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Griffen Thorne
Hashish corporations and (relying on the state) manufacturers typically use license agreements to develop their manufacturers. If executed accurately, they could be a enormous driver of income for the manufacturers and licensees, and might develop the great will of the model throughout a selected territory. Nonetheless, they’re notoriously straightforward to botch. A foul license settlement could be devastating for a hashish model. On this submit, I’ll look at a number of the most typical issues I’ve seen in license agreements throughout a number of various states.
It could assist if I first clarify what I imply by “license settlement.” I’m utilizing the time period loosely to seek advice from a scenario the place an organization (a licensor) licenses its mental property (like its model title) to a 3rd social gathering to make use of in an outlined method. There are one million other 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. Normally, that is the type of license settlement I wish to give attention to on this submit.
#1 Failure to contemplate regulatory impression
Hashish is a extremely regulated business. So it ought to come as little shock that regulators typically care loads in regards to the varieties of folks that licensed entities take care of. Mental property licensors are one such group. Many states put roadblocks in entrance of IP licensors, making it troublesome and even unattainable to do license agreements. Generally, laws are so onerous that offers have to be fully reformatted, susceptible to nice penalty to at least one or each events.
I say this loads right here, however it’s actually essential to determine this out earlier than paying an lawyer to draft and negotiate a license settlement. Not solely will events probably waste cash by failing to do this, however they can even probably put themselves susceptible to regulatory penalties later down the highway.
#2 Poorly outlined cost phrases
I’ve executed extra license agreements than I can rely. Often, they begin with a consumer or opposing counsel relaying agreed-in-principle deal phrases. And infrequently, I hear one thing like “royalties can be X%.” My subsequent query is at all times, “X% of what?” You’d in all probability be shocked how typically I hear crickets in response.
It typically takes a number of handholding or wrangling to determine the exact calculation of royalties. And that’s simply one in all myriad cost phrases. Issues like cost timing, expense funds, invoicing and charge disputes, credit, and so forth. all require further thought and element. Events typically don’t respect {that a} license settlement units the state for a long-term, generally multi-year relationship, and so are very completely 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 number of time working my method by way of unclear cost phrases, by far the most typical 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 goal is the manufacture and sale of products, that is… an issue. Nevertheless it occurs on a regular basis.
To be truthful, some license agreements could 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 actually promote them, then that hashish firm could have discretion as to how and when to make merchandise. However license agreements is probably not 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 circumstances, 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’s not clear how the events will dictate or request for these processes to occur, then issues are certain 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. Likelihood is the model can be paid a royalty that’s some proportion of the gross sales value of every unit of product bought. So clearly, the model will need the gross sales value to be as excessive as attainable. There are a couple of potential issues that manufacturers can get actually mistaken right here.
First, some license agreements could not say something about gross sales costs. In an excessive case, the licensee might promote the merchandise at such a low price that the model received little again. Alternatively, if a model units a minimal gross sales value too excessive, the licensee could not be capable of promote any product and each events are out of luck. I’ve seen corporations on the verge of litigation over these points. For my part, a number of that is simply avoidable.
Savvy manufacturers have a couple of choices right here. On the very least, they might embody a contractual obligation to make use of “finest” or “commercially affordable” efforts to promote the merchandise for the best attainable value. However that is nonetheless fairly squishy and up for debate. Manufacturers might additionally embody “tiered” pricing choices, setting a “goal” value and a decrease minimal value. That method the licensee would want to attempt for the goal value, however might have wiggle room to decrease it a bit. Or, the events might agree on a value however decide 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 tremendous for merchandise that aren’t over-regulated, however it may be an issue for hashish transactions. Hashish label legal guidelines are notoriously complicated – a lot in order that I’ve had no less than a couple of modifications on 100% of the labels I’ve reviewed. For instance, California has completely different units of detailed necessities that apply to manufactured and non-manufactured merchandise which can be extraordinarily technical and sophisticated right down to issues like font dimension and textual content placement.
Even placing laws apart, a licensee in all probability needs no less than some stage of assurance that its licensor isn’t going to do one thing that brings an infringement case on the licensee (see here for some examples). So leaving a label as much as a licensor, who could not even be a licensed firm, is a significant danger.
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. In reality, we normally find yourself with a licensor creating the preliminary label and modifying it based mostly on inputs from the licensee. However as with the rest, it’s essential to get this within the contract in order that there usually are not disputes later down the highway.
#6 No guardrails on advertising
Equally, hashish advertising legal guidelines are difficult. If a license settlement permits licensees to conduct advertising actions, the license settlement ought to on the very least obligate the licensee to adjust to legal guidelines whereas doing so. However robust license agreements could 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 supplies can each adjust to the regulation and trigger hurt to the popularity of the licensor or good will of the licensed model.
#7 Failure to guard the licensor and model
The ultimate frequent downside I’ll tackle right now is a license settlement’s failure to adequately defend the licensor or model. With respect to model safety, a great license settlement will embody a laundry listing of provisions proscribing how the licensee can use, sublicense, or delegate the licensed IP, and would require the licensee to supply help in or take part in mental property disputes. With out locking a licensee’s use in place, the licensor might 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 don’t have 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 attainable. There are a number of contractual provisions that the licensor might embody to perform this, reminiscent of:
- 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 obtain insurance coverage with further insured protection for the licensor.
- Legal responsibility limitations that may restrict the licensee’s potential to recuperate from the licensor.
- Covenants and different provisions that may make crystal clear that the licensee (and never the licensor) remained liable 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 mistaken. So for instance, if a licensee markets a licensor’s model in a method that results in a third-party infringement swimsuit, then the licensee is probably not entitled to indemnification.
Conclusion
The above points are a number of the extra frequent ones I’ve seen crop up through the years I’ve reviewed, drafted, and negotiated license agreements. They’re on no account unique and there could be many different issues, particularly once you begin moving into extra “unique” settlement varieties, like tri-party agreements.
In the event you’re enthusiastic about different essential provision in license agreements or different kinds of B2B hashish contracts, try a few of our different posts under:
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