Contract considerations for an international license agreement

contract-businessmanAs the world continues to grow and international trade on a multi-continent level has become the norm, protecting a company’s name is one of the most important things a company can do, regardless of their size or international standing.

Due to what has become almost “organic” international growth for most companies, the use of trademarks owned by U.S. Companies within Europe has grown exponentially in the last 5 years. Consequently, the use of distribution licenses across Europe has also expanded massively.

Distribution agreements and licenses essentially enable companies from one location to gain direct market access in another, often without having to do a huge amount of work. Example being, a surfboard manufacturer in California wants to sell surfboards in Europe. The demand exists for the company name, however it is not cost effective or practical for the California company to set up a base in Europe and start manufacturing there. Shipping goods is also out of the question due to import taxes. Therefore they choose to use a third party company, already established in Europe that can build and distribute their items within the region using the California company name (normally for a percentage fee).

The crucial difference here is that the company itself is not directly trying to break the market, rather, they are using a third part organization which is already established in a cunning attempt to gain access.

As crazy as it sounds, a huge number of companies that have demand in a secondary international market do not push into it for fear of trusting their company identity to another company. However, where companies do take the leap to enter a new market via this mechanism, we see some of the best and most creative license agreements. (For the purpose of this article, we are setting aside the concept of Patents and only focusing on Trade Mark use).

In order to best protect companies that are granting use of company logo (and all identifying features) to a third party in a different country, there are a number of things that need to be considered. There is the age old expression that many attorney has used across the ages, “a good contract should only be seen when it is signed and renewed between the parties”. However, those of us seasoned enough know that somewhere along the line in the relationship a dispute will arise. It is in these situations where the agreement is truly tested.

To mitigate disputes through damage limitation and protect a company that has effectively put its identity in the hands of another, there are a number of steps during the drafting phase that companies looking to issue licenses to third parties should always consider.

For those of you looking to embark upon an international license agreement, here are some key things to look out for in your drafting.

Choose your venue

The venue for dispute resolution is often the most overlooked thing. By default, a huge number of countries across the world will allow the licensee to choose the venue. That venue will almost always be their home court. Most lawyers simply accept this. Consequently, it can prove costly if things go south, making litigation sometimes pointless, unless it is over a certain amount.

Disregard this as the norm and do your research. Never be afraid to put the court of dispute resolution within the United States of America. New York has one of the most commonly used international dispute resolution systems in the world. If you can, get things on your home turf as the licensor.

Secondary to that. Outside of the United States, remember that the United Kingdom has a “uniform and open” approach to law. They will use the laws of any country within their courtrooms, providing the contract is valid and specifically says that the disputes will be resolved there and under what law the contract will be interpreted. Yes, to be clear, licenses and contracts do exist where the Chancery Court of London will apply the Laws of the State of New York in a dispute between companies from California and France.

Pick the country that has the best laws for your client and speaks the same language. Do your homework and in the event of a dispute this can pay real dividends and put you on the front foot.

Identify exactly who can authorize use of protected items

Simple as it may seem, ensure that your license contract identifies the exact people within an organization that can authorize the use of any protected items. This way, when it comes to depositions and finger pointing you can identify exactly who within an organization allowed a breach to occur. This includes both organizations. Who in the licensor’s company can authorize use and who in the licensees company can authorize use.

Electing the head of marketing is always a great idea. If the head of marketing has to keep track of everyone that utilizes protected items during the court of fulfilling the contract, then you can follow the trail much easier. Remember, if neither company keeps to this condition, then an action for breach of contract can become much stronger.

Make sure the contract automatically survives

A vast number of contracts automatically have an end date. In respect of licenses and permissive use contracts, that is insane. Yes, most well drafted contracts will have a protection clause “determining that 3 years etc. after ending of this contract…” However, draft a well-qualified survival clause, and mitigate your concerns.

Most people in business have the maxim “if it isn’t broke, don’t fix it”. When it comes to international agreements, don’t become that lawyer. Instead, require the parties to talk every year or two. Think of these agreements as more like a marriage, once it is signed, it should exist forever more unless the parties chose to vary it.

Assignment

One of the most powerful things any company can have during an acquisition is their contracts. License agreements are one of the most lucrative objects a company can own aside of tangible property. Always allow your party the right to assign such an agreement with the consent of the other side (which, cannot be unreasonably withheld). This way, everyone is still able to benefit from the contract in the event that either company is sold, adding massive financial value to the contract. More importantly, both parties still maintain their protection to veto it the assignment of the contract, in the event they do not like the new proposed party.

Although this list is non-exhaustive these are a few simple things many lawyers will overlook during the drafting phase of license agreements. Remember, the negotiating table is there for a reason, always do the best to protect the brand.

*Disclaimer: This article does not constitute legal advice.

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