An automobile purchaser would exhibit poor judgment if he paid the purchase price without receiving an appropriately formalized transfer of title, and the seller would not be wise to transfer the title without having payment in hand. The representations and warrantees made by each party in a license agreement can be far more significant, financially and otherwise. Nevertheless, they may well be overlooked because they are often written in language that causes eyes to glaze over.

Licensee Obligations

Many licensor-generated agreements require the licensee to warrant that it will not attack the title of the licensor to the property or to any patent, copyright, or trademark pertaining to the property. Similarly, the licensee is usually required to assure that it will not harm, misuse, or bring disrepute to the property in any fashion, nor will it deal with the licensed products other than ethically and in compliance with applicable laws and regulations. Licensees are asked to assure that they will adhere to territorial and distribution channel restrictions, and that their own manufacturing facilities and those of any vendors are operated in compliance with local labor laws supplemented by any additional requirements that may be imposed by the licensor.

The extent of the licensee’s burden under these obligations can vary widely from one agreement to the next, and circumspect licensees recognize the need to pay close attention not only to the specific language of their required undertakings, but also to the severity of penalties for failure to conform. In some agreements, seemingly insignificant warranties can carry the “death penalty” of termination of the license and forfeiture of guaranteed royalties in the event of any violation, whether material or otherwise. Licensors’ agreements also may include specified liquidated damage provisions, often imposing a hefty fine in the event of any deviation by the licensee.

Licensor Undertakings

Perhaps not surprisingly, licensor-generated agreements seldom make far-reaching assurances on the licensor’s own behalf. Those representations that are provided may be limited to statements that the licensor has “the right to enter this agreement” (which is more an assurance of licensors having corporate authority to enter contracts in general, than that it has sufficient rights in the property). The licensor may also include a statement that its entering this particular agreement will not violate its own agreements with third parties, to the extent that this adds any substance. This sparse comfort may be coupled with a statement that the licensor’s obligations apply “to the extent that the property is owned or controlled” by the licensor. A licensee might read this as an assurance that they are being granted the license to the fullest extent possible when, in fact, the quoted words operate as a quitclaim.

Would a buyer readily pay a few thousand dollars for an automobile if the transfer of title were qualified by a thought such as, “If I actually own the car, I’m transferring absolutely all of my rights to you”? Very doubtful. Yet these sorts of provisions appear in license agreements worth many times the value of a car and often go unquestioned.

Reasons for Caution

Clearly, the licensee should seek assurance that the licensor does, in fact, own or control all rights in the property that is being licensed and that the licensor’s ownership or control is sufficient to support any grant of exclusivity being made. Representations (and indemnifications) should also be included, stating the licensee’s use of the property—as authorized under the agreement and as approved by the licensor—will not infringe third-party rights or result in adverse claims. Without these elements, the licensee has no assurance that it can market the licensed products without being at risk of claims originating with the property itself, or that another licensee won’t market directly competitive products using the property emanating from a legitimate third-party source.

If the licensee is planning to use the likenesses of actors from a property comprising licensed motion picture or other audio-visual work, it needs assurance that the licensor can convey those rights as well. Otherwise, it may have to defend claims made by the actors or their unions based on the licensee’s uses of the likenesses in its products or advertising. Similarly, if an automobile or other prop from the film is to be an element of its product line, the licensee must assure that the licensor has given a warranty that the product placement deal with the automobile manufacturer conveys rights for merchandising uses. Without this, the licensee might face a claim from yet another quarter for which it finds itself on its own.

In a corporate brand license, does the licensor assure that it has taken all of the steps necessary to procure trademark protection for the brand in the licensed product categories? If there is no trademark registration already in place that is applicable to each of the pertinent product categories, has the licensor filed “Intent to Use” applications in the U.S. and applications to register the mark in other countries of the licensed territory? What representations and warranties is it willing to put into the licensing agreement to ensure that it has the necessary rights?

Pinning It Down

Efforts to incorporate such pertinent assurances by licensors into agreements often meet resistance. Licensors may resort to arguments such as: “We are granting you absolutely all the rights that we have; we’re not holding anything back.” If the licensee is paying for the right to use the property in its product line, should it accept such a weak assurance? Stay tuned.

As seen in The Licensing Book