Product License Agreements – The Basics

Product license agreements, whether the product is software, hardware or simple consumer goods, focus on two main areas of law: contract law and trademark law. The contractual part of the agreement is fairly obvious, while in this modern age (where often up to 90% of a product’s value is the name or logo on its packaging) the trademark is an additional necessity.

The distribution license – a general product license agreement – is a complicated agreement whose drafters must be extra careful to delineate the rights and obligations of each party, or costly litigation is the surefire end result.

A typical distribution agreement should look like this:

1) The parties (obviously).

2) The Services: This is a detailed description of each party’s responsibilities to the other. Example: Party A agrees to distribute software in New York for Party A. In return, Party B agrees not to license any other party to distribute the software in New York. Perhaps Party B is also responsible for updating and providing customer warranties for the software? It’s ultimately up to the parties…

3) The payment: who pays whom? At what intervals? What are the penalties for late payments? Who is responsible for dealing with the end customer, collecting invoices, etc.?

4) Additional guarantees: Here the parties make additional promises to each other. This is also where a good lawyer will anticipate and consider as many contingencies as possible: should an unforeseen contingency arise, costly litigation will become inevitable (e.g. stating which party bears the burden of this new tax). Best advice: Don’t rely on googled forms, especially for high value contracts; Hire a lawyer who knows your industry and therefore knows what can go wrong.

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5) Proprietary Rights: This is the Trademark Law section. The agreement should clearly state which intellectual property belongs to which party. After several years of working together and using each other’s logos on your products, the lines between who owns what can become blurred…

6) Limitation of Liability: This is usually standard language in which each party agrees not to hold the other liable for standard failures under the agreement (you can exclude non-standard failures, such as lighting the camp).

7) Term (time): This goes without saying.

8) Termination: This is also very important and requires sound legal advice. How a relationship ends and the ongoing rights and obligations of the parties is just as important and prone to litigation as the beginning of the agreement.

9) Arbitration and Choice of Law: These are optional but strongly encouraged. A strong arbitration clause ensures that all disagreements go before arbitration. While arbitration can get expensive, those costs don’t come close to the years of filing practice, discovery, and appeals you see in traditional litigation.

In summary, the main goal of a well drafted agreement is to provide for as many contingencies as possible to avoid future disputes and certainly avoid costly litigation over such disputes.