BOTL II

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When reviewing a license agreement, be on the lookout for provisions, whether boldly set forth in the “Default/Termination” section or sitting innocuously in the body of the agreement, that inappropriately (from the licensee’s perspective) may create potentially uncurable defaults or otherwise end the agreement. Some examples:

  • “Licensee shall ensure that if (a contractor or a distributor or a retailer, etc. does/does not …..).” Although a licensee should be responsible for damages to its licensor caused by a third party with which the licensee chooses to deal, should it be subject to termination if one of these third parties fails to act properly? Yet “shall ensure” means that, if the third party acts in a way that violates the license agreement requirements, an uncurable default has occurred. Go for “seek to ensure” or, better, no termination for third party acts if the licensee stops dealing with the offending third party (unless the licensee was aware/involved).
  • “Licensee may renew the license agreement if (among other things) it has maintained a performance standard acceptable to Licensor throughout the initial term.” Such a subjective standard could make the option illusory. If a licensor offers an option to renew, generally any conditions should be objective.
  • “Licensor may terminate the license agreement if Net Sales on account of sales of Licensed Products to Closeout Accounts during a Contract Year are more than X% of all Net Sales during that Year.” Licensors do not want the licensed business to evolve into a special make-up/closeout account business so, hence, they propose termination as a disincentive. Good reason, but a bit heavy-handed, so long as the licensee doesn’t make a habit of it. (Assuming an 8% royalty rate, it is fair to say that a licensee is not closing out the Licensed Products at substantial discounts to cheat the licensor out of its 8% royalty on the discounted amount, while eating the other 92% itself.)
  • “Licensor may terminate the license agreement if there are more than some number of late payments within a Contract Year or even within a period of months (even if no default notices have been sent).” Surely the licensor must have recourse if payments are habitually very late or, more clearly, if a licensee were to keep forcing a licensor to send out notices of default before curing payment defaults, but the words here also would cover a few payments arriving within a few days after they are due. I know – “no licensor would try to terminate” or “no arbiter would side with the licensor” in such a seemingly extreme case, but a line has been drawn in the license agreement. For a remedy as draconian as termination, something more should be required. While not perfect, a “no harm, no foul” window and a notice requirement would serve fairness.

Credit:  Jonathan R. Tillem

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