Licensing agreements are living documents that can change over time. Unfortunately, that’s easy to lose sight of. After all, you worked hard to get an agreement in place. You spent weeks if not months hammering out every aspect of your future relationship with your licensee. You negotiated a royalty rate, worked out who would be paying for additional intellectual property, asked for an audit as well as an improvements clause, determined how long the contract would last, and settled on minimum guarantees. And those are just a few of the terms of your agreement! I’ve seen licensing agreements as short as three pages and as thick as three inches.
But despite how thorough your agreement is, sooner or later, one party will breach it–typically your licensee. Which only makes sense, because they’re fulfilling the majority of the terms of your agreement, including manufacturing, marketing, and selling your innovation. I speak with conviction, because over the course of my career, it’s happened to me numerous times. It hasn’t been a problem, though. In fact, it’s worked out for the better nearly every time. I may have lost a little time… but that’s about it.
If you’re dubious, I get it. How could this possibly be true? Let me explain.
In the past, the number one reason why companies have breached our contract is that they missed a minimum guarantee payment. (Minimum guarantees are useful because they hold licensees accountable. To retain the rights to your idea, your licensee must pay you a certain amount regardless of whether the company has actually sold any product or not.)
In my experience, the following is a typical chain of events.
Your licensee misses its ship date. You factored in a healthy amount of cushion, as much as six to eight months, but the company missed its deadline nonetheless. When you receive your royalty statement in the mail, it reads zero. Most licensing agreements state that the licensee has 30 days after a quarter closes to make a payment. That day comes and goes. At that point it’s up to you to send the company a breach of contract letter. After it receives that, the company has between 30 and 60 days to remedy the problem (in other words, pay you), per standard licensing agreement language.
Sending a breach letter is never easy. My approach is to call my licensee first to discuss the problem. I try to be as sympathetic as possible. And trust me, you’ll hear every justification under the sun why they’re late. But the bottom line is this: The company breached your contract.
Which means it’s time to renegotiate! A breach of contract has nearly always enabled me to renegotiate a better deal. The first time around, you were at a disadvantage. You were excited to sign a deal, period. So you gave a few things away. You wanted to make it work. Now it’s time to get a few of those things back. Because your licensee breached your contract, it will be more amenable to you. The company can’t afford to screw this up now, because so much time and money have been invested already.
I’ve used a breach of contract to reduce my licensee’s exclusivity rights, sometimes by distribution but more often by territory. The company wanted the rights to worldwide distribution when we first signed our contract (which is an impossible feat anyway); now I’m able to pick up a few countries. I’ve also renegotiated a higher royalty rate, higher minimum guarantees, and back pay for intellectual property. You may be able to carve out a way to license the idea to a different company–one that isn’t in competition with your first licensee.
My advice is to be understanding. You are partners. Act like a team player. If things are moving forward, stick with it. There’s no need to overreact. At first, you may feel shocked. You’re ready to see your product on store shelves! You’re crushed, and you wonder how this could have happened. Maybe they’re not interested after all, you think. It’s only human nature to wonder about the worst-case scenario first.
But in my experience, a breach of contract is not at all unusual. There have been instances when a licensee made its first minimum guarantee payment to me, and then decided to walk away from the deal afterwards. In those cases, I got the rights to my idea back and was able to license it to a different company.
Ultimately, receiving a blank royalty check led me to becoming more involved with the development process. Now I know to ask about scheduling and check in regularly about next steps. Realize that ship dates are moving targets; ebbs and flows will occur.
Originally published on Inc.com February 18th 2015.
