License Agreements: Partnerships Worth Getting Right

Whenever you see a licensor and licensee in litigation with each other you should assume that something has gone wrong – very wrong.  I have had to terminate some license agreements for my clients, but I have never had to sue over one.  Why not?  In part because I’m still under 40; I know that such suits are inevitable in long licensing careers.  But also because litigation over license agreements hurts both licensor and licensee, whoever is at fault, as well as the licensed brand, for both licensing and its own core business.  Licensing lawsuits are something we should all try to avoid.

Contracts are drafted to be enforced, but enforcement takes several forms before it means filing a complaint.  First, it means working a licensing relationship to your advantage without having to cite contractual clauses; second, it means using those clauses to achieve your ends.  Third, finally, and regretfully, it means litigation.  A lawsuit over a licensing agreement means that true enforcement did not succeed, like a custody battle following a marriage that counseling could not solve.  And if a litigated license agreement is like a custody battle, then drafting a license agreement is like drafting a prenuptial agreement for a couple already expecting a child.

License Agreements are Different: Partnerships, Brands, Portfolios

Like marriages, license agreements are partnerships, and it is always more difficult to undo a partnership than a contract between truly independent parties.  Moreover, because the value of each license agreement derives from the underlying value of the licensed brand, undoing the license agreement impacts brand equity in unpredictable and unpleasant ways.  Finally, each license agreement is usually one of a portfolio of such partnerships, and undoing one will have some effect on them all.  Licensors don’t find business easier after winning lawsuits against licensees, just as ex-spouses don’t usually find it easier to get dates (Ron Perelman excluded) after getting a divorce.  It would always be better to get it right the first time.

Partnerships 

A company that decides to license must do all the things it does before establishing any kind of partnership.  Some licensors seem to think that the finite term or limited scope of a license agreement justifies working with otherwise unacceptable partners – which is like thinking that no-contest divorce legislation justifies marrying an unreliable fiance.  It is true that the time and effort devoted to establishing a partnership – and researching a partner – should be proportionate to the scale and importance of the deal at hand.  But licensors should assume that they will be attached to their licensees for even longer than the stated terms of their agreements, not just through inevitable sell-off periods, but also because a bad licensee – like a bad tenant – can linger and cause trouble for the licensor long after his license has expired.  Companies that license their brands and trademarks should do as much due diligence, and work just as hard to make sure there is a good fit, before signing up licensees as they do for any other partnerships they enter.

Brands 

Licensing deals have sometimes avoided such scrutiny, and the resulting latitude for licensees, brand licensing agents and others (which they have often welcomed) is not a good thing.  Even when licensing deals (traditionally considered unimportant by brand managers) are small, their potential impact on a brand is great, and they deserve the same attention that a company would grant to any small but important co-venture.  The license agreement will impact the brand if it goes well, and it will impact the brand even more if it goes badly.  The costs of a poorly chosen licensee are not just the additional hassle of managing and eventually terminating his agreement. 

They also include the intangible costs associated with any of his breaches (product distributed to an inappropriate channel, use of disapproved labels or artwork, and the difficulty in finding  a replacement when the initial licensee has screwed up).  Licensees who have once erred can always change their ways, but licensors who can do better don’t need to be the ones to prove it.

Portfolios

Managing a portfolio is different from running a single business.  New books are written weekly on aspects of portfolio management, but almost nothing has been written about managing a portfolio of licensing agreements as a portfolio.  How many licensing deals should a particular brand have?  How can you use certain deals to lead to others?  How to decide which deals are too important to lose?  When has a given deal served its usefulness? 

Making sense of license agreements means making sense of the way they fit together with others.  And enforcement of an individual license agreement must always be balanced against the impact of such enforcement on other intact agreements.  This may argue in favor of rigid and ruthless enforcement – to show other licensees that this licensor means business.  But it may argue in favor of tolerance, working as hard but gently to keep the offending licensee within bounds but not upsetting one deal for fear of hurting others.

For a licensor and licensee whose relationship did not work, undoing their contract will not be simple.  Whether the licensor wants to admit it or not, the licensee has its hold on a part of the licensor’s brand.  And any resolution will have to be measured against its impact to the licensor’s image, to an entire portfolio of licensing deals and to the long-term equity of the brand itself.  The licensor may not want to hear that undoing a partnership that didn’t work will be more complicated (and more expensive) than telling an unwanted suitor to get lost – which is why he should pay as much attention to them as possible beforehand.

 From the September 2001 issue of The Licensing Letter