Legally Speaking

Legally Speaking Most Important Provisions in a License Agreement for Licensees

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THE BUSINESS OF LICENSING The Essential Guide for Intellectual Properties

Licensing has has exploded into a $250+ billion worldwide industry at retail and generates more than $7 billion in royalty income for those property owners who are savvy enough to license their properties for a wide variety of consumer products. About 8 years ago, lawyer Gregory J Battersby and licensing veteran Danny Simon introduced the first Basics of Licensing book. They published a revised version a couple of years later and followed it with a Licensee edition and then finally an International edition. Recognizing that there was a degree of commonality between these editions, Battersby and Simon concluded that it was time for the definitive work on licensing, hence, The Business of Licensing which combines the best of all three prior editions and takes the subject to the next level. This book takes the reader through the nuts and bolts of how to conduct a licensing program and handle many of the problems that it might face There is a substantial amount of reference material. They have included an expanded history of merchandising, and an extensive collection of the forms that any licensing professional may need which they intend to provide to purchasers with electronic access to the forms via Dropbox.

The Complete Business of Licensing is available at a cost of $39.95 ($34.95 for LI members). https://www. totallicensingworld.com/site/business_ of_licensing

Gregory J. Battersby Battersby Law Group, LLC 25 Poplar Plains Rd. Westport, CT 06880 (203) 454-9646 gjbattersby@gbiplaw.com www.gbiplaw.com

By: Gregory J. Battersby

Since licensors will typically draft merchandising license agreements, they tend to slant them in their favor. That is why they consider it important to “control the form.” While licensors typically discourage a licensee from making changes to their form agreements, most will entertain at least some revisions, the extent of which will vary per the importance of the license. The larger the category, the more a licensee is willing to commit to the program, and/ or the uniqueness of the product are factors considered by licensors when considering changes.

Licensees should pay particular attention to the following provisions in a license agreement:

Effective Royalty Rates.

The royalty is the most common form of compensation, i.e., a percentage of the licensee’s sales of licensed products. Licensors will also require an advance and minimum guarantee. Care should be taken when agreeing to a guarantee to avoid a situation where the “effective royalty rate” (the rate when factoring in the guarantee) is two or three times higher than the stated rate because expected sales did not materialize.

Net Sales.

The royalty is always calculated on “net sales” of licensed products, i.e., gross sales less discounts, allowances, deductions, and returns. Therefore, licensees should pay particular attention to what they can and cannot deduct and whether there will be a cap on such deductions. If a cap is included, the licensee should be confident that it can operate under it based on its historical experience.

Channels of Distribution.

Most licensors will dictate not only the territories in which the licensee can sell products but the allowable distribution channels within the territory. Therefore, licensees should carefully review the acceptable channels. When they are defined generally, e.g., mass market, licensees should seek better definitions or examples of what these general categories mean.

Ownership of Rights.

Licensors will seek to claim ownership of everything developed by either party during the license, claiming they are a “work made for hire.” Licensees should attempt to resist this because it will impact what they can do post-termination. At the very least, licensees should seek to retain ownership in designs developed before the license and anything that doesn’t include the licensed property.

Assignment/Transfer.

Licensors want to control what licensees can do with their companies and, as such, will mandate that the licenses cannot be transferred or assigned to others without their approval. In some cases, licensors will demand that a “transfer fee” be paid as a condition of approval. This will significantly impact the ability of a licensee to sell their company, take in new investors, or reorganize. Therefore, licensees who plan to sell or reorganize their businesses should carefully consider this provision.

Force Majeure.

The pandemic and related supply chain issues have shined a bright light on this provision, as licensees cannot manufacture, ship, or deliver products through no fault of their own. At the very least, these events should be included as force majeure events. Also, the notice provisions should be relaxed because of the uncertainty of many of these issues.

Materiality and Reasonableness.

License agreements include a raft of requirements where the licensee must obtain the approval of the licensor, e.g., product sample, advertising, etc. While the law builds an implied “covenant of fair dealing” into most license agreements, licensors frequently demand the sole and unfettered right to approve such submissions. Wherever possible, licensees should attempt to require the licensor to act “reasonably” when considering submissions. Moreover, where approvals are required as a result of changes, they should only apply where the changes are material, not trivial.