In last month’s column I described how unexpectedly successful, and long-lasting, licensing deals can lead to an equally unexpected pitfall: a license agreement renewed annually without amendment and rendered over time so out-of-date as to pose a genuine liability to the licensor.

The world of licensing has changed rapidly over the last 10 years, yet many long-term licensees are operating under agreements whose legal provisions have not been amended since they began.  The world of licensing will continue to change rapidly, and brand owners, their counsel and licensing agents need to avoid the same fate in the future.  But how?

The Solution: It’s Already There

Many license agreements contain two separate sections: one, usually entitled “Special Provisions,” contains the terms specific to the deal at hand.  The other, called by creative legal draftsmen something like “General Provisions,” contains the lengthy boilerplate clauses that represent state-of-the-art licensing at the time the deal is signed.  (Other agreements segregate terms specific to the deal in a separate schedule attached to the general form.)

Active licensors usually revise the terms of their “General Provisions” annually, semi-annually, or more often (I know one company that revises its form whenever outside counsel discovers another word or phrase to recommend.)  But no matter how often the form is changed, one thing remains almost universally true: the licensor never asks existing licensees to agree to the same legal terms it requires of new licensees.

How can licensors prevent this disparity between licensees – all of whom, after all, are using the same trademark in the same legal environment?  How can they enjoy the same legal commitments from new and pre-existing licensees alike?  The very structure of those agreements offers the answer: licensors could require licensees up-front to agree to an annual update of the agreement’s “General Provisions” as a condition of its renewal.

Such a license agreement would require that any renewal be mutual, and under its terms each new licensee would agree that the licensor could condition renewal on the revision of the agreement’s “General Provisions.”  Some licensees will be wary of this requirement (although licensees will often agree to more onerous terms for renewal than they accept for an initial term).  But most concerns will recognize that no licensor will scare away a successful licensee on renewal with truly unreasonable demands.

This solution would answer the licensor’s interests in a number of ways.  First, it would force the licensor and its counsel to review the legal provisions of its form license agreement every year.  Second, it would make licensing programs easier to administer since most outstanding agreements would contain the same governing terms.  Third, and most important, it offers brand-owners the comfort that most of its licensees are operating under legal provisions with which it can feel safe.

There are types of license agreements, of course, for which this solution will not work.  It will not work with agreements that present their own legal particularities; a license that was not susceptible to the standard form at its beginning will not become more so over time.  Nor will it work for licensing programs in which the licensee’s investment is so great that it cannot take the risk that the licensor will regain all of its bargaining power every 12 months.

But it will work uniformly well for agreements that rely on the licensor’s form “General Provisions,” and agreements that provide for any renewals, whether annual, biannual, or even less frequently.  Even agreements with long initial terms could provide for a legal update at whatever regular renewal periods do apply.

Keeping License Agreements Successul and Current

I believe that this solution, overlooked by too many licensors and their attorneys, would reward the successful deal-making that makes for long-lasting deals while avoiding the legal risk that often come as the cost of such success.  Imagine a world where all licensees – or almost all licensees – are operating under an agreement whose legal provisions, if not identical to the brand-owner’s latest revisions, at least bear a close resemblance to them.  The mere idea is enough to warm the heart of anyone looking out for the interests of the licensors and their agents.

From the April 2001 issue of The Licensing Journal

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