Don’t shortchange the time it takes to structure the right type of licensing agreement. If the agreement is riddled with holes, nothing is more draining in both time and money then having to litigate your way out of a licensing agreement.
Your licensing agreement is a contract between you and your partner on what you agree to do to bring your IP into the market successfully. It’s your plan but it’s also a written document designed to avoid litigation. One of the best ways to make sure compliance doesn’t become an issue is with a licensing agreement that meets both you and your licensing partners expectations. That’s why it’s important to be clear and specific about your terms. If you have a disagreement, it’s clear on how it will get resolved.
The agreement is designed to anticipate what could go wrong. It spells out how potential problems such as a dispute, late payment, or not submitting a product for approval, get resolved. When I was at the studios, product approvals were strictly enforced, especially on the big kids properties with dozens of licensing partners and hundreds of licensed products. Licensees had to submit each licensed product at four stages of product development for approval. If they failed to get all the approvals, products were yanked from retail distribution, and sometimes the licensee lost rights to it. On occasion, they wound up losing the license for trying to sell a product that wasn’t in their license.
It also includes obligations and performance benchmarks such as minimum sales goals, development time lines and fees, royalty payments, and in some cases, total royalty payments required to automatically renew the agreement. For example, many of the kids entertainment deals I did required paying 150% of the minimum guarantee for an automatic renewal. If the minimum guarantee was $500,000, the licensee had to pay at least $750,000 in royalties before the end of the agreement to get the renewal. Sometimes it was at the same terms, and in other cases, the renewal terms were slightly different, such as higher royalty rates and minimum guarantees for the renewal period. The better defined these terms are, the smoother your licensing relationship will go.
It’s also a document that will sometimes outlive the people who made the partnership. Memories fade or people change and, unless it’s in writing, anybody new stepping in can stop or change the deal. If your licensing partners’ management changes, your agreement is what keeps the spirit of your licensing deal in place. I was working with one of my clients in negotiating a number of movie licenses. One of the most important terms in those agreements were the approval milestones that we tied to guarantee payments. We knew the studios were notorious for sudden management changes which, if it happened, could delay our approvals and market entry. That’s exactly what did happen in one case, and it saved the company from getting drained by the guarantee payments while approvals were on hold until the new management team was “up to speed”.
Don’t make the mistake of treating the agreement like a legal exercise. Every license agreement is unique and should reflect the goals and expectations of both you and your licensing partner. You must take the time to make sure your contract terms are clear about the agreed upon responsibilities, milestones and compliance requirements to avoid future problems. Otherwise your IP winds up languishing because your licensing partner fails to support your IP as promised, costing you revenues, missed market opportunities, and legal fees trying to unwind the licensing agreement.