Manufacturing Products with a US Licensee: Key Considerations for Emerging Businesses

In the early stages of doing business, emerging businesses often use a distributor to introduce a product to the US market without a full sales force. This requires a solid distribution agreement. As your business expands, manufacturing your products locally is often a key element of long-term growth strategy. Business owners are not always ready to acquire a US manufacturing facility at the start. An alternative for emerging businesses to consider is licensing the technology and know-how used to manufacture your products to a US licensee. With this arrangement, the licensee will receive the exclusive US license to market your products under your product trademark.

What are the licenses needed to manufacture and sell products?

When you license the manufacture and sale of your products to a licensee, there are two licenses at work.

  1. The first covers the technology and know-how used to manufacture your products. You may charge a separate royalty for technology and know-how or a combined royalty. The licensee and its employees should agree to keep the technology and know-how confidential, to use it only for your products and not to use it after the license agreement is terminated.
  2. The second license is the right to use the product trademark on products that are manufactured. The key issue here is quality control. For the first time, your trademark will appear on goods manufactured by others. You must supervise the quality of the licensee’s products to ensure that your standards are met. Failure to do so can result in the loss of trademark rights.

Top license agreement issues to consider:

  1. Exclusivity: The licensee will probably insist on exclusivity. When accessing the license term may be longer than the distributorship because of the manufacturing commitment. However, try to seek as short a term as possible to keep options open, as again, you will know not know how successful sales may be.
  2. Inventory: You should also have the right to purchase the licensee’s inventory after the License Agreement terminates.
  3. Compliance: Compliance with local laws is the licensee’s responsibility, while Manufacturer’s responsibility includes filing trademark and patent registrations. The par­ties should cooperate in developing the marketing plan.  Manufacturer expects to license the “Product” trademark for other goods. It hopes that the public will associate these goods with the high quality Products for which Manufacturer is known. These licenses will present many of the same concerns as the Manufacturer/Licensee license.
  4. Quality control: You must take appropriate measures to protect your business and the product’s image and prevent reputational damage in the market, including legal remedies and specific insurance products to cover for the unfortunate situation in which public pressure threatening its reputation.