Licensing Agreement Terms

Licensing Agreement Terms: the basics.

Every licensing contract is unique. There is NO typical deal (contract, agreement) in art licensing because it depends upon the manufacturer, industry, products, the notoriety of the artist, etc. which affects the terms and payment. Also negotiations between the property owner (or representative) and licensee (manufacturer) affects the contract.

Licensees that often offer licensing deals to licensors (property owners /artists) normally have their own contracts that they want licensors to sign. A manufacturers that is new to licensing or infrequently offer licensing deals often ask the licensor to supply their own contract. Knowledge about licensing agreement terms is crucial here, even before hiring an attorney. So it is wise for every artist to have a contract before it is needed. Hire an intellectual Property (IP) attorney knowledgeable about art licensing to create a generic licensing contract that can be customized for each licensee. Also hire an IP attorney to review contracts (and its license agreement terms) before accepting ones offered by licensees especially if the deal involves a large amount of art and/or multiple SKUs.*

*SKU (pronounced skew) means a stock-keeping unit and is used by retailers to keep track of individual items for inventory.

If you do not want to spend the money to hire an attorney to look over a contract, think again. Contracts concerning licensing agreement terms can be complicated. Ideally the contract should benefit both licensor and licensee. But missing terms, placement and incorrect use of words, rights given to the licensor at the beginning of the contract but later taken away with confusing terminology can make a big difference in the contract and ultimately benefit the licensee and not the licensor. Don't be foolish and risk losing revenue or even your art by failing to hire a reputable art licensing IP attorney. Study your stuff and everything that has to do with licensing agreement terms ahead of time. Also, read "Hire a Lawyer - but Which One?" for information on hiring lawyers that specialize in art licensing.

Contract Terms

Below are comments about some of the licensing agreement terms in a contract. Also read "The legalities of Licensing" by attorney Joshua Kaufman for information and definitions of terms. Note: This article was written in 2004 and amounts stated for royalties etc. are no longer accurate.

• Advance: A non-refundable advance payment against royalties to the licensor is sometimes given when a contract is signed. It shows that the licensee has faith that licensors art on their products will sell. In the past, advances were often given but recently there are much fewer. Advances can range from a low $100 per image to $30,000 or more for multiple images and/or SKUs in a product line.

• Artwork: Contracts should list the art that is being licensed. This licensing agreement term is of the highest importance! The contract should not state or infer that all the licensors artwork is being licensed.

• Exclusivity: Some licensees want to have an exclusive arrangement with the licensor. That way the licensor does not license their unique work to the licensees competition. Usually this is when the licensee wants to introduce a large line of art by the licensor. An exclusive arrangement could be beneficial to the licensor if the licensee markets the art, has a large customer base, and continues to license more art. It is not beneficial to the licensor if the licensee only wants to license a few designs because then other licensing opportunities are lost.

• Guarantee: Guarantees on the monies to be earned during the length of the contract are now rarely offered to artists unless they are a well known brand with a proven track record in being able to sell products with their art.

• Length: The length of the licensing agreement depends upon the type of product, how long it takes to manufacturer and get to market, and how long the manufacturer anticipates that it will be sold. Most contracts last two to three years.

• Payment: There are three basic types of payment agreements in the licensing industry (on-demand, flat-fee and royalty). Licensors and licensees agree that each have their place in licensing art. They are discussed below.

• Samples & Sample Approval: Samples of the product are not always offered to the licensor especially if the product is produced only when ordered by the client. Sample approval by the licensor before the products are mass produced and sold to retailers is not always given. In fact, licensor sample approval is not possible for many licensees because of tight scheduling in producing the products and shipping to retailers.

• Territory: The territory of the contract is usually United States or North America with additional countries listed separately. Listing world-wide as the territory is unwise if the licensee does not sell their products world-wide because it limits the potential of licensing the art to other countries.

On-demand Payment

This type of payment means that the licensee does not manufacturer the product until it is ordered by a client. Thus the licensor may not receive a fee if no product is ordered. It allows the licensee to secure the use of art without investing in it. A quarterly royalty rate is the fee normally given for this type of payment. The pros for the licensor is the art gets visibility which MAY result in sales. The cons for the licensor is that the art is not available for licensing of the same product (unless it is non-exclusive) during the time of the contract with no guarantee that the product will ever be manufactured and sold. It is up to the licensor to determine if the visibility and the hope that the licensee's clients purchase the products out weights the cons. Unfortunately this type of payment is becoming more common.

Flat-fee Payment

A licensing flat-fee (usually just called flat fee) gives the artist all the benefits in a licensing agreement but instead of getting royalties the artist gets a one time upfront fee that MAY range from $500 to $2000 per SKU. A licensing flat-fee is usually offered by a licensee that does not want to be bothered by tracking sales of licensed art on products or does not have an established bookkeeping system to manage royalties. The cons to this type of payment is that the artist may lose revenue if the product is popular and has multiple printings. The pros is that the payment is made up front instead over a period of years or not at all if the product is not made or does not sell. Some licensors recommend taking this kind of deal if the licensee does not have a large customer base or if the theme of the art is a fad and retailers may not order and reorder enough products. Note: When you hear the term "flat fee" in the licensing industry do not confuse it with the term "flat fee" used by some illustrators and artists. Flat-fees in that case means selling all rights to their work including the copyright. In art licensing, flat fee means a one time payment in a licensing agreement.

Royalty Payment

Receiving royalties is usually the choice of payment for most licensors because the most revenue may potentially be made with this type of payment method. But the licensor takes a chance that the product(s) will sell well. If they do not sell well, the licensor may not make any revenue or very little. I have heard that one artist only made $25 for one image during the two year length of the contract. Another artist made "many" thousands of dollars in the same time period.

Every licensee offers different royalties depending on the type of products they sell and are paid quarterly. The average art licensing royalty is in the 4-6 percent range but can be larger depending on the product and how well known the licensor. Royalty rates can be found in the following publications.

"Graphic Artist's Guide Handbook of Pricing and Ethical Guidelines" (published September 29, 2010 - cost $26.39) This publication can be read at some public libraries or purchased. It includes the pricing for many kinds of art and illustrations and includes royalty rates for "some" art licensing industries.

"The Licensing Letter Royalty Trends Report" (2010 edition - cost $319.00) This is a comprehensive report on royalties for the entire licensing industry including art licensing. Note: I have not purchase this report so I do not know how much information it has on the art licensing industry.

When deciding on whether to sign a contract or not, do not just judge it only on the offered percent of the royalties but on all the terms. Also find out how large the licensee customer base, licensee estimate on number of products sold, and if an advance is offered. At first glance a six-to-eight percent royalty may sound better than a four percent royalty. However, a four percent royalty deal for products selling to big box retailers with a huge number of stores could yield ten times the revenue that a six-to-eight percent royalty deal for products sold to a modest amount of gift stores.

The actual calculation on how royalties are paid differ from licensee to licensee and the terminology in the contracts can be very confusing. Royalties are not often based on the wholesale price of the product but on the net price that can include discounts, shipping etc. That is another reason why an attorney should review contracts before they are signed by the licensor. Read "Royalties Rates: Not as simple As you may think!" by attorney Joshua Kaufman to find out more. Note: This article was written in 2002 and amounts stated for royalty rates are no longer accurate.

I believe that knowledge is power. Learn as much as you can about licensing contracts and license agreement terms. Become familiar with what should be included in them and read the articles linked to this post so that you are aware of the pitfalls before signing a contract. And always be willing to negotiate a contract that is not beneficial to you.

Article author: Joan Beiriger

Some More Licensing Agreement terms

License agreements come in a million flavors, but they all contain a few critical elements. An in-depth knowledge of licensing agreement terms is crucial for your success. Here is a Crib Sheet of 10 Key Licensing Agreement Terms you need to comprehend.

1. Scope: What restrictions do you want to impose? The main ones are field-of-use, geography, time and exclusivity. Field-of-use means a customer can only use your product within a specific market. Restricting a license to the automotive sector prevents a customer from using it in aerospace or retail (without paying you again).

2. Geography: Predictably, this determines the physical area where a customer may use your product. Geographic scope is usually worldwide (though I have seen “throughout the universe”), but in some situations a tighter scope makes sense. This one of licensing agreement terms is vital to consider.

3. Time: When pricing your license, this one of the licensing agreement terms is of great importance to you. You will need to decide whether to charge a one-time perpetual fee or a renewable subscription. If renewable, choose an expiration date.

4. Exclusivity: Your customer is the only person who can use your product within the parameters specified. Customers will ask for exclusivity if your product is somehow central to their business. Pay attentions to this fourth of the licensing agreement terms: consider charging a premium for this, unless your product is a commodity (like Microsoft Office), in which case there is no value in negotiating exclusivity.

5. Representations and warranties: The fifth of the licensing agreement terms means that this is where you give your customer assurances that the product is yours to deliver, doesn’t infringe on anyone else’s IP, and that you will stand behind it if anything goes wrong. These elements get negotiated frequently. For the warranty, simply find out what your competitors offer and benchmark to it.

Representation of the authenticity of your IP is more challenging. Practically speaking, it is impossible even for big companies to prove that a product does not infringe on existing IP “anywhere else in the world.” Some tips: (a) determine where your customer is likely to use your product and assess whether you need to worry about infringement claims from those parts of the world; (b) limit the scope of your warranty to registered intellectual property in all cases. Patents must be registered to be effective, but trademark and trade secret rights can exist without registration, making due diligence impossible to complete with certainty.

6. Indemnification: The sixth of the licensing agreement terms presented here merely means that if you breach a representation or warranty, and your customer incurs damages, this assures them you will cover the costs. IP claims are foremost in most people’s minds, but personal injuries and property damage (e.g. if your gear causes a fire) are other common grounds for indemnification claims.

7. Limitations on liability: Number seven of the licensing agreement terms presented here in plain English. This is your opportunity to state that if any claims on your warranties are made, the maximum amount you will pay will be capped. Most licensors limit it to the fees they will receive from the customer. (Licensees, of course, will want no limits.)

8. Most favored nations: Avoid this provision as much possible. It means that if you ever offer better terms to a new customer, you must give earlier lincensees the benefit of the same terms. Each business deal naturally involves a slightly different set of compromises. Be aware of the importance of the eighth of the licensing agreement terms. 

 But if you do give a customer an “MFN” provision, consider yourself warned: you’ll be required to give that person the best part of every deal you do in the future also.

9. Jurisdiction and venue: Jurisdiction determines the set of laws that apply to your agreement (e.g. California vs. New York). This particular one of the licensing agreement terms is critical. Venue determines where any subsequent lawsuit will be filed. Litigation is rough on startups; litigating long-distance, worse. Set the venue close to home if possible.

10. Attorney fees: If there is a dispute, the loser pays attorney fees incurred by the victor. In my experience, where this provision exists, the parties stay at the negotiating table longer, resorting to court only if certain they will prevail. It can come back to haunt, however; there is always a risk that you could lose, no matter how good you think your claim is. So, pay close attention to this very last of the licensing agreement terms presented here.

(Key Terms of a Licensing Agreement: by Jay Parkhill)