Five Questions for a Licensee to Ask Before Signing a License Agreement
Licensees are often presented with licensing deals for properties that appear to have great potential, and there is sometimes a tendency to sign first and ask questions later. However, there are at least five questions that a licensee should ask before committing to a deal.
Who owns the licensed property?
The assumption in a typical licensing transaction is that the licensor is the owner of the licensed property, but this is not always the case. For example, if several individuals formed an entity to act as the licensor, the licensed property may belong to one of the individuals and may not have been transferred to the licensor. Similarly, if the licensor engaged independent contractors to create artwork or other copyrighted works that make up the licensed property, the licensor may not have secured proper written and signed assignments of copyright from those contractors, in which case the copyright in the licensed property would be owned by the contractor rather than the licensor. Just as with a real estate transaction or any other property transaction, in order for the grant of rights to the licensee to be valid, it must be made by the party that actually owns those rights.
Is the licensed property registered?
If the licensed property is a copyrighted work, the copyright must be registered in order to take legal action against an infringer. Thus a licensee will want to ensure that a registration is in place so that action can be taken to protect its interests in the event of any infringement. If the licensed property is a trademark, a licensee will most likely want to ensure that the trademark has been or will be registered for use with the goods to be produced by the licensee. Registration can also be helpful in verifying ownership of the licensed property, as discussed in point 1 above.
Will the license be exclusive or nonexclusive?
As a general rule, a licensee will prefer an exclusive license, but the inquiry should not stop there. Most exclusive licenses come with a guarantee, and if annual royalties do not meet the guarantee, the licensee will be obligated to make up the difference. In some cases, a nonexclusive license may be sufficient to protect the licensee’s interests and at the same time allow the licensee to avoid any demand for a guarantee. For example, if the licensee will be the first to the market with its licensed goods, and if it plans to have broad market coverage, that may be enough to prevent any other licensee from having an interest in obtaining a license for the same goods or from entering the market with the same goods.
Also, an exclusive license may not be as good as it initially appears. Licensees should beware of exclusive licenses for limited types of goods or limited channels of distribution, as such licenses may leave the door open for the licensor to issue other licenses for competing goods or for the sale of the same types of goods in different channels of distribution. For example, if the licensee has an exclusive license to distribute apparel in upper tier department and fashion stores but the licensor retains the right to grant licenses to others to distribute apparel in mass market and discount stores, the value of the licensee’s license may be significantly diminished.
Has the licensor issued or does the licensor plan to issue other licenses?
In most cases it will be to the licensee’s advantage to have a broad-based licensing program built around the licensed property. However, a licensee should determine if the other licensed products included or to be included in the program will be complimentary to the licensee’s products, or if they will compete with or even detract from the licensee’s products. If the licensee will be distributing apparel, then having another licensee that is selling luggage or purses of the same quality will probably benefit the licensee. However, if other licensees will be selling lower quality products, or will be selling products that appeal to a different market or that convey a different image or message than the licensee’s products, the licensee’s sales may suffer.
What has the licensor done and what does the licensor plan to do to promote the licensed property?
A trademark or a celebrity’s image will have value only to the extent that it has consumer recognition. Recognition can exist at the time the license is signed, or it can be generated through the licensing program, including through the marketing and sale of the licensed products, but in any case there has to be some mechanism for generating interest on the part of consumers in order for the licensee to sell significant quantities of the licensed products.
Similarly, even though artwork and photographs may have enough visual appeal to sell the licensed products on which they are displayed, it will be beneficial to the licensee if the artist or photographer is able to establish some brand recognition for his or her name or distinctive style.
Licensees should carefully consider all of the above before signing a license agreement.