it is or what it means. After all, the company wants to license your product, so that must mean they believe in it, right?

Wrong. It’s essential to know your exit strategy before signing any licensing agreement. Otherwise, you could find yourself trapped in a bad deal that’s impossible to get out of.

Exit Strategies

An “exit strategy” refers to a plan for getting out of a situation if things go wrong. In the case of licensing agreements, the exit strategy is known as termination clauses.

Termination clauses stipulate what will happen if the company decides to stop manufacturing your product or if they go bankrupt. With these exit termination clauses, you can regain your IP rights (without expensive legal action) or keep your product on the market.

One of my clients was stuck in an exclusive licensing deal with a partner that didn’t get their product into the market. But their licensing agreement didn’t include a termination clause for this situation, and they had to wait until the agreement ended to get their IP rights back.

Some other essential exit clauses include royalties and the length of the licensing agreement.

Royalty Payments

When negotiating your licensing agreement, be sure to discuss royalties. Royalties are payments made to you (the licensor) by the company (the licensee) for each unit of your product they sell. If the company stops paying your royalties, this termination clause allows you to exit the agreement.

Length of the Agreement

Another important consideration is the length of the agreement. You want to avoid being locked into a long-term contract with a company that might not be interested in your product after a few years. On the other hand, you don’t want an agreement that’s so short-term that it doesn’t give the company enough time to recoup its investment and make a profit.

Try to negotiate an agreement somewhere in the middle; three to five years is a reasonable time frame for brands and copyrights, longer for patented products and technologies. Keep in mind the length of the agreement can end sooner based on your termination clauses.

Conclusion

The bottom line is this: before signing any licensing agreement, ensure you understand all aspects of the contract and have the right exit strategy in place if things go wrong. Including these exit termination clauses will protect yourself and your business interests if your licensee decides to stop manufacturing or selling your product.

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