Don’t make this common mistake with your license agreement
May 1, 2019
It’s fairly common, a licensee’s legal or executive team negotiates and signs the licensing agreement and then hands the reigns over to a marketing contact for day-to-day management. The high level and more obvious sections of the contract are usually communicated (for example, guaranteed minimum royalties, term, and territories), but there are always some sections that go unnoticed and contain essential information relevant to your day-to-day operations.
Definition of Sales
one of the most negotiated points of a licensing contract is the definition of “sales” because it determines how the licensee will pay royalties. Some contracts calculate royalties from “gross sales,” and others may calculate from “net sales.” Usually, the definition of sales also highlights if, and how, licensees can take deductions from “sales.” These details are incredibly important to not only the licensee’s finance and accounting teams but also sales teams, as it can affect negotiations with retailers.
It happens more times than you would think. Licensees understand the territories in which they have rights to sell their products (think, the U.S., Canada, etc…) and they completely forget that the definition of distribution channels outlines specific channels, and in some cases, particular retailers or sections of the store where a licensee can sell the products. Be sure your sales team understands which channels you have rights to sell your product. If you wish to sell the product into a new channel where you don’t currently have rights, be sure to first get the green light in writing from your licensor.
Performance requirements and Sales hurdles
Many times the contract ties automatic renewals, exclusivity hurdles, or both, to performance requirements in the license agreement. These requirements were likely set based upon sales projections determined during the negotiation of the contract before actual retail pitches occurred. As we all know, sometimes sales projections don’t actualize. Be mindful of where you are tracking against your performance requirements. If you are not meeting the hurdles, communicate the circumstances of why not with your licensor. Depending on the situation, it may be grounds to amend the performance requirements, or they may grant you an exception on the automatic renewal or exclusivity rights.
Product quality procedures and timelines
Depending on the complexity of the category and product, your licensor could have strenuous product quality procedures built into their approval process. Before your license agreement is signed, make sure you understand this product approval process and the expense it can bear (some licensors require very technical reporting and use of third-party testing labs). It’s also important to understand how this approval process will affect your product launch timeline. What steps can be parallel pathed, if any? Over-communicate with your licensor to ensure you are both aligned to a realistic schedule that won’t have you missing essential launch dates.
Approval of marketing/advertising materials
Your license agreement will outline an approval process for licensor review of marketing and advertising materials. Pay close attention to this process for how to submit submissions for review and the time required for licensors to respond – often 10-15 business days. Calculate this review time into your product development and launch timeline.
While dissecting sections of a license agreement is not the most exciting topic for a blog post, it’s one of the frequent issues I come across in my role working with licensees, and it is worth the reminder to stay on top of your contractual obligations. I highly recommend making it standard practice to revisit the license agreement annually and especially when there is a change in personnel. As many licensees may deal with multiple license agreements, its good practice to regularly revisit each agreement to stay up to speed.