2. Negotiate a License Agreement With the Intellectual Property Owner That Includes Clear Terms
In a license arrangement, the intellectual property owner, called the licensor, gives rights to a licensee to use and sell products bearing the licensor's intellectual property for a fee—typically a percentage of sales called a royalty. While the agreed-to royalty is a critical term, other terms can be equally as important.
Here is a cautionary tale to demonstrate this point. I represented a school that had licensed its name and crest to a T-shirt manufacturer. The parties had a "back of the napkin" type license agreement that, in the interest of saving money, was prepared without the assistance of a lawyer. Their license agreement provided for a royalty to be paid to the licensor (the school) based simply on net sales of the T-shirts, and an initial term of three years. The parties terminated the contract after the third year. However, the manufacturer continued to use my client's name and crest after this time. That's when my client called me, exasperated that the manufacturer would do such a thing.
My client sued the manufacturer for breaching the license agreement and for trademark infringement, for continuing to use my client's trademark without permission. To make matters worse, we learned in discovery (the part of the case where we obtain the other side's documents and take deposition testimony) that the manufacturer had come up with a crafty way to reduce my client's royalty. The manufacturer had decided unilaterally to deduct from "net sales" all of its costs, including marketing expenses and shipping expenses. This, of course, resulted in a smaller royalty paid to my client.
After an extensive and costly litigation battle, my client prevailed. However, the lesson here is that if you are going to embark on a licensing deal, retain a lawyer with licensing experience, and have a solid license agreement in place. A license agreement should, at minimum, have provisions relating to the following: