Sealing the Deal
The process for formalizing a workable licensing or co-publishing partnership consists of having three documents in place:
- A mutual non-disclosure (NDA) agreement.
- A term sheet.
- A binding agreement or contract.
Mutual Non-disclosure
Regardless of the nature of the deal and how eager both parties are to conclude the negotiations, it’s always prudent to sign a mutual non-disclosure (NDA) or confidentiality agreement. An NDA is meant to be a preliminary document that can serve as the first step in executing a term sheet and ultimately a final, binding agreement. An NDA will permit potential partners to exchange information freely, including any data or documents that might be considered to be proprietary or confidential. Although an NDA is more common, and essential, in software licensing, where exchanging code can present real business risks to the developer if the code were to be made public, it’s a good idea to have a written document for the exchange of IP that lists any proprietary issues and specific content or creative output that are tied to the publisher’s brand, patents, trademarks, or copyrights.
The NDA must be mutual, meaning that both parties are equally responsible for maintaining the confidentiality of the discussions until a contract is signed, and for securing all documents and correspondence that are exchanged during the negotiations. The NDA should require both parties to destroy any documentation related to the other party’s IP or the nature of the relationship in the event that they could not come to an agreement. An NDA should have a term limit of between two and five years regardless of whether the deal goes forward or falls apart for any reason, including simple apathy.
The Term Sheet
Assuming that both parties have determined that they are going to proceed with a formal contract, they should exchange a concise list of terms and conditions, or a term sheet, that describes the basic elements of the deal, what the mutual obligations are, and expectations of a successful outcome for both parties. This can be as simple as a bulleted list or outline of intentions, roles, and responsibilities, the resources that will be employed, and the anticipated financial commitments. The primary purpose of the term sheet is to expose any issues or areas of disagreement that need to be resolved prior to formalizing an agreement and to get a sound, mutual understanding in place before the partnership is official. Often it’s easier to “see” the structure of a relationship in a term sheet prior to setting in stone the formal language in a legal document. The term sheet should be a simple listing or outline, a basic description, in plain language, of commitments that each party is willing to make. I would not begin to generate a formal document until the term sheet is agreed upon by both parties.
Using the mutually agreed-upon term sheet, both parties can proceed to formalize the relationship and make it legal by recording the terms and conditions in a binding licensing agreement or contract. Small publishers that do not have a legal department or even a standard licensing agreement on hand do not have to rush out immediately and hire an attorney to have one produced. Chances are the partner will have one that will be perfectly acceptable. However, before anyone signs anything, especially someone else’s standard form, both parties should have an IP attorney on each side ensure that the document accurately represents the agreed-upon business goals and the spirit of the term sheet, and protects joint corporate interests.
A Standard Agreement
Most international publishers that license their content or products out to other publishers as a regular part of their business activity have a standard agreement—in English—that should serve both parties’ purposes well. The same will be true of publishers that are accustomed to licensing content from other publishers. Whatever the starting point, after the terms and conditions are agreed upon and incorporated into a formal document, it needs to be reviewed and approved by an attorney who specializes in IP, particularly if the agreement came from a basic boilerplate template that is used for multiple types of partnerships or vendors.
In the course of doing several agreements, publishers new to licensing are eventually able to piece together an agreement that satisfies most of their licensing purposes. Over time, it will likely need to be refined and revised as they gain more experience or as new situations demand. But I don’t know of any publisher who is particularly possessive about the agreement itself or rigid about the specific language of the agreement. If it seems to meet the needs of both parties and covers the general business goals, it should be able to serve most licensing situations. These kinds of documents are not highly regulated, so the particular language used in them will vary from publisher to publisher.
Licensing agreements normally consist of five sections:
- definitions of terminology and other legal covenants that are described in the agreement;
- the terms and conditions of the business transaction itself, or what the partners are agreeing to buy or sell from each other;
- the specifications of the IP that is being licensed as well as the format in which the content will be transferred;
- the roles and responsibilities of both parties; and
- the termination triggers, which attempt to address what happens if and when things go wrong—or causes the relationship to end—to avoid any unnecessary legal intervention at the end of a relationship.
Although the business terms of the agreement are not subject to any prescribed legal standards, an attorney should make sure that the relationship does not put the company at risk and that the commitments being made are enforceable. Attorneys can clarify legal terminology or warranties and incorporate standard terms and conditions that may be required by the firm.
If the licensing agreement also allows for the transfer of code, or if it includes ongoing software or Web services, someone from the IT staff should review the agreement as well.
Assuming that the legal parameters of an agreement are covered, the business manager, not an attorney, should assume responsibility for justifying and explaining the basis of the transaction to upper management and the execution team. Articulating the terms and conditions of any agreement should be a business function, not a legal one. An attorney can help structure the language so that it reflects the business manager’s intentions and goals, protects the IP, and ensures that the deal is consistent with any other legal commitments that others in the company may have made. But the final acceptance and sign-off should be made by the business manager.
Below is a brief summary of the main points and standard terms and conditions that need to be included in any agreement, and which are more fully rendered in the sample form:
- Identification and place of business of the parties entering into the agreement, as well as where the parties are incorporated if different from the place of business.
- A clear description of the IP.
- The grant of rights, or what the owner of the IP is interested in providing to the licensee. (This may require detailed elaboration in an appendix to the licensing agreement.)
- Specific rights that are excluded.
- The territory or places where the licensed property can be sold and any re-licensing rights.
- Warranties indicating that the licensor owns the property in question and has the right to enter into a licensing agreement, as well as any restrictions or encumbrances that may apply.
- The term of the agreement—how long the licensee will have rights in its territory—and what performance hurdles will be required in order to extend those rights.
- The quantity and price agreed to if the licensee is buying finished goods.
- Deliverables required, such as electronic files, transcripts, or original art, if the licensee is handling production and manufacturing.
- Terms of payment, specifying royalty rates and any advance against those royalties as well as minimum guarantees.
- Copyright and trademark notices, including specific language that both parties require.
- A final publication date.
- Notice of the reversion of rights, back to the licensor, when the term of the agreement expires or if the publication date isn’t met.
- The state’s/province’s or country’s laws that govern the agreement and where any arbitration will take place in the event of a dispute.
- Actions, or negligence, that constitutes a breach of the agreement, and the remedies—and required timeframe for making the remedies—in the event of a breach.
In addition to the above, the contract must allow for worst-case scenarios—for example, in the case of copyright or trademark infringements, bankruptcies, acts of war and God, and other dire events. These rarely come up in licensing deals, but they must be considered: companies can go bankrupt; they can be bought and sold soon after a deal is signed; and books and other physical materials can sometimes be lost at sea, literally. Most boilerplate agreements will have these clauses spelled out; an attorney should make sure that they are either slanted in the client’s favor or, at the very least, apply equally and fairly to both parties. At the end of the day, the best agreement is one that enables both parties to achieve their goals, sets the stage for additional deals, and provides the basis of a trusting relationship and not just a one-time transaction.
Since licensing agreements are often between companies that operate in different countries, three common issues may need to be negotiated:
- which country’s laws govern the agreement;
- where legal disputes are to be resolved;
- the currency that payments will be made in.
Usually whoever is marketing the licensed property will expect the agreement to be governed by the laws in their country and to have any legal disputes settled there as well. In addition, the licensee, in this case, will probably prefer to make payments in its local currency to avoid taking any risks with exchange-rate fluctuations.
One way to resolve the venue problem, and how to determine whose laws to adopt, is to apply the laws of a neutral country, such as Switzerland, and to choose a location that is equally difficult to get to by both parties. This avoids favoring one side over the other and helps to keep the resolution of problems where they belong—out of the courts and between the business groups of the two parties.
Regarding the currency used in making payments, most people will agree to convert to U.S. dollars or British pounds if they can be shielded from an unfavorable foreign-exchange rate. Naturally, international publishers will calculate their royalty obligations in their local currency and then convert the amounts owed prior to making payments. Often the conversion rate is written into the agreement. If it is, it shouldn’t be fixed for the entire term. The contract should allow for the conversion rate to be reviewed quarterly or prior to the due date, and adjusted, if necessary, against the current prevailing rate. The parties may have to agree on a fluctuation range that will be mutually acceptable.
Both parties will go through a learning curve to determine whether the minimums were appropriate or not, and sometimes failing to achieve these minimums may not be anyone’s fault. Before the licensor pulls the plug on a partner for not meeting minimums, especially a partner that operates in good faith, it should make sure that it really understands the market, that it has evidence that the product is being undersold, and that it believes that the product is better off in someone else’s hands. I wouldn’t change partners without a good reason. It’s much better to fix a product problem or a poor marketing plan than to develop a new mutually beneficial relationship.
In short, the same flexibility that is built into the development and production process must also be applied once the product is rolled out for sale. Here too, regardless of what is explicitly stated in the agreement, unexpected issues will arise and both parties may need to make adjustments to save the relationship and the viability of the product. At all times, common sense should prevail, and every participant in the relationship should assume that both sides are operating in good faith, and work towards an amicable resolution to unanticipated challenges from market conditions, competitive products, and any outside event.
