New England Biz Law Update
If your company licenses the manufacture and sale of its products, technology or brands, you may have multiple distribution schemes and, therefore, multiple license agreements. When creating these sales channels for your company, prospective licensees often ask for exclusive rights.
Your company certainly wants the revenue, so you sign an agreement with the terms the licensee requests. Six months later, that big deal comes in with a national or even international manufacturer or distributor. Unfortunately, because of one or more of those “exclusive” deals you have already signed, you are unable to put the deal it wants into place.
How could you have avoided this problem?
Whenever your company is negotiating a license arrangement where there is the potential to grant exclusive rights, there are a number of ways to give the licensee most of the deal it is looking for while still preserving to some degree your ability to adapt your company’s distribution channels as your company’s needs change.
Take a step back and look forward. Your company should maintain an efficient, understandable means of tracking its distribution scheme – both direct and indirect channels, as applicable. It is never too early or too late to implement such a system to help prevent unwanted or impermissible overlap.
Whenever a new licensing opportunity arises, this system should immediately bring to light any conflicts. Even in the absence of a conflict, it is still very important to look ahead to the various facets of your company’s activities and determine how they might affect any license arrangement you are looking to implement now.
Are there new products, technologies or brands in the pipeline? Will these supplement or replace existing sales? If your company also sells direct, what short- and long-term goals have been established? Are there current license arrangements due to expire during the proposed term of the new license? If so, how will their absence alter the overall picture? What territories, markets and/or methods of sale will remain untapped, even with this new license?
The answers to these and other questions will help you determine whether the proposed license is right for your company and, if it is, what the appropriate terms should be.
Craft narrow parameters – exclusive as to what? Ultimately, how you craft the various terms of a new license arrangement will determine how much flexibility your company will have to create new channels and adapt to changes resulting from internal and external forces affecting your company.
The following are some of the factors to consider:
Territories. One of the most obvious parameters in creating a license arrangement is the licensee’s geographical territory. Before committing to a broad territory, break that territory down into smaller segments and consider the licensee’s capabilities in each one.
Depending on the results of that analysis, it might make more sense to have some of these segments be non-exclusive or to carve them out completely. If the licensee develops greater strength in these segments, the agreement can provide for their addition at a later date if other suitable licensees have not been engaged.
Markets. Beyond geographical distinctions, consider the market or markets to be covered by the license. Is the prospective licensee the appropriate vehicle for all of these markets? Carve out any markets for which the answer to that question is “no.”
How you break down your markets will depend upon characteristics of your products, technology or brands. For example, you might break down your markets by end users, such as business and consumer. Or you might distinguish by use or application, such as a product which can be used in any number of medical specialties or a technology with applications in both electronics and communications.
Unless there are substantial licensee strengths or efficiencies to be gained, make the licensee prove itself with an initial use or application before committing to a broader structure.
Methods of Sale. Depending upon the nature of your product, technology or brand, there may be numerous methods of sale by which a prospective licensee may sell. Wholesale, retail, television or other media, e-commerce and on-site are some of the means which may be available to a licensee. Only grant rights to those methods for which the licensee is best suited and expressly carve out all other methods.
Multiple Products, Technology and Brands. If your company has multiple products, technology or brands, consider granting a licensee rights to only one or a limited number of them until such time as the licensee has demonstrated a proven ability to achieve results. Make sure you understand the licensee’s end-user base or targets.
There may be products, technologies or brands for which the licensee’s buyers are not suited. These should be reserved for better channels of distribution.
Term. Setting an initial term that allows the licensee reasonable time to achieve short-term sales and revenue goals, but no longer, will provide your company with the cleanest means of terminating a license arrangement that is not working. There is always the desire on the licensor’s part to “lock in” the licensee on favorable terms.
However, strong results during a shorter initial term will likely make the licensee just as eager to renew the relationship as your company, keeping the negotiating playing field level. Absent those results, your company will have the ability to engage a new licensee or take that particular channel back in-house.
Performance Benchmarks. If the licensee desires an arrangement of any length, the incorporation of performance benchmarks is often the best way of maximizing flexibility for your company’s distribution scheme.
While short-term benchmarks (one year or less) can set forth reasonable estimates, do not be afraid to set aggressive long-tem standards. Such higher goals will give you an out, not only in a failed license arrangement, but also to pursue more lucrative arrangements with bigger and better partners as your company grows and potentially outgrows its initial licensees.
Consider whether termination of the license or devolution to a non-exclusive arrangement (in either instance, in whole or in part) should be the penalty for failure to achieve the benchmarks.
The best license arrangement with a particular licensee will ultimately depend upon the manner in which all of the above factors interrelate. However, careful consideration of each factor in the context of your company’s existing structure and future goals will help you create the flexibility to adapt and grow the distribution scheme as your company changes and grows.
