license agreement primer: sell-off
As we noted in a previous post, the term of a license agreement is how long it lasts. The parties always have the power to modify the agreement, to renew it, extend it in part or whole—in short, to change it any way they wish depending on their respective needs. But all good things eventually come to an end. For example, you may wish to explore opportunities with other manufacturers. Likewise, your licensee may find that some or all of the licensed products are not selling at the levels they once did and they’d like to wind down the arrangement.
When a license agreement’s end has come, what becomes of any product that remains in your licensee’s warehouse? A license agreement will ordinarily specify a period after the agreement ends during which the licensee can continue to sell licensed products.
After the agreement’s term ends the licensee no longer has the right to manufacture additional goods, but they may have remaining inventory of already-manufactured licensed goods which they would like the opportunity to sell through if they can. For this reason, even though the license technically ends at the end of the term, the agreement will typically allow the licensee some period of time in which to continue selling the licensed products on a non-exclusive basis. A common sell-off period is 180 days.
The sell-off period can benefit both parties, provided it is well-defined and well-managed: your licensee gets the opportunity to recoup its investment in the goods, and you receive royalties from those sales. By keeping the duration of the sell-off period relatively brief (e.g. 180 days), your licensee will be incentivized to order conservatively if it looks like the agreement is unlikely to be renewed. This can help ensure there’s a relatively small amount of inventory on hand at the end of the term, which in turn helps to ensure that you don’t see a glut of your licensed products in deep discount channels (something you may wish to avoid, as discussed in our earlier post).
Other options for remaining inventory
Even with a sell-off period, there may still be inventory remaining. A super-duper thorough license agreement will contemplate what happens then. Here are some scenarios we’ve seen:
The artist has the opportunity to buy remaining inventory at cost, or possibly less than cost. (Note: this may also be specified as an option the artist can exercise either before or during sell-off.)
The parties may mutually agree to an extension of the sell-off period.
The parties may agree upon a charitable organization to receive remaining products.
As a worst case scenario, remaining goods may have to be disposed of or destroyed. This is sad and, we hope, unlikely. Nevertheless, it’s a good idea to give it some thought up front. By doing so, you can ensure that product disposal happens in a responsible manner if it gets to that point.
We’re nearing the end of our license agreement series! On Thursday we’ll be wrapping things up with a look at those ultra-legalese terms you find at the end of most agreements. What are they for? We can assure you, it's in your interest to know and understand, so please come on back to learn more!
Please remember: The information provided on this blog and throughout our website is intended for general educational purposes only. While some information on this site relates to the law as a topic, it's not intended as a substitute for legal advice. Only a lawyer, selected by you and fully informed of the facts relating to your particular situation, can render legal advice.