Licensing Agreements in Ontario Explained

A licensing agreement grants one party — the licensee — permission to use intellectual property owned by another party — the licensor — without transferring ownership of that property. The IP involved can be software, a patent, a trademark, copyrighted content, a trade secret, or any combination of these, and the permission granted can be as broad or as narrow as the parties agree.

The key concept to hold onto is that a licence is permission, not ownership. The licensor continues to own the underlying IP throughout the arrangement, and the licensee’s rights are limited to exactly what the agreement describes — nothing more. Using the licensed IP in a way the agreement doesn’t cover can amount to a breach of the agreement and, in some cases, infringement of the underlying IP rights themselves.

Licensing arrangements show up constantly in everyday business — a company licensing software from a vendor, a retailer licensing a brand’s trademark for merchandise, a publisher licensing the right to reproduce copyrighted content, or a manufacturer licensing a patented technology for use in its products. The underlying structure is similar across these examples even though the subject matter differs considerably.

A licensing agreement typically also sets out ancillary obligations beyond the bare permission to use the IP — things like quality control standards for licensed trademarks, technical support or updates for licensed software, and confidentiality around any proprietary information shared to enable the licensed use. These supporting terms often end up mattering just as much in practice as the grant of rights itself.

It’s worth clearly distinguishing a licence from an assignment, since the two are often confused but carry very different consequences. A licence grants permission to use IP while ownership stays with the licensor. An assignment, by contrast, transfers ownership of the IP itself to the other party, much like selling a piece of property outright.

After an assignment, the assignee generally becomes the new owner and can exercise the full range of ownership rights — including licensing the IP to others, modifying it, or enforcing it against third parties — subject to whatever specific terms the assignment itself contains. A licensee, by comparison, is bound by whatever restrictions the licence imposes and doesn’t gain ownership rights at all.

This distinction matters practically when a business is deciding how to structure a deal. A company buying custom software built specifically for its own use, for example, often wants an assignment of the resulting code so it owns the output outright, while a company adopting an existing off-the-shelf product is almost always working with a licence instead, since the vendor continues to own and support that product for many other customers.

Licences are commonly structured as either exclusive or non-exclusive, and the difference meaningfully shapes the value and risk on both sides.

An exclusive licence generally means the licensor won’t grant the same rights to anyone else within the scope of the agreement, and often agrees to refrain from exercising those rights itself as well. This gives the licensee a stronger, often competitively valuable position, and is usually reflected in a higher fee or royalty rate compared to a non-exclusive arrangement covering the same rights.

A non-exclusive licence allows the licensor to grant similar rights to multiple licensees at the same time, and typically to keep using the IP itself as well. This structure is common where an owner wants to maximize the reach of their IP across many licensees rather than committing exclusively to one — software licensing is a frequent example of this model.

A middle option — a sole licence — sometimes appears as well, under which the licensor agrees not to license anyone else but retains the right to use the IP itself alongside the licensee. This sits between the two more common structures and is worth watching for, since its practical effect differs meaningfully from a true exclusive licence.

Payment under a licensing agreement can be structured in several different ways, and there’s no single standard approach — it’s entirely a matter of negotiation between the parties.

A flat fee is a one-time or periodic fixed payment, independent of actual usage or sales. A running royalty is instead calculated as a percentage of revenue or sales generated using the licensed IP, or as a fixed amount per unit sold, tying the licensor’s compensation to the licensee’s actual commercial success.

Many agreements combine approaches — for example, an upfront fee plus ongoing royalties, or a running royalty with a guaranteed minimum royalty that must be paid regardless of actual sales performance. Minimum royalties protect the licensor against a licensee that secures exclusive or favourable rights but then fails to actively exploit them.

Reporting and audit rights typically accompany royalty-based structures, giving the licensor a way to verify that reported sales or usage figures — and the resulting royalty payments — are accurate, since the licensor generally has no independent visibility into the licensee’s actual sales without this kind of mechanism built into the agreement.

A licensing agreement should clearly state its term — how long the licence lasts — and whether it renews automatically, requires active renewal, or simply expires. It should also address the circumstances under which either party can terminate early, such as a material breach, insolvency, or a change of control of either party.

What happens when the agreement ends matters just as much as when it ends. Many licensing agreements require the licensee to stop using the IP, remove or destroy materials incorporating it, and cease any representation of an ongoing relationship with the licensor, often within a defined wind-down period rather than instantly.

Certain obligations are commonly drafted to survive termination regardless of why the agreement ended — confidentiality obligations and accrued payment obligations are typical examples. Identifying which provisions survive, and for how long, avoids ambiguity about what each side still owes the other once the main relationship has ended.

Beyond exclusivity, a licence’s scope is commonly narrowed in two other key ways: territory and field of use. A territorial restriction limits where the licensed rights can be exercised — a specific country, region, or defined market — letting an owner license the same IP differently across different territories without those licences conflicting.

A field of use restriction limits what the licensed IP can be used for — for example, a technology licensed for use in agricultural equipment but not in consumer products. This lets an owner license the same underlying IP into different industries or applications through separate agreements, each tailored to its specific market.

Sublicensing rights are a related and often overlooked detail — a licensee generally cannot grant their own permissions to a third party unless the original licensing agreement expressly allows it. Where sublicensing is intended, such as in a distribution arrangement, this needs to be addressed directly rather than assumed.

This article provides general information about how licensing agreements are typically structured under Ontario law, and isn’t legal advice about any specific agreement. For related reading on other common business agreements, visit our agreements hub, or see our contact page for how to reach us with questions about this site.