THE ROLE OF LICENSING AGENTS
A licensor who does not want to spend time identifying and soliciting potential licensees and administering a licensing program may want to engage a licensing agent. The basics of licensing agent relationships are discussed below:
Functions of the Agent
An agent's functions include identifying potential licensees for the licensor's property, representing the property at appropriate trade shows, presenting the property and licensing proposals to potential licensees, and negotiating license agreements. Some agents may also help the licensor develop and position its properties so that they will be suitable and attractive candidates for licensing. This service may be included in the commission (see below), or may be an optional service available at an additional fixed or hourly charge. In most cases, the agent will administer the license by receiving and reviewing licensed product samples and collecting and accounting for royalties and other payments. In some situations, the licensor may prefer to receive samples directly, and may want to receive all payments and remit the commission to the agent.
Scope of the Agency
The agent agreement should list or define the properties that the agent will be authorized to represent, as well as the product lines and territories covered by the agreement. Some properties may have potential for publishing, software, film or other uses beyond the typical merchandise categories. The licensor may want to exempt those uses from the agent relationship, particularly if the agent does not have any experience or track record in securing licenses in those areas.
Most agent appointments will be exclusive. This means that the agent is the only agent that can represent the licensor. Under an exclusive agency, the agent will be entitled to a commission from any license entered into during the term of the relationship, regardless of whether the license resulted from the efforts of the agent, the licensor or some third party.
Ownership and Control
The licensor should always retain ownership of the property and should have final approval over all license terms. The licensor should also sign all license agreements and retain final approval rights over all artwork and product prototypes and samples. The agent should never acquire any interest in the property, and should not be a party to any license agreement, other than to be designated as the party to receive communications and payments on behalf of the licensor.
Commissions and Expenses
Commissions for licensing agents generally average between 30% to 40% of gross licensing revenue, and may run as high as 50%. In addition, some agents require the licensor to pay part or all of certain expenses incurred by the agent in representing the licensor. These expenses may include trade show costs, costs of creating promotional packages and display and solicitation materials, travel costs and legal fees. The licensor should insure that the agreement specifically identifies all costs to be paid by the licensor. In addition, the licensor may want the right to approve all expenses in advance, and may want to impose a cap on the total amount of expenses for which it will be responsible.
Most agents require a minimum initial term of two or three years, since it often takes that long to develop a property, find licensees and begin to receive royalties. The licensor will usually have to concede on this point, but may be able to get the right to terminate the agreement earlier if certain performance benchmarks, such as a minimum amount of royalty income or a minimum number of new licenses, are not reached by a specified point in the term.
The agent will not want to invest a substantial amount of time and effort on the licensing program unless it will have the opportunity to stay around and reap the rewards from that investment. Accordingly, the agent will usually want an option to renew the relationship for one or more additional terms. Typical renewal options include: (i) automatic renewal, unless either party gives notice by a certain date before the end of a term; (ii) renewal solely at the option of the agent; or (iii) automatic renewal or renewal solely at the agent's option, but conditioned on a certain level of royalty income having been reached during the first term.
Termination of Authority
Under the common law of agency, the licensor can terminate the agent's authority to act on behalf of the licensor at any time. However, the licensor cannot terminate the agent's right to receive commissions from licensing deals entered into during the term of the agreement. A licensor who terminates an exclusive agent's authority to act and retains another agent before the end of the term of the agreement with the first agent will be liable for the payment of commissions to both agents for deals entered into during the balance of the term of the original agent agreement, and may also be liable for double commissions after the end of that term. (See paragraph 10 below.)
Termination of Agreement
An agent cannot guaranty the success of a property, and most are reluctant to enter into an agreement that permits early termination if the licensor's idea of success is not met. However, the licensor should always have the right to terminate the agreement if the agent fails to pay net royalties to the licensor within the time required under the agreement or enters into any license agreement without the licensor's approval. 10. Post Termination. Post termination issues are often ignored when entering into an agency relationship, but they can be the source of major disputes when that relationship ends. In general, an agent will feel that the success of a licensor's program is a direct result of the agent's efforts, and the agent will want to continue to be compensated for those efforts even after the agency relationship has ended. A licensor, on the other hand, will likely be reluctant to continue paying commissions to an agent who is no longer providing services, especially if the licensor has to retain and pay another agent to continue the program. Some alternatives for addressing these competing concerns are as follows:
- After termination, the agent will still be entitled to receive commissions from all licenses entered into during the term of the agreement (including all renewals, extensions or modifications of those licenses) and all licenses that were under active negotiation at the end of the term and are entered into within some specified period of time (usually six months) after termination. The licensor may want the agent to provide a list of all licenses under negotiation that will be subject to commissions if entered into within the six month post termination period. In addition, the licensor may want to specify that commissions on renewals, extensions or modifications will be at a reduced rate, and/or will apply only to the portions of the license originally negotiated by the agent, and not to any additional properties or product lines added after the termination of the agency relationship.
- The agent's commissions continue after termination, as provided above, but at a declining rate (e.g., 40% for the first year after termination, 30% for the second year, and 20% thereafter). This reflects the fact that the agent will no longer be searching for licensing opportunities, and, in most cases, will no longer be administering existing licenses or collecting royalties.
- The agent's right to commissions ends on a final date (e.g. 3 - 4 years after termination), even if agreements originally negotiated by the agent are still in place at that time. In addition to questions regarding post termination commissions, the issue of who receives royalties after termination can be difficult to resolve. The licensor will usually want to have all royalties from existing licenses paid directly to the licensor, or to the licensor's new agent. However, the previous agent may want to continue to receive those royalties, and thus insure that it will get its commission.
In many cases, the licensor enters into an agent relationship as a result of the licensor's confidence in the individual agent who will be handling the licensor's account. Accordingly, the licensor will want the right to terminate the agreement if that agent ceases to handle the account for any reason. Licensors and their agents should resolve the above issues in a written agreement before beginning an agency relationship.