Michael S. Fischman, Phillips Nizer Partner
Whether it be the impact on supply chains, office disruption from government shut-down orders or lost business from the temporary closing of retail stores to help limit the spread of the coronavirus (COVID-19) outbreak, licensing relationships are likely to be tested like never before. It is therefore important for both brand licensors and licensees to have clarity about the effect of legal provisions of their agreements and about the legal rights and protections that may be implicated by the global pandemic.
Although the breach of a license agreement may create both legal and reputational risks for a licensee, of immediate concern to many licensees today is whether they can continue to pay the minimum guaranteed royalties due under their contracts. The purpose of such a provision, after all, is to lock in a baseline level of royalty revenue over the duration of an agreement. With decreasing retail sales, licensors will likely come to rely more and more on these forms of “guaranteed” payments. A licensee, knowing that its licensor could well be hard-pressed to replace its license in the current business climate, may choose to use this moment of mutual business distress to seek relief from its minimum guarantee. After all, the licensee might assume, the licensor will recognize the impact of coronavirus on the licensee’s business and will want to retain the contractual relationship for when business conditions improve.
That may be an accurate assessment by the licensee, but it does not come without risk. For example, depending on the wording and context, communications with the licensor before any payment is due could trigger an anticipatory breach of the contract. An anticipatory breach involves “a wrongful repudiation of the contract by one party before the time for performance,” entitling “the nonrepudiating party to immediately claim damages for a total breach.” Under this doctrine, “[t]he nonrepudiating party need not … tender performance nor prove its ability to perform the contract in the future,” but rather, “the doctrine relieves the nonrepudiating party of its obligation of future performance and entitles that party to recover the present value of its damages from the repudiating party’s breach of the total contract.” (Id.) What that means in practice is that there could be serious unanticipated consequences of what might have been intended to be no more than an innocent expression of financial difficulty by a licensee, but which instead is determined to be a declaration of its inability or refusal to make payment of an imminent minimum guaranteed royalty or other amount due under its license. Specifically, the licensee may find itself defending a lawsuit for anticipatory breach of contract.
Before making that call or sending that email, therefore, carefully review with counsel your license agreement and the facts specific to your business issues. To be considered, for example, is the question of whether the license contains a force majeure clause – a provision that excuses non-performance due to circumstances that are beyond the control of the parties. Typically, force majeure clauses under New York law (and those of other states) apply to events such as fires, floods, wars and acts of God. The determination of whether COVID-19 applies to a specific license agreement will depend heavily on the language of the contract. What is often considered “boilerplate” and not subject to any substantive negotiations, the force majeure clause might be able to be used to avoid or suspend minimum guaranteed royalty and other payment obligations. A caution: those clauses are narrowly construed by courts, meaning that: “only events specifically listed will excuse a party’s performance.”
Depending on the circumstances, government decrees arising from the coronavirus outbreak — such as prohibitions against public gatherings, shelter in place orders and border closures of facilities – may give rise to a valid claim of impossibility or impracticability. The doctrine of impracticability may provide relief when such unexpected superseding events occur (and where the nonoccurrence of which was a basic assumption on which the contract was made) and make it unreasonable or commercially senseless to require performance in light of such events. The doctrine of impossibility of performance may also excuse temporary non-performance in exceptional circumstances where a party is able to show that performance was rendered objectively impossible for any similarly situated party. These legal doctrines may have particular relevance during times when governmental measures render performance temporarily impossible.
As news of additional outbreaks and new transmission paths continue, responsive measures to COVID-19 are likely to escalate further (albeit at different times and in different degrees globally), creating broader and more severe economic ramifications. Licensees may be able to use the doctrines of force majeure, impossibility, or impracticability to protect themselves from liability for non-performance. However, whether those doctrines apply in specific circumstances is a question that will depend on fact-specific analyses. In short, regardless of how close a relationship you have developed with your licensor, it is wise to be prepared before seeking relief from the express terms of your license agreement.
- American List Corp. v U.S. News and World Report, Inc., 75 N.Y.2d 38, 44 (1989).
- Force Majeure Clauses and COVID-19 – Can Force Majeure Clauses Excuse Performance Under New York or Delaware Law in a Pandemic? The National Law Review (March 13, 2020).
- See Bush v. Protravel International, Inc., 746 N.Y.S.2d 790 (Civ. Ct., Richmond County 2002) (holding that performance of a travel contract has been rendered impossible for a period of time immediately following the 9/11 attack where New York City was in virtual lockdown); see also Kolodin v. Valenti, 979 N.Y.S.2d 587, 589 (1st Dep’t 2014) (management and recording contract between two parties was rendered objectively impossible by subsequent court order precluding all contact between them).