Contract Term – Renewal Threshold

October 20, 2018

  

One of the most confusing terms of a licensing agreement is the term of the agreement and that is not just because it is the term that is the term that we are talking about.

 

Three or five year terms are typically offered with various elements governing renewals.

 

A fixed term almost never makes any sense in a toy or game license contract.

 

The origin of this thinking comes from big deals where entertainment companies license their well-known properties like Disney Princesses or the like. The licensor is given a fixed time to prove their mettle. The licensed property is often more valuable than the licensee’s net worth and the licensor can therefore call the shots.

 

This is not true of our usual licenses. The company would ideally like a “life of product” term. That is as long as they sell the product, the contract remains in force. There is no term. This would be fine for inventors too assuming that the product succeeds and sells big numbers year after year. The problem arises when sales drop to a trickle, maybe in one or two territories and the company does not want to relinquish rights but the inventor wants the property back.

 

Most companies are loathe to offer any kind of guarantees so here is what I suggest: Do not have any term but give the company a couple of years to get up and running. After that, establish a threshold of royalty payments that represents a minimum that both agree represents a reasonable level of continuing success. If that threshold is met then the contract automatically remains in force. If the threshold is not met, then the inventor has the OPTION to request remedy. Then the company has the OPTION to make up the difference to keep things moving along to the next year. If they do not, then the inventor has an additional OPTION to demand termination. Neither side needs to exercise their options and if they do not it is possible that the contract limps along at lower levels than the threshold. This might be acceptable depending on a number of factors.

 

Note that you can apply this same approach separately to different territories.

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