Its a pirating license to gank ships from a certain factions and being rewarded for the kills with isk and LP. The hostile faction ships will automatically become orange for you.
Each faction (pirate and empire) allow you to buy letters of marque against specific hostile factions. The bounty ratio depends on the difficulty.
However be warned the letter becomes void if you kill anyone from the giving faction. And you will have to buy a new one. These letters are only valid in low sec.