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An international licensing agreement lets you earn from intellectual property you already own. If you control the rights to a product or a device, licensing opens a foreign market without the cost of entering it yourself. Consequently, a licensee overseas pays you to use what you have built. However, every international licensing agreement carries risk as well as reward. Below, we set out the pros and cons that American business owners should weigh before signing.
Benefits of an International Licensing Agreement
It Expands Your Market and Your Revenue
Most American companies license abroad for one reason: growth. You may have exhausted the opportunities at home. Consequently, an international licensing agreement can open a new market quickly. Moreover, done properly, it creates a stream of passive income and puts your product in front of customers you could not otherwise reach.
It Reduces Your Risk and Your Cost
Setting up a business in another country is expensive and risky. You may know little about the local market, and even less about local law. Therefore, an international licensing agreement shifts that burden to someone better placed to carry it.
Your licensee already operates in its home country. Consequently, it absorbs the cost of distribution and compliance. Meanwhile, you earn income from an established network for a modest entry fee.
Disadvantages of an International Licensing Agreement
You Depend on Someone Else’s Performance
Once you license, you rely on the good faith and competence of a company abroad. However, that company may simply underperform. Consequently, your revenue suffers, and an international licensing agreement gives you limited control once signed.
Your Intellectual Property May Be at Risk
Sometimes a licensee turns out to be disreputable. Consequently, it may exploit the international licensing agreement to take your intellectual property outright. International instruments such as the Madrid Protocol help, yet they guarantee nothing on their own.
A bad licensee can sell your intellectual property into other markets. Moreover, it may produce knock-offs and ship them back into the United States. In addition, poor manufacturing can damage the reputation you spent years building.
Payment Can Be Delayed or Eroded
Even a well-run arrangement can hit payment problems. Large royalty transfers may trigger review by the Treasury Department. Consequently, your royalties can be held while they are examined.
Currency risk is a further concern. Exchange rates move, and a deal that looked strong at signing can weaken sharply. Similarly, a recession in the licensee’s country will cut sales, and you earn nothing on sales that never happen.
Enforcement May Mean Litigating Abroad
The hardest problem is enforcement. If your licensee breaches the contract, you may have to sue it where it sits. Consequently, an international licensing agreement can land you in a foreign court, facing unfamiliar procedure.
A choice-of-law clause naming a US forum helps, but only partly. You may still need to enforce a US judgment abroad. Therefore, the process can become slow, costly and frustrating. Our international trade disputes lawyer page explains how we handle that stage.
How to Protect Yourself Before You Sign
Most of these risks can be managed at the drafting stage. Consequently, the terms of your international licensing agreement matter far more than anything you do afterwards. In practice, we focus on:
- Clear scope: exactly which rights are licensed, in which territory, and for how long
- Quality control and audit rights, so the licensee cannot damage your brand
- Restrictions on sub-licensing and on sales outside the agreed territory
- Royalty reporting obligations, with a right to inspect the books
- A dispute clause pointing to international arbitration, which is far easier to enforce than a court judgment
- Termination triggers that let you exit quickly if the relationship fails
Above all, an international licensing agreement should be drafted with enforcement in mind. Moreover, arbitration under the New York Convention is usually enforceable in over 170 countries. Consequently, it is often the single most valuable clause in the contract.
Speak With Us Before You Enter an International Licensing Agreement
An international licensing agreement can grow your revenue with very little capital outlay. However, it can also expose your intellectual property and your reputation. Contact our firm today, and our attorneys will help you license your intellectual property safely.
If the issues discussed here affect your business or investments, our team is ready to help. Contact our team to discuss a strategy tailored to your situation.
