LICENSING HUGE BENEFITS BUT BEWARE OF THE PITFALLS!

pencils

Art Meets Matter merchandise showing the licensed imagery from Penguin Books

For creative artists and gift and product designers licensing can be one of the most   effective and profitable relationships. Licensing is an extremely sound way to expand your business and develop long lasting commercial partnerships. However, it’s a two-way deal and only works when each party respects the other. For licensing to succeed, like any other commercial relationship, a sound and effective communications framework is essential, two way positive and constructive feedback being a key ingredient. If this is backed by a legally structured licensing agreement which has been negotiated in good faith on ethical grounds then, if the relationship is sound, licensing may well be an effective route to company and brand expansion.

Often callers to the ACID legal hotline will ask, how much or what percentage should I ask in royalties? There are no hard and fast rules, but clearly for any licensing arrangement to work effectively the level of royalties need to be acceptable for both parties. For the originator and design creator, sufficient so that they feel that their creativity is adequately rewarded and for the manufacturer/distributor enough to offer good profit margins. Basically, a small percentage of volume sales may be as good as a large percentage of small sales, so realistic discussion about potential levels of sales is key, possibly with built-in review dates based on success. In this way if a designer/creator has established a good and honest relationship with a manufacturer/distributor the goal posts can change depending on the success of a particular product range. This will encourage the artist/designer to work positively within that partnership and can lead to better returns all round.

So what are the watch points when setting up a licensing deal? Who owns the rights?
If the licence agreement clearly states who owns the rights then if there is a problem further down the track you can refer to the agreement. It is also important to agree who is going to be responsible for pursuing any rights infringement you or the licensee? Understand the difference between assigning your rights and licensing your right. By licensing your rights you are effectively permitting someone else to exploit those rights for a certain period of time, usually in return for a ROYALTY. After that period the rights revert back to you. If you assign your rights you are TRANSFERRING ownership of those rights for good.

What’s the difference between an exclusive, sole and non-exclusive license agreement?

  1. Basically an exclusive licence restricts the licensor from granting a licence to anyone else AND exploiting those rights themselves. Thus, if you were to grant an exclusive licence to a retailer to manufacture and sell one of your designs, you would be restricted from doing the same yourself and you could not allow anyone else to manufacture or sell that design either.
  2. The benefit of granting this type of licence is that the ROYALTY you receive is likely to be greater than the royalty you would receive if you granted a non-exclusive licence.
  3. If you grant someone a sole licence, the only people allowed to exploit those rights are you and the licensee. You would not be allowed to grant a licence to someone else.
  4. If you grant a non-exclusive licence you would still be able to exploit those rights yourself and you could allow others to do so. Although the ROYALTY you would receive under these terms would be less than under an exclusive licence, the benefit would be (subject to market demands and/or geographical restrictions in the licence itself) that there would be no limit on the amount of licensees you may appoint.

Financial provisions
Most important – always ensure that you fully understand who is paying what and how royalties will be managed. There are many companies who specialise in forensic license audits and who can advise you about the best way to ensure that you are getting what is rightfully due to you. Safeguards include regular audited communications of sales. The bottom line is that if what you are licensing proves to be a good product for a licensee they will want to ensure that the relationship is based, not only on agreed method of financial probity, but of trust and fairness. By rewarding the creativity that makes a design or artwork commercially successful for both parties this makes for a better long-term relationship. It is a short term and negative strategy when licensees do not fulfil their obligations and brings licensing into disrepute. A good safeguard is to speak to others with whom the licensee works – are they trustworthy? Do they honour royalties? What is their reputation with other designers?

Adaptations/Modifications
Often modifications or adaptations are necessary to take a product to market by a licensee so it is important that you establish and clarify who will be responsible for these and how much control you have as a licensor – what you don’t want to happen is for one of your products to be modified or adapted in a way that is not acceptable to you or your brand identity.

Territories and duration
What are the limitations for use and how long will the license run? Is it just for the UK or in other territories? This must be clear and unambiguous so that if there are any disputes you can always refer to the small print.

Termination
How do you intend to terminate the agreement? Try and consider bottom line scenarios so that you have clear guidelines, acceptable to both parties, if one party wishes to terminate the agreement. How much notice is necessary, what will be the conditions for termination?

How can Intellectual Property be used creatively and successfully?
A fantastic example of a successful, long term and developing licensing relationship is that of ACID members Arts Meets Matter with giants Penguin, owners of the iconic trade mark “Penguin Books”. Tony Davis, by recognising the natural affinity between books and coffee/tea drinking, pencils and deckchairs translated this into an exciting range of award winning products sold throughout the UK. Equally, Penguin books had the vision to see the potential of this synthesis. Tony Davis had not only the creative thought to broker the deal but the business savvy and acumen to make it happen. One of the most important aspects of any collaborative design work is the agreement upon which the relationship is based. ACID has worked with both product designers and manufacturers to produce a simple to read and user-friendly re-usable licence/royalty agreement which creates a level playing field between both parties. This is positioned as an industry standard agreement to which bespoke clauses can be added to suit both parties.  The most important aspect of any relationship is NEVER have to rely on the small print but in the unlikely event that you do, ensure that the small print works for you.  Details of ACID’s re-usable industry standard licensing/royalty agreement are available from the ACID Trading area.

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