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LICENSING AGREEMENTS

Pitfalls & Protections in Licensing Agreements

Before signing any licensing agreement, a licensee has to ensure they are completely covered. Here are the basic steps every manufacturer should take before putting pen to paper. In reviewing licensing agreements you must know what your critical business requirements are and whether the agreement that you are reviewing grants them to you or not. This is one of those difficult business decisions that executives are frequently called upon to make.

The Business Plan

When approaching a licensing deal, the licensee can only properly review the licensor’s draft agreement after having developed a detailed business plan for the brand. The licensee’s business plan is the most important element in negotiations, even though it is not part of the document itself.

Questions a licensee should ask include:

  1. Does the agreement submitted by the licensor give us the rights that we need?
  2. Is the cost what we expected?
  3. How else might we get shafted?

Unfortunately, the last question can have many possible answers. If the licensee is not absolutely certain that the licensor’s draft is consistent with its business plan, they should not sign. Timing is crucial—once the agreement is executed, the licensor is not obligated to entertain any requests for changes.

Standard License Agreements

When the licensor submits the first draft, it frequently will refer to that draft as “The Standard Agreement.” In fact, the only thing that is “standard” about the licensor’s draft is that it has been drafted to favor the licensor in every possible way. In fact, the brand owner never stops thinking up modifications to the document to make it even more favorable to themselves.

The use of the term “standard” is intended to discourage the licensee from trying to change any of the document’s content. It would be unwise to accept this if there is anything unsavory or confusing in the agreement. In such instances, the licensee must ask questions. If the answers are not satisfying, the licensee must ask more questions. And if the licensor’s representative can’t or won’t clarify terms, that is a sign that they are the wrong contact person or even the wrong company to deal with.

Case: Grant of Rights

The licensee’s purpose in entering an agreement is to be able to use in its product line and related materials elements of the “Licensed Property.” As a result, the definition of this term is of the essence of the deal. Let’s assume that the licensor submits a first draft incorporating the following definition of the term:

Licensed Property

“The Licensed Property consists of story lines, scripts, designs, artwork, characters, names, trademarks, logos of the motion picture entitled “Terminator,” and the in-character names and likenesses of the principal performers as well as visual props and other elements contained within the Style Guide, to the full extent that Licensor shall have such rights.”

Problems?

There are several problems with this “Grant” clause. The reference to the Style Guide is vague. Is there only one, or are there several editions? Has the licensee received and reviewed the document in order to determine whether it contains all of the visual, audible and textual elements that the business plan identifies as being necessary to the licensee? Even if the licensor has submitted this document, unless it is explicitly identified and stated to be incorporated into the license agreement, it will have no binding effect upon the licensor. One good way to handle this question would be by specifying the Style Guide by “version number” and attaching it as an exhibit to the contract.

Another major problem is the portion of the definition that limits the grant of rights for performers and other elements “to the full extent that licensor shall have such right.” One might read this phrase as the licensor’s assurance that it is not holding back any elements of the property. However, the more accurate interpretation is that the licensor is saying “If our attorneys didn’t do their jobs well and failed to acquire the in-character names and likenesses of the principal performers or other elements, don’t blame us. You’re on your own.”

A reasonable request by the licensee at the time of negotiating the agreement would be to request that the licensor make a determination whether or not it does, in fact, have the rights to make the grants in question. The language should either be revised to be unconditional or, if refused by the licensor, the licensee must assume that it will face problems if the talent in question challenges the licensee’s rights to make use of the talent rights involved.

If the licensor will not make the grant unconditional, then the licensee must make the decision whether or not certain of the talent rights are absolutely essential to the business plan, and if they are, whether to proceed with the deal or not.

How much less would the “Terminator” property be worth to the licensee if it might not be able to use the likeness and characteristics of Arnold Schwarzenegger? The licensee may move forward and assume the risk or, look for another alternative.

Perhaps there is one particular actor in the motion picture whose in-character likeness and other characteristics are absolutely essential while that is not the case for the other talent rights. If so, the licensee might bargain for the unconditional use of that single actor’s rights on an unconditional basis, and assume the risk with respect to the remaining talent.


Licensing Agreements is a TLL feature to help licensing professionals avoid contracting pitfalls. The feature is published with the permission and based on the writings of James M. Kipling, a veteran licensing attorney in the Cincinnati offices of Dinsmore & Shohl LLP, contained in Mr. Kipling’s Licensing 101 series which has been published continuously since 2002 in The Licensing Book. Mr. Kipling may be reached at (513) 977-8536, or jim.kipling@dinsmore.com

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