Reexamining Contract Terms

One of the themes noted across all four weeks of the Festival of Licensing, organized by Informa Markets in partnership with Licensing International, was the need to restructure and rethink the terms of licensing contracts, both new and existing, as a prerequisite for success of a licensed product line. Some of the configurations that were noted by presenters throughout the event, which took place October 6-29, included:

  • Lower or even no minimum guaranteed royalties, typically in return for contractually guaranteed marketing or promotional initiatives, promises of timely product introductions, investment in product development, expansion into untapped channels, or other contributions of value.
  • Spreading payment of minimum guarantees over a longer period of time, especially for existing contracts that were closed prior to the pandemic when conditions were different. This has become almost a standard step during the crisis.
  • Terms absolving licensees of the requirement to remit royalties when a key retail customer does not pay. The precarious position of many retailers during COVID, as well as failures (e.g. Toys ‘R’ Us) pre-COVID, puts a priority on this issue and, while restructuring a contract in this way is certainly not a given, it is a topic of conversation. Even without a contractual promise, licensees can approach licensors on a case-by-case basis; if a licensor wants merchandise on store shelves and permits the licensee to fulfill an order from a retailer in danger of failing, it may be willing to forgo royalty payments if the worst comes true.
  • Removal of caps on deductions from net sales and/or allowing uncollected retail payables to be deducted. This is something that licensors have been resisting for the most part so far, but licensees believe it will be allowed in the future as the risks of nonpayment rise, through no fault of the licensee.
  • Clauses addressing pandemics inserted into the traditional boilerplate, so the partners do not need to rely on the less-specific force majeure clause.
  • Requirements for licensee adherence to sustainability and other ethical guidelines (e.g., workers’ rights, diversity). These issues are often part of a licensor’s due diligence in the licensee selection process. Some observers believe they will increasingly be contractually required as consumers’ purchase decisions are influenced more often by the steps marketers are taking to make a positive impact on the world. Some contracts already contain such provisions.

We have just posted our coverage of the last week of the Festival of Licensing, the Licensing Leadership Summit. You can view our deep dive into the trends spotted at the Summit, and the entire Festival, here.

Separately, Raugust Communications’ monthly e-newsletter for November comes out next Tuesday, November 17. If you are not a subscriber to this free publication, please sign up here.

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