What could be worse than a trademark license agreement whose terms a licensee boldly violates, earning the wrath of its licensor and immediate termination? Only a successful trademark license agreement renewed so often than neither side pays any attention to its material terms.
How the Risk Presents Itself
My firm has a client still enjoying royalties from a 15-year old agreement renewed without changes over and over again until both parties have stopped paying any attention to its text. Reading this agreement is like walking through Miss Havisham’s dining room in Great Expectations. The cobwebs grab at you from each paragraph, and a musty flavor pervades the experience. It is like deciphering a Hanoverian land grant – or watching “Flash Dance.”
How has this happened? How has trademark counsel to this Fortune 500 company allowed it to remain party to a legal form whose terms it stopped drafting before the dawn of computers? Because nobody imagined the company’s licensing agent was doing such a good job. Because nobody likes confronting unpleasantness when things are going well. Because nobody imagined the agreement would last for so long.
People and companies enter into renewable contracts every day in other areas of the law; employment agreements, real estate leases, even representation agreements for licensing agencies are examples of contracts that include “evergreening” renewal provisions. And in all of those cases there is a risk that the agreement be renewed beyond its legal relevance. Why does it present a greater risk in licensing?
First, because the licensor’s key trademark is its most valuable asset – a fact that the company’s lawyers (like the company itself) may have undervalued 10-15 years ago. Second, because every aspect of licensing – liability, consumer sophistication, retail distribution, applicable laws – has changed so much over the same period, and continues to change so rapidly. Allowing a valuable asset to be leased under terms no lawyer would currently propose amounts not just to reckless deal-making but to legal malpractice.
How to Fix the Problem?
If it is easy to conclude that the legal provisions of license agreements should be regularly updated, it is not easy to say how.
The easiest – and least practical – way to solve this problem would be to deny all licensees the right to renew their license agreements. But that would force the parties to renegotiate the entire deal at regular intervals (whether one year or three), reducing licensees to a vulnerability they will not generally accept. At a minimum, any licensee will reasonably ask that any license agreement they execute to provide for renewal if the parties mutually agree. A licensor cannot easily refuse such a provision, although as a practical matter it does not help it avoid the risks I’ve described. Such renewals happen with hardly any attention from either side. The licensor is as busy as the licensee; the deal is going well; and no one has either the time or the inclination to spend on renegotiating an agreement they probably spent too much time on to begin. Finally, just as the license agreement is beginning to pay off, the licensor is unlikely to ask its counsel to eat up more of another chunk of its royalty income with legal fees.
Licensees also frequently request renewal at their option if they are paying royalties at or above a certain level. This request ensures that an underperforming licensee will not continue manufacturing product but it probably leaves the licensor even worse off, because the licensee can extend, perhaps indefinitely and its option, an agreement whose legal terms are sure to become outdated.
The only reliable solution would be (1) a provision that granted the licensor the right to update the legal provisions of its license agreements as part of every renewal and (2) a process that forced the licensor to exercise that right. How such a provision, and such a process, might actually work is a subject I will address in next month’s column.
From the March 2001 issue of The Licensing Journal