License Agreements Explained: Definition, Models and Liability Provisions

If you develop software or own a business, understanding license agreements is an essential part of protecting your intellectual property. License agreements specify the rights and obligations of each party when using software, products, services, designs, and other copyrighted materials.

From allowing certain types of content to preventing the unauthorised reproduction or redistribution of goods, proper licensing helps ensure that all parties play by the rules while still allowing companies to benefit from their creativity and hard work.

Below, we'll break down the key parts of license agreements so you can be sure you understand them when it's time to sign them.

What is a License Agreement?

A license agreement is a legal contract in which one party (the licensor) gives another party (the licensee) permission to use certain assets it owns — usually intellectual property — in return for a license fee, without giving up ownership of them.

License agreements usually involve the licensed use of intellectual property such as trademarks, patents or designs, but also for tangible goods such as real estate or fixed assets. In licensing agreements, both parties make promises - the licensor grants the licensee a license to use an asset, in return, the licensor receives a license fee.

The terms of each license agreement are usually set out in detail and include provisions on property rights and responsibilities, as well as obligations when the original agreement is amended.

Through license agreements, licensees are usually granted the rights to use the following industrial property rights in return for payment of a pre-defined amount of money:

• Patents, trademarks,
• Registered designs or utility models and
• Other copyrighted material

Through the use of carefully drafted license agreements, products or ideas are protected so that innovators can be sure that their creations remain protected against misuse, even if rights of use are granted.

In Germany, in contrast to trademark registration, the use of license agreements cannot be registered and entered in an official register. German law also has no explicit law regarding license agreements. In this way, license contracts can be drawn up freely and individually in accordance with general contract law.

Examples of typical license agreements include:

• Trademark license agreements
• Design license agreements
• Patent license agreements
• Copyright license agreements including publishing contracts
• Software licensing agreements
• Film and television license agreements

What Are the Most Important Parts of a License Agreement?

In Germany, a license agreement can generally be concluded informally, but the conclusion in commercial transactions requires the provision of written documentation. If documentation is missing and no implied action can be proven, it is generally assumed that there is no license agreement. A typical license agreement includes:

• A description of the licensed item,
• Rights granted to the licensee,
• Models or fees that may be associated with the license
• Terms and end of contract
• Liability and warranty regulations, and
• Contractual penalties that may be applicable.

Licensing agreements set the expectations of both parties and generally ensure that no important details are overlooked. The licensor is typically required to maintain the licensed right. The licensee pays the licensor any applicable fee and supports the licensor in prosecuting infringements of his intellectual property rights.

What Rights of Use Can Be Granted Through License Agreements?

A license agreement defines the scope of rights that a licensee may use from a trademark or copyright owner. It is an essential step towards ensuring the proper use and protection of intellectual property, whether in the form of works of art or written work.

Simple usage rights

A simple right of use grants the licensee permission to use a specific copyright, trademark, or other intellectual property in a specific way. This type of license gives the owner many options — he can give multiple parties access to the same rights and benefit from others' creative products.

Exclusive rights of use

An exclusive license grants the licensee the sole use of an intellectual property right. The licensee is hereby granted the sole right of use for a specific area or type of use, while all other third parties are excluded from use. However, if the licensor wishes to maintain access and use for himself during the contract period, both parties can agree on an exclusive license agreement which contains a reservation of self-use so that this provision is permitted.

How Can License Rights Be Structured or Restricted?

The right of use in a license agreement must be regulated in detail so that the scope of use is precisely defined. Restrictions may be spatial (limiting use geographically), temporal (applying only to specific periods), or content-based (applying only to specific uses — such as quantity or quota).

• Spatial limit: A territorial restriction limits the right of use to certain regions, e.g. only the sale of goods in Germany.
• Time limit: A time restriction ensures the agreement is only valid for an explicitly defined period — years, months, weeks, or even just days.
• Content limitation: Content-based restrictions protect the licensor's rights by defining which types of use the assets are permitted for. Common examples restrict use to specific quantities or purposes, ensuring the material is not used in a way that reflects badly on the original owner.

For example, the license agreement limits the use of the software as follows:”For the term of the contract, the contractor grants the client the paid, worldwide, non-exclusive and non-transferable right to use the software as intended, subject to the suspensive condition of full payment of the agreed remuneration.”

By granting exclusive rights, the rights holder transfers his power to take action against third parties in the event of violations of the law to the licensee. This enables the licensee to take measures against unwanted uses by third parties during the term of the license agreement. However, licensees of simple licenses cannot prevent third parties from interfering with these licensed property rights without consequences. The licensor is then responsible for protecting this right.

Which Models For Charging License Fees Are Common?

By granting access to its resources, the licensor lets the licensee pay fees on predetermined terms. These payments can be adjusted to the circumstances, so both parties have room to negotiate a fair solution. Common licensing models include:

• Flat-rate license: The licensee pays a fixed fee on a fixed schedule — regardless of actual usage — giving the licensor predictable income and the licensee budget certainty.
• Piece license (usage-based): The licensee pays according to actual usage or units sold. This "pay-as-you-go" model is usually linear — the more it is used, the more is paid.
• Sales or profit share: The fee is a percentage of the revenue or profit generated with the licensed asset. This aligns both parties' interests and often comes with low or no upfront fees.

When granting licenses, it should be ensured that the author's remuneration is appropriate and meets usual industry standards. At the start of a project, it is often difficult to predict the success of its success, so that the agreed remuneration rate is initially agreed too low. However, if the profits from the project far exceed initial payment expectations, the creators have the right to challenge the terms of the contract and claim further compensation.

How Can Sublicenses Be Granted?

A sublicense allows a licensee to extend the use of his license agreement rights to third parties while maintaining ownership or control. In general, this is possible without additional consent from the licensor for exclusive licenses, while simple licenses require approval and/or subsequent approval. It is therefore advisable to include provisions in all agreements setting out how to deal with the possibility of sub-licensing in order to avoid subsequent discussions.

Liability Regulations For License Agreements

The effective regulation of liability and warranty is a complex contractual process. From the time the contract is concluded, the licensor is responsible for the usability, technical feasibility and the existence of property rights, while the licensee assumes the risk when it comes to meaningful economic exploitation. When both parties are aware of their respective responsibilities, they can ensure successful results that meet shared expectations.

Liability for infringement of third party rights

The licensee must always be aware of the risk of licensing a right even though the rights do not actually exist yet or belong to a third person. In the latter case, the licensee may incur claims from the third person. Against this background, it is advisable for the licensee to protect himself against potential claims by third parties and to include an exemption clause or a warranty clause.

”The granting of the agreed rights of use to the client is not precluded by the rights of third parties. ”

Warranty

The licensee has the right to withhold payment of the license fee in the event of material or legal defects. Nevertheless, he must pay the contractual license fees until a verdict on the invalidity or expiry of the property rights can be reached, as the licensor is not liable in cases where there is doubt.

A guarantee wording could be as follows:

”If the rectification finally fails after two attempts at rectification, the client may withdraw from the respective individual contract or reduce the remuneration accordingly. The contractor will pay compensation or compensation for futile expenses due to a defect within the limits of liability set out in these terms and conditions.”

What Should Be Done if There is a Dispute Over the Terms of the Contract?

A judicial solution is usually associated with high costs and great uncertainty. Therefore, check your license agreement first and try to find out which rights you have and which rights are being denied to you. Try to enter into dialogue with the license partner to find out which interests are being pursued.

If you are still unable to reach an agreement with the contractual partner, it may be helpful to hire a lawyer to review the license agreement in detail and represent your interests. It may also be beneficial to involve an arbitrator or referee so that both sides can express their concerns and achieve an acceptable outcome. With the right approach and advice, you should finally be able to resolve your license agreement dispute with confidence.