Anatomy of a license agreement

- As your portfolio and reputation in the industry grows, there may come a time that entering into a licensing agreement is a good idea. You may either have a body of work, brand, or product that others are looking to promote on a larger scale. If so, there are a number of things to consider before engaging in any sort of licensing agreement and here's what you can expect when you're presented with a license agreement or you're working with counsel to prepare one of your own. The first thing the contract document will outline are the parties. Make sure you know to whom you're granting the license and that it doesn't include all parents, affiliates, and subsidiary entities. A license to MTV is on a vastly different scale than a license to its parent, Viacom. As we've seen, these parties to a license agreement are known as the licensor and the licensee. In a typical licensing arrangement, a licensor will grant a licensee a clearly defined right it wouldn't otherwise have. In exchange, the licensee usually submits to a series of conditions regarding the use of that licensor's property and agrees to make payments known as royalties. Licensing agreements cover a wide range of situations, some well known and some that might surprise you. For example, a retailer might make a deal with a professional sports team to develop, produce, and sell merchandise bearing that team's logo. Or a small manufacturer might license a proprietary production technology from a larger firm to gain a competitive edge rather than expending the time and money trying to develop its own tech. Alternatively, a greeting card company might reach agreement with a movie distributor to produce a line of greeting cards bearing the image of a popular animated character. Because of the legal ground these documents must cover, licensing agreements are, in general, fairly lengthy and complex documents. But most such agreements cover the same basic points. These include financial terms and conditions, including payment terms, required advances, royalty rates and how those royalties are calculated, exclusivity or territorial restrictions, that is to say, whether the licensor is granting an exclusive right or if he or she may license the IP to another party or to another another party outside of a certain location, the term of the contract, including the length of contract and any renewal options, right of monitoring and quality control, including most procedures to be followed, and finally, choice of law. Let's start with financial terms and conditions. Financial terms and conditions, t's and c's for short, are hands down, the most important terms in a licensing agreement. We can generally break them down into three broad categories. One, advance payments, this is what you can expect to receive up front. Two, guaranteed payments, which are minimum payments on future royalties, what you can expect to receive as time goes on. Three, invoicing and transfer of title terms, the mechanics of how and when you will actually receive payment. Advance payments are great if you can get them and it's always safest to get as much money as possible up front. None of us has a crystal ball. We can't predict whether the license will make enough money in the future to be worthwhile. There isn't any hard and fast rule related to these payments and in fact, I often spending a lot more time advising clients about the dollar amount they should be asking for than the specific t's and c's. Future payments and guaranteed or minimum payments are the real meat of most financial t's and c's. These clauses describe a, the circumstances under which you'll get paid and b, how to calculate the amount you should be receiving. There are many ways to structure these types of payments. For example, some licensors use guaranteed minimum payments to extend or renew the license, if the licensee doesn't sell enough, the agreement may terminate. Equally important is how much and when. Invoicing sections will tell you when or if you have to submit an invoice for payment. A good contract, and a good attorney who drafted that contract, will structure the deal so that you needn't do anything and the licensee will pay you at the predetermined times or events described in the contract. The last term and condition I want to talk about in this section is transfer of title or transfer of the license. In absolutely all cases, you must make sure that the language surrounding transfer of the license is tied to payments. If the lessor is late or misses a payment, the license should be suspended or outright revoked or terminated. The last position you want to find yourself in is that of a licensor with a licensee who hasn't paid and still holds the license. That way lies litigation and no sane person wants to go there. Exclusivity and territorial restrictions. Arguably, the next important section of a licensing agreement is related to what we call restrictive covenants. Simply put, these terms restrict what a licensee may do with his or her license. These terms may restrict either or both the geographic location of the license and the number of entities to which the property may be licensed. You may have one company in North America, one in the EU, one in China, all with identical licenses, but restricted from selling outside of their own spheres. Directly opposite that, you may have for example a record company that requires your creations be licensed to them for exploitation throughout the known universe and in perpetuity, which is forever. The important concepts to remember here are that these contract clauses are intended to limit the scope of the license, primarily to protect the value of the license, in certain geographic locations and to preserve, or at the very least, refrain from violating the rights of other licensees. Time term and termination. Properly drafted time term and termination clauses will provide the parties with a clear understanding of the circumstances under which the agreement will start and end. The easiest explanation is term. This simply means the date the contract will bind both parties and the date, barring a termination or unforeseen events, on which it will end. These terms are generally in the first few paragraphs of any contract. Termination provisions are easy to define but difficult to generalize. Termination t's and c's do exactly what they sound like they do. They describe the conditions under which a party may terminate the license. They are as widely varied as whatever I feel like it to never. As you can see, with such variation, the things to remember are one, am I able to terminate this license if I don't get paid? Two, am I able to terminate if the licensee violates other terms of the license? And three, how quickly can I return my intellectual property to the marketplace to produce further revenue? Quality, most licensing agreements also address the issue of quality. For example, the licensor may insert conditions into the contract requiring the licensee provide prototypes of the product, mock ups of the packaging, and even occasional samples throughout the term of the contract. Of course, the best form of quality control is usually achieved before the fact by carefully checking the reputation of the licensee. Another common quality-related provision in licensing agreements involves the method for disposal of unsold merchandise. If items remaining in inventory are sold as cheap knockoffs, it can seriously hurt the reputation of the licensor in the marketplace. Choice of law. As you'll see in just a second, choice of law, or choice of forum, is very important. Let's assume that your contract stipulates that Delaware law applies and any disputes will be brought in the appropriate Delaware court. And you live in California. As you can imagine, serious issues abound. Adding to the stress of filing the lawsuit, you'd be forced to travel to, and find lodging in another state, hire an attorney versed in the laws of that state. Most large companies use this as a tactic to force an early settlement, generally for much less than any court might award. Obviously, entering into a contract with an out of state party does not automatically raise red flags, but whenever possible, you should do your best to ensure that your licenses, indeed any contract you sign, is subject to the laws of your home state and locality.