What Should A Product Licensing Agreement Include?

Yes, if you're letting another business make, sell, use or market your product, brand or technology, you should usually have a written product licensing agreement.

The reason is simple: licensing can be a smart way to grow without doing everything yourself, but you're also handing over something valuable. The contract needs to spell out exactly what the other party can do, how you'll get paid, how your brand or product quality will be protected, and how the arrangement can end.

For a product licensing agreement small businesses can actually rely on, the details matter. A short handshake deal might feel easier at the start, but it can become messy once royalties, territories, exclusivity, improvements or customer complaints are involved.

What Is A Product Licensing Agreement?

A product licensing agreement is a contract that gives another business permission to use your product, intellectual property, brand, technology or know-how on agreed terms.

You still own the underlying rights unless the contract says otherwise. The licensee gets a defined right to use those rights for a specific purpose, usually in exchange for royalties, fixed fees, minimum payments or another commercial benefit.

For example, Mia owns a small kitchenware brand and has designed a popular reusable lunch container. A larger homewares distributor wants to manufacture and sell it under Mia's brand across the US. Mia doesn't want to sell the design outright, so she licenses the product and trademark instead. The agreement sets the royalty rate, quality standards, approved packaging, sales territories and when Mia can terminate if standards slip.

Product licensing can cover things like:

• A physical product design or invention
• A brand name, logo or product line
• Software, apps or embedded technology that may need separate software license terms
• Manufacturing specifications, formulas or processes
• Artwork, photos, videos or written content used on products
• Packaging, labels, marketing materials or product manuals

The agreement should make it clear whether you're licensing patents, trademarks, copyrights, trade secrets, software, technical materials or a mix of different rights.

Do You Need A Written Product Licensing Agreement?

Yes, you should use a written agreement if another business is relying on your product or intellectual property to make sales.

Some IP rights can be licensed informally, but relying on emails, invoices or verbal promises leaves too much open. Without a clear contract, you may struggle to prove what was agreed, recover unpaid royalties, stop unauthorized use or control how your brand appears in the market.

A written agreement is especially helpful where:

• The licensee will manufacture or modify your product
• Your trademark or logo will appear on packaging, websites or ads
• You're giving access to confidential know-how or technical files
• Royalties will be calculated from sales revenue
• The license is exclusive or limited to a territory
• The other party will sell through retailers, marketplaces or distributors
• You may want the rights back later

Federal law gives you important protections, but your contract does much of the practical heavy lifting. For example, the Lanham Act supports trademark protection, the Copyright Act protects original works, and the Defend Trade Secrets Act can help with misappropriated trade secrets. Even so, your agreement should explain day-to-day rules like approval rights, reporting, audits and quality control.

State law and industry rules can also affect parts of the deal, especially around contract interpretation, warranties, product liability and sales of goods under the Uniform Commercial Code. If the product is regulated, such as health, food, children's products, cosmetics or electronics, you should check the rules that apply to your business before you grant rights to someone else.

What Rights Should You Grant To The Licensee?

You should grant only the rights the licensee actually needs to perform the deal, and keep everything else reserved to your business.

This is one of the most important commercial parts of the agreement. If the rights are drafted too broadly, you might accidentally allow the licensee to use your product in markets, channels or formats you never intended.

Scope Of Use

Your agreement should say exactly what the licensee can do. For example, can they:

• Manufacture the product?
• Sell finished products to retailers?
• Sell directly to customers online?
• Use your logo on packaging and advertising?
• Modify the design or create derivative products?
• Use your software code, API, technical files or documentation?
• Sub-license rights to another business?

If sub-licensing is allowed, be careful. You may want approval rights, flow-down obligations and direct visibility over who is using your IP.

Territory And Channels

The territory might be the whole US, a specific region, online sales only, certain retail channels or a defined distribution agreement channel. You can also limit sales to named customer categories, such as independent retailers, enterprise customers or approved distributors.

If you're planning to license the same product to other partners, your territories and channels shouldn't overlap unless you're comfortable with competition between licensees.

Exclusive, Non-Exclusive Or Sole

The agreement should say whether the license is exclusive, non-exclusive or sole.

• Exclusive: only that licensee can use the licensed rights in the agreed scope, and you may also be restricted from using them yourself.
• Non-exclusive: you can license the same rights to others and usually keep using them yourself.
• Sole: only you and that licensee can use the rights in the agreed scope.

If you agree to exclusivity, consider minimum sales targets, minimum royalties, performance milestones and a right to convert the license to non-exclusive if the licensee underperforms.

How Should Royalties And Payments Work?

Royalties should be defined in a way that makes them easy to calculate, verify and enforce.

The payment structure can make or break a licensing deal. A royalty rate that sounds fair in a conversation can become a dispute if the contract doesn't say what revenue number it applies to.

Common Payment Models

You might use one payment model or combine several. Common options include:

• Upfront license fee: a fixed amount paid when the agreement starts.
• Running royalty: a percentage of sales, revenue or units sold.
• Minimum royalty: a minimum amount payable each month, quarter or year.
• Milestone payments: payments triggered by product launch, sales targets or regulatory approvals.
• Flat fee per unit: a set amount for every licensed product sold.

If royalties are based on net sales, define deductions carefully. Discounts, refunds, shipping, taxes, marketplace fees and chargebacks can all affect the final number. If you leave this vague, both sides may calculate royalties differently.

Reporting And Audit Rights

Your agreement should require regular royalty reports, even if no sales were made in a period. Monthly or quarterly reporting is common, but the right timing depends on the deal.

You may also want audit rights so you can check the licensee's sales records. A practical clause will cover:

• How often you can audit
• How much notice you need to give
• Who pays for the audit
• What happens if underpayment is found
• How long records must be kept

Without reporting and audit rights, you may have no simple way to confirm whether you're being paid correctly.

How Do You Protect Your Brand And Product Quality?

You protect your brand and product quality by setting clear standards, approval rights and consequences for non-compliance.

This is especially important if your trademark is involved. Under US trademark law, including the Lanham Act, trademark owners need to control the quality of goods and services sold under their mark. If you let another business use your trademark with no real quality control, you can weaken your rights and damage customer trust.

Quality Control For Physical Products

Your agreement should set practical standards for how the product is made, packaged and sold. Depending on the product, this might include:

• Approved manufacturers and suppliers, including any manufacturing agreement requirements
• Product specifications and materials
• Sample approvals before production
• Packaging and labeling requirements
• Safety, testing and compliance obligations
• Recall procedures and customer complaint handling
• Inspection rights

If your licensee cuts corners, your business may be the one customers blame. Clear quality clauses help you step in early before a product issue becomes a brand issue.

Brand And Marketing Approvals

If the licensee can use your name, logo, product photos or marketing copy, you should control how those assets appear.

You might require the licensee to get written approval before using:

• New packaging or labels
• Online product listings
• Ads, social posts or influencer materials
• Trade show materials
• Claims about product features, performance or results

The Federal Trade Commission Act and FTC guidance also matter if the licensee makes advertising claims, endorsements, influencer promotions or performance statements. Your contract should require truthful advertising, proper substantiation and compliance with applicable marketing rules.

Who Owns Improvements, New Versions And IP?

The agreement should clearly say who owns improvements, updates, new versions and related IP created during the license.

This is a common pressure point in product licensing. A licensee might improve your design, adapt your software, create new packaging, discover a better manufacturing process or develop new marketing assets. If the contract is silent, ownership can be hard to untangle.

Your agreement should address:

• Who owns improvements to the original product
• Whether the licensee must disclose improvements to you
• Whether you get a license to use improvements after the agreement ends
• Who owns new trademarks, product names or branding
• Who owns copyright in packaging, manuals, photos and ads
• Whether inventions need patent filings or assignment documents
• Who can register or enforce IP rights

For copyright, the US Copyright Act generally treats the creator as the first owner unless there's a valid assignment or a specific work-made-for-hire arrangement. For trademarks, USPTO filings and ownership records should line up with the commercial reality of who controls the brand. For patents and inventions, written assignments are often needed to avoid doubt.

If you're sharing confidential formulas, technical drawings, source code, supplier lists or manufacturing know-how, include strong confidentiality and trade secret obligations. The Defend Trade Secrets Act can protect trade secrets at a federal level, but your contract should still set out access limits, security steps, return obligations and what happens after termination.

How Can You End A Product Licensing Agreement?

You can end a product licensing agreement in the ways the contract allows, so termination rights need to be clear from the start.

Licensing deals often begin with optimism, but you need exit rules in case sales don't happen, royalties aren't paid, quality drops or the relationship no longer works for your business.

Common Termination Rights

Your agreement might allow termination for:

• Non-payment of royalties or fees
• Repeated late reports
• Misuse of your trademark or product materials
• Failure to meet quality standards
• Unapproved sub-licensing
• Failure to meet minimum sales targets
• Insolvency or business closure
• A serious breach that isn't fixed within a stated cure period
• Convenience, with a notice period, if that fits the deal

Cure periods are common for fixable breaches. For example, the licensee might have 10 or 30 days to pay overdue royalties after notice. Some breaches, such as unauthorized disclosure of trade secrets or counterfeit use of your trademark, may justify immediate termination depending on the contract and applicable law.

What Happens After Termination?

The end of the agreement shouldn't leave loose ends. Your contract should say what happens to:

• Unsold inventory
• Pending customer orders
• Product listings and marketing materials
• Confidential information and technical files
• Domain names, social accounts or marketplace listings
• Outstanding royalties and final reports
• Tooling, molds, prototypes or manufacturing equipment
• Customer data and business records

You may allow a sell-off period for existing stock, but only if the products are compliant, royalties continue and brand use remains controlled. If the issue is quality, safety or unauthorized use, a sell-off right may not be appropriate.

What Clauses Should You Check Before Signing?

You should check the commercial clauses, IP clauses and risk allocation clauses before you sign, because they decide how much control and protection your business keeps.

Templates can be a helpful starting point, but licensing deals often involve details a standard template won't capture. The right document should reflect your product, your brand, your sales model and the value of the rights you're giving away.

Before signing, pay close attention to:

• Definitions: Make sure the product, licensed rights and territory are precise.
• Exclusivity: Check whether you're giving up the right to license others or sell yourself.
• Payment terms: Confirm rates, timing, deductions, taxes, reports and audit rights.
• Quality control: Include standards, approvals, inspections and recall responsibilities.
• Compliance: Allocate responsibility for laws, product rules, labeling and advertising claims.
• IP ownership: Deal with improvements, new works, registrations and enforcement.
• Confidentiality: Protect trade secrets, know-how, pricing and supplier information.
• Indemnities: Decide who covers losses from product defects, IP claims or regulatory breaches.
• Insurance: Consider product liability, commercial general liability and any industry-specific cover.
• Termination: Set cure periods, immediate termination rights and post-termination steps.
• Dispute process: Include a practical process for escalating and resolving disputes.
• Governing law: Choose the law that applies, while recognizing state law can affect enforcement and interpretation.

If the license is a major revenue stream or gives away exclusive rights, it's worth getting tailored advice before signing. A small drafting gap can have a large commercial impact once the product starts selling.

Frequently Asked Questions

Can I License A Product If I Haven't Registered My Trademark?

Yes, you can license an unregistered trademark, but registration with the USPTO usually gives stronger rights and clearer enforcement options. If your brand is central to the deal, consider your trademark filing position before giving another business permission to use it.

Can A Product Licensing Agreement Cover Software Too?

Yes, a product licensing agreement can cover software, but software terms need extra care. You may need clauses for source code access, APIs, updates, support, security, data handling, open source components and restrictions on copying or reverse engineering.

Do I Need A Separate NDA?

Sometimes. If you're sharing confidential information before the full licensing agreement is signed, a separate NDA can protect early discussions. Once the main agreement is signed, it should include detailed confidentiality and trade secret clauses.

What If The Licensee Sells Outside The Agreed Territory?

If the agreement clearly limits the territory, selling outside it may be a breach. Your remedies should be set out in the contract, such as stopping those sales, requiring extra royalties, removing exclusivity or terminating the agreement.

Key Takeaways

• A product licensing agreement lets another business use your product, brand, technology or IP while you keep ownership of the underlying rights.
• Your agreement should define the licensed rights, territory, exclusivity, channels, royalties, reporting and audit rights.
• If your trademark is involved, quality control is essential to protect your brand and support your rights under US trademark law.
• Deal with improvements, new versions, confidential information and trade secrets before the licensee starts work.
• Clear termination and post-termination rules help you avoid disputes over unpaid royalties, unsold inventory and continued brand use.
• State law, industry rules and the exact product can change the answer, so tailored advice is helpful for high-value or exclusive deals.

If you'd like help with your product licensing agreement, royalty structure, trademark use rules or IP ownership clauses, you can reach our team at (888) 449-8437 or team@sprintlaw.com. Where legal services are required, they're provided by licensed US lawyers at ElevateNext US, LLC, a trusted US law firm, through the Sprintlaw platform.