During the course of negotiating a license agreement, a licensee may propose certain changes that may appear logical and reasonable. However, a licensor should be on the lookout for seemingly innocuous proposals that could impede its ability to operate its business.
- “I need a longer sell-off period after termination and the types of customers to which I can sell during the sell-off period [e.g., only closeout accounts] is too limiting.” Agreeing to these requests may not be problematic if no new licensee is in place, but the license agreement must contemplate the possibility that there may be a new licensee; and extended and extensive sell-off rights may make it more difficult to conclude a new license and may increase the pressure to give financial and other concessions to the new licensee. (In a later post, we will discuss the substance of sell-off provisions, including circumstances of termination that could result in a bar to a sell-off beyond the date of a termination of the license agreement.)
- How much time does a licensee actually need, particularly considering that, for a seasonal business with a typical December 31 contract year/term end, sell-off actually could be starting as early as September?
- While selling off prior seasons’ inventory should not seriously compete with a new licensee’s business and while closeout accounts may be the only meaningful customers for closeouts, it cannot be good for the licensor’s brand or the new licensee’s business if the former licensee’s products, whether or not they include “basics,” are being offered to the new licensee’s regular customers at the same time that the new licensee’s business is being launched.
- “I would like an option to renew the license agreement.” While renewal options are quite common, and sometimes may even be offered by a licensor, accepting some common licensee complaints can have unintended consequences.
- “The date by which I have to exercise the option is too early.” Depending on the length of the term, this could be a fair point, but a licensor must keep in mind that, if the option is not exercised, it will need time to locate, negotiate with and conclude an agreement with a new licensee and the new licensee will need time to develop its initial collection, which, for a seasonal business, will have to go to market well before the end of the current licensee’s agreement. (In a later post, we will discuss the need for provisions in an exclusive license allowing the licensor to engage a new licensee during the term and the new licensee to start business before the end of the term.)
- “The conditions for renewal are not objective.” As noted in an earlier post, a licensee will want only objective standards when it comes to the conditions it will have to satisfy in order to exercise its option. However, is it unreasonable for a licensor to be able stop doing business with a licensee that, while not technically having defaulted in its obligations, has been a terrible partner and exceedingly difficult to deal with?
- “I would like a right of first refusal for additional products or countries or trademarks.” A right of first refusal, in effect, requires the licensor to make a deal with a prospective third party licensee and then offer the current licensee the right to match it. There is not much chance that a prospective licensee will be willing to devote the time and expense of negotiating a license agreement in these circumstances. If pressed, giving the existing licensee a first right to try to make a deal with the licensor – a right of first negotiation – is a better, and reasonable, alternative.
- “I want more countries in my licensed territory.” If a prospective licensee can demonstrate the wherewithal to properly exploit the proposed additional countries, the inclusion of the additional countries is often just a question of business judgment. (There may, however, be legal considerations to be addressed in the license agreement depending on the status of the licensor’s trademark rights in the additional countries.) If additional countries are included, though, a licensor should retain the right to take back countries that the licensee does not exploit adequately; and any such reversion right must be carefully drafted, particularly to take into account that getting back a few countries in a region may not be of any real value to the licensor. (What potential new licensee is going to be interested in a license for a few scattered Asian or European countries if the existing licensee retains the major markets in the region?) A possible compromise here might allow the licensee to keep the entire region if it is appropriately exploiting the major markets in the region, but to lose the entire region if it is not.
Credit: Jonathan R. Tillem
See previously published posts:
- License Agreements: BOTL (Be On The Lookout)
- BOTL II