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5 Pitfalls To Avoid Before Signing A Licensing Agreement – Part 2

The previous post talked about the business pitfalls of licensing agreements. There, I stressed the importance of knowing and understanding the business implications of the terms in the contracts so that you are able to negotiate the most optimal deal for yourself.

In this blog post we pick up with the pitfalls that brand owners and manufacturers face when they deal with the definitions of Work Product, Sell Off period and Quality Control and  Compliance.

Work Product:

It is important to pay attention to how the term Work Product is defined. Many licensees feel that the Work Product they create remains their intellectual property.  In fact, Work Product often becomes the property of the licensor as is indicated in this sample language.

“To the extent any Work Product qualifies as a “work made for hire” under applicable copyright law, Licensee agrees that such Work Product shall be a work made for hire owned by Licensor.

Licensee irrevocably assigns to Licensor all right, title and interest (including without limitation all patent, copyright and trademark rights therein) in and to the Work Product. Licensee shall take all actions reasonably required by Licensor to secure and perfect its title to such Work Product.”

If the manufacturer is not aware of this provision, they may invest a substantial amount of money into new technology for a licensed product only to find out that the technology no longer belongs to  them.

Sell Off period

This is an important section in case of contract termination. I recently heard of a story where a client asked his attorney to negotiate an agreement on his behalf. In the contract, the manufacturer was provided three months at the end of the contract to sell off any licensed inventory – a punitively short time period for the product he was licensed to sell. As the attorney did not understand the business impact of this provision, he did not negotiate additional time for his client, which ultimately cost him when he had to dump the excess product after the three month  period.

Quality Control and Compliance:

This section is one of the most important sections to the licensor.  If the licensed products do not meet the quality standards stipulated in the contract, they will not be approved for sale. Recently, I was working with a manufacturer of key chains whose product has been fully approved except of the testing for lead paint. The retailer was clamoring for the product as consumers were expecting it. It turned out the test involved sending multiple samples of the key chains to a testing lab so they could scrap enough paint off of the finished product to conduct a thorough test. This caused significant delays. We learned later that the manufacturer feeling confident that the product was safe shipped it to the retailer before the tests were completed. When we found out we had to have the entire product pulled as a safety precaution. This resulted in a substantial cost to the licensee. Most licensing agreements will stipulate the licensor’s quality standards as a Test Protocol.  Test Protocols are standards set out by the industry for each product category.  If no standards are

provided, the licensee should inquire as to what the standards are to ensure the licensed product will be approved in time to meet committed ship dates. At all times the licensee must comply with all government laws in the development of their licensed product. Any breach of the compliance standards can result in recalls which can have a devastating impact to both the licensor and the licensee.

I hope these five examples have given you a good appreciation for what can happen if either party agrees to standard contract business language without fully understanding what they are agreeing to. While licensing agreements by their nature tend to be one-sided to protect the brand owner, a solid understanding by both parties will ensure everyone gets off on the right foot.