Licence Agreement For Using A Manufacturer's Designs

Yes, if you want to manufacture or sell products using someone else's designs, you usually need a written licence agreement first.

The bit that can get tricky is working out exactly what you're being allowed to use. A design might be protected by registered design rights, unregistered design rights, copyright, trade marks, confidential information or a mix of all of these. A handshake or a few emails often won't cover enough detail.

A well drafted licence agreement gives your business permission to use the design in a specific way, while making it clear who owns the IP, where you can sell, whether anyone else can use it, how royalties work and what quality standards you need to meet.

Do I Need A Licence Agreement To Use A Manufacturer's Design?

Yes, you should have a licence agreement if your business is using a third party's design to make, brand, import, distribute or sell a product.

This is especially important if the design owner is a manufacturer, product designer, factory, agency, artist, engineer or overseas supplier. Even if they're happy for you to use the design, you need the permission set out clearly so both sides know what has been agreed.

In England and Wales, designs can be protected in several ways. The main ones are:

• Registered designs - these can be registered with the UK Intellectual Property Office and protect the appearance of all or part of a product.
• Unregistered design rights - these can arise automatically, but the scope and duration can be more complicated.
• Copyright - this may protect drawings, CAD files, artwork, packaging graphics, photographs and other creative materials.
• Trade marks - this may protect names, logos, labels and product branding.
• Confidential information - this may include technical files, production know-how, supplier details and prototypes that aren't public.

If your product is based on someone else's creative or technical work, don't assume payment for manufacturing includes IP rights. Paying a supplier to make goods isn't the same as being given a licence to use the underlying design.

Without a written agreement, you may struggle to prove what you're allowed to do. That can create problems if you scale quickly, approach retailers, sell overseas or want to bring on investors.

What Should A Product Design Licence Cover?

A product design licence agreement should set out exactly what design rights you're licensing, what you can do with them and what limits apply.

The agreement should avoid vague wording like 'you can use our designs'. That might sound friendly, but it doesn't answer the practical questions that matter when you're manufacturing and selling products.

At a minimum, your licence agreement should cover:

• The design being licensed - product name, sketches, CAD files, drawings, registration numbers, prototypes or schedules attached to the agreement.
• The permitted use - whether you can manufacture, import, market, sell, distribute, customise or sublicense the product.
• The licensed products - whether the licence applies to one product line, a collection, future variations or replacement models.
• The term - how long the licence lasts and whether it renews automatically.
• The territory - whether you can sell in the UK, Europe, online globally or only in named countries.
• Exclusivity - whether you're the only business allowed to use the design in the relevant market.
• Royalties or fees - how the design owner is paid and when reports are due.
• Quality control - what standards your products need to meet and who approves samples.
• IP ownership - who owns the original design and who owns changes or improvements.
• Termination - what happens if the agreement ends, including stock sell-off rights.

This level of detail might feel a bit much at the start, but it's what stops small misunderstandings becoming expensive disputes later.

Should The Licence Be Exclusive Or Non-Exclusive?

It depends on your commercial plan, but you should be very clear on exclusivity because it can make a big difference to the value of the deal.

An exclusive licence means only you can use the design in the agreed way, usually within a defined territory and for specific products. The design owner may also be prevented from using the design themselves, depending on the wording.

A non-exclusive licence means the design owner can license the same design to other businesses too. This is often cheaper and more flexible, but you won't have market protection.

A sole licence usually sits somewhere in the middle. You may be the only third party licensee, but the design owner can still use the design themselves.

Example: Exclusive UK Rights

Say Priya runs a homewares brand in Manchester. A ceramics manufacturer owns a distinctive mug design and agrees Priya can sell it under her brand. Priya wants to invest in packaging, photography and retailer outreach, so she asks for exclusivity in the UK for two years.

The manufacturer agrees, but only if Priya meets a minimum sales target of 10,000 units per year. If she doesn't hit that target, the licence becomes non-exclusive.

That can be a sensible balance. Priya gets protection while she builds demand, and the manufacturer isn't locked out of the market if the product doesn't sell.

If you want exclusivity, think carefully about:

• Which countries or channels you really need exclusive rights for
• Whether exclusivity applies online sales as well as retail stores
• Whether minimum sales targets or minimum royalties apply
• Whether the design owner can still sell to existing customers
• What happens if you stop actively marketing the product

Exclusive rights are valuable, so they're usually negotiated carefully. A narrow exclusive licence can sometimes work better than a broad one that you can't properly use.

How Do Royalties And Payments Usually Work?

Royalties usually work by paying the design owner a percentage of sales, a fixed amount per unit or a one-off fee, depending on the deal.

There isn't one standard royalty structure for every product design licence. The right model depends on the product margin, manufacturing costs, sales channels, exclusivity and how established the design already is.

Common payment structures include:

• Upfront fee - a one-off payment when the agreement is signed.
• Royalty percentage - a percentage of net sales or gross sales.
• Per-unit royalty - a fixed amount for each product sold or manufactured.
• Minimum royalty - a guaranteed minimum payment each year or quarter.
• Milestone payments - payments when sales targets, retail listings or production volumes are reached.

The words 'net sales' need careful drafting. If royalties are based on net sales, the copyright licence agreement or design licence should say what can be deducted. For example, VAT, refunds, retailer discounts, shipping, marketplace fees or returns.

Worked Example: Royalty Calculation

Let's say your business sells licensed lamps for GBP 80 each. Your agreement says the designer receives a 6% royalty on net sales, excluding VAT and refunds.

In one quarter, you sell 500 lamps. The total customer price is GBP 40,000. If that includes VAT, the net amount before VAT is GBP 33,333.33. If you have GBP 1,000 in refunds, the royalty base is GBP 32,333.33.

At 6%, the royalty payable is GBP 1,940. You'd usually send a royalty report showing the number of units sold, sales value, deductions and royalty due.

Your agreement should also say:

• How often royalties are reported and paid
• What records you need to keep
• Whether the design owner can audit your sales records
• What happens if payments are late
• Whether interest applies to overdue amounts

Getting the payment mechanics right makes the relationship much easier to manage, especially once your product is selling through several channels.

Who Owns The IP In Improvements And New Versions?

The original design owner usually keeps the original IP, but ownership of improvements and new versions depends on what your agreement says.

This is one of the most important parts of a design licence agreement or content licence agreement. Product businesses rarely use a design exactly as received forever. You might change colours, materials, dimensions, packaging, components or features after testing the market.

Your agreement should deal with:

• Original designs - confirming the design owner keeps ownership of the existing IP.
• Adaptations - whether you're allowed to modify the design at all.
• Improvements - who owns refinements, technical upgrades or manufacturing efficiencies.
• Derivative products - whether new product versions are covered by the licence.
• Branding - who owns your trade marks, labels, packaging and marketing assets.
• Design registrations - who can file new UK IPO applications and in whose name.

For example, if you take a licensed chair design and create a folding version for smaller flats, is that your new design, the manufacturer's design, or jointly owned? If the agreement doesn't answer this, both sides may have a different view.

Joint ownership can sound fair, but it can be awkward in practice. You may need each other's consent to license, enforce or transfer the IP. Often, it's cleaner for one party to own the improvement while the other receives a defined licence to use it.

You should also ask for warranties that the design owner actually owns or controls the rights they're licensing. If the design owner is a company, you may want to check its details at Companies House and make sure the agreement is signed by the correct legal entity.

Can I Use A Licensing Agreement Template In The UK?

Yes, a template can be a helpful starting point, but you shouldn't treat it as a finished licence agreement for a product design deal.

Templates often miss the details that matter most in manufacturing and product sales, especially around territory, exclusivity, quality control, royalties and ownership of improvements. A document works best when it's tailored to your product, supply chain and commercial plan.

If you're using an outline to prepare for legal drafting, it should cover these sections:

1. Parties - name the correct legal entities, company numbers if relevant and trading names.
2. Background - briefly explain the design, product and commercial purpose of the licence.
3. Definitions - define the licensed design, licensed products, territory, channels and net sales.
4. Grant Of Licence - state what you're allowed to do, such as manufacture, import, sell and market.
5. Exclusivity - say whether the licence is exclusive, sole or non-exclusive, and any conditions.
6. Term And Renewal - set the start date, end date and renewal process.
7. Fees And Royalties - explain upfront fees, royalty rates, reporting periods and payment timing.
8. Quality Control - set sample approval, manufacturing standards and packaging requirements.
9. IP Ownership - confirm ownership of original IP, improvements, branding and registrations.
10. Confidentiality - protect drawings, CAD files, prototypes, supplier details and pricing.
11. Warranties And Indemnities - deal with ownership promises and what happens if a third party claims infringement.
12. Termination - set out breach rights, sell-off periods, return of materials and post-termination restrictions.
13. Governing Law - choose the law and dispute process, often England and Wales for UK deals.

This isn't a complete legal document. It's a practical fill-in outline you can use to collect the commercial details before a lawyer tailors the agreement for your business.

If the design owner is overseas, you may also need to think about import terms, currency, tax withholding, product import and export terms, product compliance, governing law and how disputes will be handled across borders.

What Quality Control Clauses Should I Include?

You should include quality control clauses that protect the design owner's reputation and give your business a clear approval process for manufacturing and selling the product.

Quality control isn't just a brand issue. Poor quality can lead to returns, retailer complaints, product safety issues and damage to your business's reputation too.

Your licence agreement should explain:

• Whether the design owner must approve pre-production samples
• What materials, colours, dimensions or finishes must be used
• Which technical specifications or drawings apply
• Whether substitutions are allowed if components become unavailable
• What packaging, labelling and instructions must look like
• Whether the design owner can inspect products or request samples
• What happens if a batch doesn't meet the agreed standard

If you're selling to consumers in the UK, your products also need to meet your obligations under the Consumer Rights Act 2015 and any product-specific safety rules that apply. For example, electrical goods, toys, cosmetics, furniture and food-contact products can each have their own compliance requirements.

The licence agreement won't replace your wider product compliance work, but it should make clear who is responsible for meeting standards, testing products and dealing with defective stock.

It should also cover approvals for marketing materials and any content licence rights needed to use product images, artwork or copy. If the design owner is sensitive about how the product is presented, agree the process upfront. For example, you might need approval for packaging artwork but not every social media post.

A practical approval process helps you move quickly without constantly going back and forth for minor decisions.

Key Takeaways

• If you want to use a third party's product design, get the permission in a written licence agreement.
• Your agreement should clearly define the design, products, territory, term, exclusivity and permitted uses.
• Royalties need careful drafting, especially if they're based on net sales after deductions.
• Quality control clauses help protect both the design owner's IP and your business's reputation.
• IP ownership for improvements, adaptations and new versions should be agreed early.
• A licensing agreement template can help you prepare, but it should be tailored before you rely on it.

If you'd like help with your product design licence, royalty clauses, IP ownership position or quality control terms, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.