Everyone generally understands the need to “cover all the bases” in a license agreement. Unfortunately, it has been our experience that very few people actually accomplish this goal.
When drafting a license agreement, most people follow a license agreement checklist and include the terms suggested in the list. Many people believe that a license agreement which fully considers all of the terms in a checklist is a good agreement.
Other people believe that even better than following a checklist is to get the “boilerplate” agreement provisions of someone else, particularly someone of standing in the industry, and use them in drafting an agreement. This approach is particularly popular today because license agreements are available at your finger tips online.
Both beliefs are misplaced and can get you into serious trouble.
The reason is that you must know why each provision is included in a license agreement. You must understand what the scope of each provision is intended to include. You must make sure that each of the license agreement clauses you use achieves the full benefit intended by each provision. Unfortunately, this is not the case with many people and certainly not those people who just merely follow a checklist or “cut and paste” someone else’s agreement.
The problem is that, more often than not, agreements drafted from checklists or copied from someone else’s “boilerplate” agreement leave the parties wholly unprotected against many of the real world problems that regularly arise in the licensing context.
In each licensing situation you must carefully understand and consider the applicability of each provision and be prepared to tailor each clause to suit your particular circumstances. This point can best be demonstrated by a discussion of a few examples of real world problems which over the years clients have brought to us to handle. Ask yourself whether the last license you were involved with would have avoided these problems had they arisen in your licensing arrangement.
CHECKLIST POINT NO. 1 – IDENTIFY THE PARTIES
Every good checklist starts off by telling you to spell out who the contracting parties are. Anyone who thinks that they satisfy this item of the checklist by getting the full legal name and address of each of the parties has already gotten off on the wrong foot in constructing the license agreement.
What form of legal entity are you dealing with and does the individual you are talking to have the authority to bind the entity? It is rather distressing to find that you thought you had an agreement with a company, only to find that the individual you were talking with, and who signed the agreement, was not empowered to act on behalf of the company you thought you were licensing. Unfortunately, there are many people running around, trying to obtain a license, and then seek to go sell it to the “licensee.” If they fail to interest the licensee, the promises that were made are based solely on that individual’s ability to stand behind them (i.e., they are normally worthless).
Is the entity that will be the contracting party financially sound? It is not enough that the entity is a subsidiary of the “biggest and richest corporation in the world” – many a subsidiary has been put in voluntary bankruptcy over the years by just such parent companies, leaving their contracting partners “holding the bag.”
Get more than just a security interest in and to the license. Seek a security interest in the inventory as well.
CHECKLIST POINT NO. 2 – THE TERM OF THE AGREEMENT
What should the term of the agreement be? Most everyone knows that “in perpetuity” terms should be avoided. And yet, there are instances when “in perpetuity” clauses are insisted upon and justified – for example, in the entertainment industry. The licensee who creates a motion picture or television series under license will want the right, in perpetuity, to commercialize the picture or shows. Oftentimes, the cost of producing the picture or shows is not recovered and profits are not made for years after the initial release or airing. Thus, it is necessary, if you want to do an entertainment deal, to give certain rights “in perpetuity.” The important point is to understand, however, that this does not mean, as some entertainment industry companies would try to demand, that you need to give up rights other than the right to air the picture or the shows. Moreover, if you are representing the property owner, you will want to insist that there is a positive obligation to actually commercialize the picture or shows. There are times when the production company may decide, for reasons in conflict with the interests of the licensor, that it is not going to commercialize the picture or shows.
CHECKLIST POINT NO. 3 – FRAGMENT THE PROPERTY, PRODUCTS AND TERRITORY
What will the license cover? Which aspects of the property, for which goods or services, and in which countries or geographic areas? All too often, rights are licensed beyond what the licensee can actually commercialize. As a result, other opportunities are lost. If the license must be granted to encompass more than is felt likely to be commercialized, introduce the ability to “recapture” rights not only at the end of a period of time (i.e., as of the marketing date), but also, if the licensee fails to take certain steps that are critical to meeting the marketing date (i.e., if rough art, prototypes, etc. are not received and approved by particular dates). Similarly, get territorial recapture rights if distribution arrangements in a foreign country are not in place by a certain date in anticipation of later marketing.
CHECKLIST POINT NO. 4 – QUALITY CONTROL
Everyone understands the need to control quality. Failure to do so jeopardizes the underlying trademark rights. But how should the mechanics of quality control be implemented? Requiring submission of samples in and of itself is not enough. Many agreements provide that samples are deemed approved if the licensor does not respond to a submission of samples for approval. However, who bears the risk if the licensor’s failure to approve or disapprove was due to the fact that, through neither parties’ fault, the licensor never received the samples for approval? What do you do when hundreds of thousands of non-approved (and it now turns out unacceptable) products have been manufactured and are “on the boat” on their way to the U.S.?
CHECKLIST POINT NO. 5 – RIGHTS AND NOTICE
License agreements will regularly and carefully spell out that rights in the licensed property remain exclusively with the licensor and require that the licensed articles bear notice of the licensor’s rights. But what about rights in connection with things developed by the licensee? Does the licensee own the rights in these things? Can other licensees of the licensor use these things in connection with their presumably non-competing licensed articles? Must the licensee responsible for creating the “new thing” be paid something? Is it instead advisable to preclude the licensee from developing anything new? Is this type of restriction feasible in the licensee’s industry and in connection with the products in question?
Can the licensee use a pre-existing property of his own with the licensed products? Does the licensor really want to have his property used to enhance the goodwill in the licensee’s property? Does the licensor’s property become associated with the licensee’s property in such a way that the licensee’s other products are somehow thought to have a connection to the licensor? Can the licensor encounter some form of liability if such connection is made?
CHECKLIST POINT NO. 6 – POST TERMINATION
Everyone readily gives a licensee a right to sell off inventory at the termination of the agreement. How often is the nature of the sell-off properly limited? Are “closeout” sales precluded? If not, what is the impact on an otherwise successful licensing program, i.e., on the goodwill of the property, if close-out products are being sold at discount houses or flea markets? Does the licensee ever lose the right of sell off? What if the termination is for failure to submit reports and pay royalties? Do you really want to have to let the licensee continue to sell after termination for failure to report and pay?
What happens to the inventory that cannot be sold? What options are available in each particular industry, with each particular product? Could the licensor use the products as premiums or for promotions? What is the licensor willing to pay for the inventory (if anything)? Does the licensor have enough “leverage” to insist that the licensee destroy the inventory if it is not sold to the licensor?
CHECKLIST POINT NO.7 – RIGHT TO SUE FOR INFRINGEMENT
Spell out not only who can sue, but also, who keeps the recovery. In some license agreements, licensees will absorb the costs and fees associated with infringement related actions.
CHECKLIST POINT NO. 8 – CHOICE OF LAW
Choose the law, but also, where any disputes will be litigated and how service of process can be completed. And remember that the right to sue a licensee in the U.S. is not enough protection against a foreign licensee. They probably will let you get a default judgment and force you to try to recover against the judgment in their home country (the only place where they have assets).
CHECKLIST POINT NO.9 – INTEGRATION
Make sure you understand and spell out all the promises. An often stated but not delineated promise is that the licensor will do certain work for the licensee which the licensee will pay the licensor for. Must the licensee use the licensor? Must the licensor perform? What pay rate? How timely must performance be? What are the consequences of failure to meet any of these obligations?
