As Seen In...The Fashion Mannuscript, October 2001THE LEGAL CORNERBy Donald L. KreindlerPhillips Nizer Benjamin Krim & Ballon LLPLICENSING - LEGAL ISSUES REQUIRING CONSIDERATIONAs designer labels have become increasingly important to generate sales of merchandise, a proper license agreementis all the more essential for both licensor and licensee. This article will consider some of the important issues that must bedealt with in a proper licensing agreement.1. Licensor’s Control Over Design.Licensor must have the legal right to closely control the design of the licensed product. Lack of such control couldjeopardize or weaken his trademark. Licensor should also have the right to strict control over the quality of thelicensed products being manufactured by licensee, as well as how licensee displays and uses the licensed trademark.In practice, licensor’s control over design may vary from almost total to almost nil, depending upon the licensor andthe product being licensed.2. Distribution Channels.Appropriate channels of distribution are crucial to most licensors and must be carefully spelled out in the licenseagreement. This is particularly important in the case of designer names or trademarks associated with “upper end”merchandise, the sale of which to discounters or even mass merchandisers could be highly damaging to the trademark.3. Royalties.Most license agreements provide for payment of royalties on a quarterly basis, accompanied by a detailed statementreflecting sales, credits, discounts, etc. The agreement should also give licensor a right of inspection of licensee’sbooks and records (to be exercised a limited number of times) to verify the accuracy of licensee’s reports. Whileroyalties are normally paid on net sales (i.e., net of discounts, allowances, etc.), what about uncollectible accounts?Licensor can argue with at least equal validity that if a sale has not been collected, he has lost more than thelicensor and his loss should not be increased by his having to pay a royalty. This one can go either way, dependingupon the flexibility and bargaining power of the respective parties.Guaranteed minimum royalties should always be provided for. One issue that is not so clear: if the sales that wouldsupport the guaranteed minimum royalties were not reached, can the licensee nevertheless keep the license bypaying the minimum royalties? Licensee may argue that by paying the minimum royalties, he has fulfilled hiscommitment. Licensor may not be interested merely in the money, however, but may also be seeking a widedistribution of the licensed products bearing his trademark. How this issue is resolved in the licensed agreementreally depends on the relative value placed by the licensor on royalties vs. distribution.4. Competitive Products.The license agreement should provide that licensee will not manufacture and sell products under any competitivetrademark. A closer question involves whether licensee may sell similar products to the licensed products if theydid not bear licensor’s trademark. This issue should be resolved in accordance with the business exigencies applicableto the particular trademark and product.5. Copyright Protection.License agreements commonly provide that any copyrights for styles or patterns created by the licensee and used onthe licensed products are the property of the licensor. But if the copyright is the result of designs or patterns
created by licensee (and not specifically identifiable to the trademark or trademark products), licensee can validlycontend that he should retain ownership of the copyright, as well as any damages recovered if the copyright isinfringed.6. Option to Renew.It is common to give the licensee the option to renew the license agreement for additional terms provided he hasfulfilled all of his obligations. One issue that arises: if licensee has paid the minimum royalties but has notachieved the desired levels of sales, should he be permitted to renew? If the license agreement provides that licenseewill not only pay guaranteed minimums but will achieve specified minimum sales levels, the problem will beacademic. In some cases, however, licensor may not be satisfied with licensee’s performance even if the specifiedminimum sales have been achieved. If that possibility is anticipated then an option to renew may be inappropriate.7. Right to Sublicense or Assign.Since licensor is contracting with a known licensee, and presumably has confidence in that licensee’s ability tomanufacture a quality product and maintain a satisfactory volume of sales, any right of licensee to sublicense orassign should require licensor’s consent. Similarly, a change in the effective management or control of the licenseeshould also give licensor the right to terminate.8. Termination.Since most of the obligations under a license agreement are imposed on licensee, termination prior to the end of thespecified term will usually be made by the licensor in the event of licensee’s failure to reach guaranteed minimums,pay appropriate royalties or otherwise breach the contract. As to those breaches that are curable (such as failure topay royalties) provision should be made to give the licensee a reasonable opportunity to cure before the harshpenalty of termination can become effective. Upon termination based on a material breach of the contract bylicensee, licensor should be entitled to recover any unpaid royalties at least through the date of termination plus anyother provable damages. Licensor would also be well advised to provide for payment of the guaranteed minimumroyalties through the end of the term mitigated by any royalties licensor may receive from a new licensee for thelicensed products during the remainder of the original term. The termination provision should also provide for thesell-off of existing inventory, either under the same terms as if the license had continued to the end of the designatedterm, or for a shorter sell-off period than that which would have been allowed had there not been an early termination.9. Arbitration.To avoid the much greater expense and time involved in commercial litigation, and to ensure that any dispute willbe resolved before business and professional people familiar with the industry, we strongly recommend that thelicense agreement contain a provision for arbitration of any controversies pursuant to the rules of the AmericanArbitration Association or other recognized arbitration tribunal.As seen in the October 2001 issue of the Fashion Mannuscript.Reproduction in part or whole without the expressed written permission of the author is prohibited.