These days, collaboration is essential to the growth of businesses and the exploitation of technologies, competencies, and other resources for value delivery. Because of this, it is essential for companies to establish legal grounds in the form of licenses, franchises, permits, and the like.
Companies such as Universal Oil Products (UOP), which are well-known for their technology licensing, will sell their proprietary technology to industry partners in the form of licenses. The acquisition of a license safeguards intellectual property. The term “licensee” refers to the entity that is granted permission to do something.
Bottling firms worldwide can obtain Coca-Cola licenses to manufacture bottles for the company’s popular brands.
Who is a Licensee?
Definition: A licensee is a person or an entity that possesses a business agreement with another organization to have, make, do or use a proprietary of the said organization. The one who grants the license is called the licensor, while the beneficiary is the licensee.
For instance, a lawyer can be granted a license by the State to operate a chamber. In the energy industry, a party intending to engage in mining oil or natural gas in a territory will need to obtain an Oil Mining License (OML) from the government to explore and produce oil for a certain period.
Licenses can be obtained by both individuals and corporate entities. Only business entities are eligible to be granted mega licenses, such as the OML.
Types of Licensees
A licensee can be
- Exclusive
- Non-Exclusive
- Co-Exclusive
Exclusive: An exclusive license implies that only the licensee can exploit the intellectual property. The license does not grant permission to utilize the rights to any other person, not even the licensor himself. This prevents other companies from gaining the same proprietary edge, which benefits the licensee.
Non-Exclusive: A license that is non-exclusive gives both the licensee and the licensor the ability to use the rights, with the licensor accepting more licensees.
Co-exclusive: A co-exclusive license is a type of license that combines elements of both exclusive and non-exclusive arrangements. In this case, there will be multiple licensees, but the agreement will only allow for a specific or limited number of them.
Obligations of Licensee
The following are the obligation of the licensee:
- Adherence to certain rules set forth by the licensor.
- Continually pay the licensor an agreed amount for using their products, proprietary or land. This fee is called a royalty.
- Maintain confidentiality of the proprietary information.
- Exploit the rights granted within the ambits of the agreement.
Rights of Licensee
The licensee has the right to:
- Carry out activities without nuisance.
- Be protected from business secrets.
Limitations of Licensee
- A licensee cannot transfer the license or right to a third party without the licensor’s consent.
Licensee Vs Franchisee
Both of these ideas are distinct, although they are commonly used interchangeably. The difference between a licensee and a franchisee is that the former is free to run their own business after obtaining the necessary permissions, while the latter is subject to the supervision of the franchisor.
A franchisee is more analogous to an extension of the franchisor; a franchisee structures their business after the franchisor’s and operates in the franchisor’s best interest. They are highly regulated.
McDonald’s is a good example of a franchise; the franchisee operates their location in the same manner as a typical McDonald’s restaurant.
Whichever agreement a company chooses to implement depends on its goals and current organizational structure.
A licensee can be sufficient if the company already has a proven model and the only thing it needs is a proprietary. On the other hand, purchasing a franchise can be a good choice if the company lacks a structure and would rather model itself after an established one.
The similarities between licensing and franchising are:
- They involve the payment of a fee.
- They are business agreements between two or more parties.
Pros of Licensing
- It gives a level of independence to the possessor compared to a franchise.
- It is a great way to leverage and boost business capability.
Cons of Licensing
- It limits the access the licensee can enjoy compared to a franchisee, where a shared relationship exists between both parties.
- If breached can result in serious litigations.
Elements of a Standard Licensing Agreement
Some elements of a standard license are:
Contract Length: The duration of the lease is decided, though this can be renewed or extended.
Dispute Resolution: This clause takes care of the possibility of infringement. In most cases, Arbitration or ADR (Alternative Dispute Resolution) is provided.
Exclusivity: The license will state clearly if the rights are exclusive or non-exclusive.
Minimum Delivery Requirements: Some license, e.g., Oil Producing License (OPL), requires the licensee to ensure minimum production of 10,000 barrel per day of crude oil from the acreage.
Oversight: Having a license is not absolute freedom, as the licensor also has a stake in protecting.
Payment Amount: This stipulates the fee paid by the licensee to access the license.
Payment Schedule: This allows for milestone or phased payments.
Renewal Terms: This stipulates the terms and conditions for the license renewal.
Sub-Licensing: This stipulates whether the licensor is granting exclusivity or allowing for sublicensing.
Conclusion
A licensee obtains a license for different business reasons. They can operate their company, and the licenser will gain royalty payments and increased brand recognition.