Hashish corporations and (relying on the state) manufacturers typically use license agreements to develop their manufacturers. If carried out appropriately, they could be a enormous driver of income for the manufacturers and licensees, and might develop the great will of the model throughout a specific territory. Nevertheless, they’re notoriously simple to botch. A nasty license settlement might be devastating for a hashish model. On this put up, I’ll look at a few of the commonest issues I’ve seen in license agreements throughout a bunch of various states.
It might assist if I first clarify what I imply by “license settlement.” I’m utilizing the time period loosely to check with a scenario the place an organization (a licensor) licenses its mental property (like its model identify) to a 3rd social gathering to make use of in an outlined manner. There are 1,000,000 alternative ways license agreements can take form.
One frequent instance could be a license of IP to a hashish firm for functions of producing and promoting the branded merchandise. Typically, that is the type of license settlement I wish to deal with on this put up.
#1 Failure to contemplate regulatory influence
Hashish is a extremely regulated trade. So it ought to come as little shock that regulators typically care so much in regards to the sorts of those that licensed entities take care of. Mental property licensors are one such group. Many states put roadblocks in entrance of IP licensors, making it tough and even unimaginable to do license agreements. Generally, laws are so onerous that offers have to be fully reformatted, liable to nice penalty to at least one or each events.
I say this so much right here, nevertheless it’s actually necessary to determine this out earlier than paying an legal professional to draft and negotiate a license settlement. Not solely will events probably waste cash by failing to try this, however they can even probably put themselves liable to regulatory penalties later down the street.
#2 Poorly outlined cost phrases
I’ve carried out extra license agreements than I can rely. Often, they begin with a consumer or opposing counsel relaying agreed-in-principle deal phrases. And sometimes, I hear one thing like “royalties might be X%.” My subsequent query is all the time, “X% of what?” You’d most likely be shocked how typically I hear crickets in response.
It typically takes a whole lot of handholding or wrangling to determine the exact calculation of royalties. And that’s simply one in every of myriad cost phrases. Issues like cost timing, expense funds, invoicing and payment disputes, credit, and so on. all require further thought and element. Events typically don’t admire {that a} license settlement units the state for a long-term, typically multi-year relationship, and so are very totally different from one-time buy agreements. If events execute license agreements with unclear or obscure cost provisions, they shouldn’t be shocked when disputes inevitably come up.
#3 Unclear order course of
Whereas I spend a whole lot of time working my manner by unclear cost phrases, by far the commonest subject I see in license agreements is an unclear order course of. Generally, license agreements fully fail to say something in regards to the course of for making and/or ordering items. In an settlement the place the entire objective is the manufacture and sale of products, that is… an issue. Nevertheless it occurs on a regular basis.
To be honest, some license agreements might not require an order course of to be spelled out intimately. If an unlicensed model (in a state that allows it!) licenses IP to a hashish firm to make and promote merchandise to whomever it could promote them, then that hashish firm might have discretion as to how and when to make merchandise. However license agreements might not be as clear as that and you might even see conditions the place each the licensor and licensee conform to market and promote merchandise.
In a lot of these instances, the licensor will want some readability about the way it can order merchandise, how a lot of a lead time there have to be to take action, and so forth. If it isn’t clear how the events will dictate or request for these processes to occur, then issues are sure to go south.
#4 Pricing issues
Let’s return to the instance of an unlicensed model licensing its IP to a hashish firm for a full suite of producing and distribution companies. Chances are high the model might be paid a royalty that’s some proportion of the gross sales worth of every unit of product offered. So clearly, the model will need the gross sales worth to be as excessive as potential. There are just a few potential issues that manufacturers can get actually unsuitable right here.
First, some license agreements might not say something about gross sales costs. In an excessive case, the licensee may promote the merchandise at such a low fee that the model obtained little again. However, if a model units a minimal gross sales worth too excessive, the licensee might not be capable to promote any product and each events are out of luck. I’ve seen corporations on the verge of litigation over these points. In my opinion, a whole lot of that is simply avoidable.
Savvy manufacturers have just a few choices right here. On the very least, they may embody a contractual obligation to make use of “greatest” or “commercially cheap” efforts to promote the merchandise for the very best potential worth. However that is nonetheless fairly squishy and up for debate. Manufacturers may additionally embody “tiered” pricing choices, setting a “goal” worth and a decrease minimal worth. That manner the licensee would want to strive for the goal worth, however may have wiggle room to decrease it a bit. Or, the events may agree on a worth however choose to revisit it periodically relying on gross sales ranges.
#5 Packaging and labeling fiascos
I’ve seen loads of license agreements that give the licensor full discretion over what goes on a product’s packaging or labeling. Which may be nice for merchandise that aren’t over-regulated, however it may be an issue for hashish transactions. Hashish label legal guidelines are notoriously sophisticated – a lot in order that I’ve had no less than just a few adjustments on 100% of the labels I’ve reviewed. For instance, California has totally different units of detailed necessities that apply to manufactured and non-manufactured merchandise which can be extraordinarily technical and complex all the way down to issues like font dimension and textual content placement.
Even placing laws apart, a licensee most likely desires no less than some stage of assurance that its licensor shouldn’t be going to do one thing that brings an infringement case on the licensee (see right here for some examples). So leaving a label as much as a licensor, who might not even be a licensed firm, is a serious threat.
When I’m representing the IP licensee, one of many first issues I do is have a look at who makes the decision on labeling content material. I don’t see a ton of pushback when licensee shoppers ask for some approval rights over label content material. The truth is, we normally find yourself with a licensor creating the preliminary label and enhancing it primarily based on inputs from the licensee. However as with anything, it’s necessary to get this within the contract in order that there are usually not disputes later down the street.
#6 No guardrails on advertising and marketing
Equally, hashish advertising and marketing legal guidelines are sophisticated. If a license settlement permits licensees to conduct advertising and marketing actions, the license settlement ought to on the very least obligate the licensee to adjust to legal guidelines whereas doing so. However sturdy license agreements might take issues additional, and require the licensee to abide by sure requirements or pointers above and past what the foundations require. In any case, advertising and marketing supplies can each adjust to the legislation and trigger hurt to the repute of the licensor or good will of the licensed model.
#7 Failure to guard the licensor and model
The ultimate frequent drawback I’ll deal with at the moment is a license settlement’s failure to adequately defend the licensor or model. With respect to model safety, a superb license settlement will embody a laundry record of provisions limiting how the licensee can use, sublicense, or delegate the licensed IP, and would require the licensee to offer help in or take part in mental property disputes. With out locking a licensee’s use in place, the licensor may jeopardize authorized safety for its model. And this completely defeats the aim of the license.
Extra broadly although, license agreements typically fail to handle potential hurt to the licensor itself. Within the instance I’ve been utilizing right here – a model licensed to an organization for manufacture, distribution, and gross sales – the licensor would haven’t any half within the manufacturing and distribution course of. In that case, it might wish to be shielded from legal responsibility to the utmost extent potential. There are a number of contractual provisions that the licensor may embody to perform this, corresponding to:
- Contractual indemnity provisions, to require the licensee to cowl the licensor’s prices ought to it’s roped right into a lawsuit on account of the licensee’s conduct.
- Necessities for the licensee to acquire insurance coverage with further insured protection for the licensor.
- Legal responsibility limitations that might restrict the licensee’s means to get better from the licensor.
- Covenants and different provisions that might make crystal clear that the licensee (and never the licensor) remained answerable for sure conduct.
- Carveouts from indemnification or legal responsibility limitation provisions that profit the licensee if the licensee engaged in prohibited conduct.
This final level bears a bit extra clarification. License agreements typically require the licensor to indemnify (i.e., cowl prices) the licensee for sure issues, like if the licensee will get sued by a 3rd social gathering as a result of the licensor’s IP is allegedly infringing. However a licensor-friendly license settlement will typically carve out obligations the place the licensee itself did one thing unsuitable. So for instance, if a licensee markets a licensor’s model in a manner that results in a third-party infringement swimsuit, then the licensee might not be entitled to indemnification.
Conclusion
The above points are a few of the extra frequent ones I’ve seen crop up through the years I’ve reviewed, drafted, and negotiated license agreements. They’re certainly not unique and there might be many different issues, particularly while you begin entering into extra “unique” settlement varieties, like tri-party agreements.
If you happen to’re occupied with different necessary provision in license agreements or different kinds of B2B hashish contracts, try a few of our different posts under: