license agreement primer: term & termination

Alrighty! We’re back for round three on license agreements.

Like a good story, your license agreement will have a beginning, middle and end. How it might end matters enough to figure prominently in most agreements.


Agreement “Term”

The “term” of an agreement describes how long the agreement lasts. The term is measured against a base date, usually called the “Effective Date.” Often the effective date will be the date when all the parties to the agreement have signed. Other times the parties may want the agreement to run from and end on particular dates. In that case the agreement will name a set date and define it as the “effective date.” This is why you may see an agreement in which the effective date comes much later than the signature date or already long passed when the parties sign. Most license agreements have terms stated in years. A two- or three-year term is common.

Terminating the Agreement

The word “terminate” is generally used in two senses in a license agreement, both meaning the agreement ends. One sense is the natural end to the “term” of the contract. A license agreement with a two-year term will terminate two years after the effective date.  We think of this as the happy form of termination. Here, the parties may have enjoyed a very successful licensor-licensee relationship and even want to extend the term by mutual agreement. The other sense of “terminate” is when one or the other party wants to end the license early. We think of this as the unhappy form of termination.

If a party to the agreement can terminate for any reason or no reason at all, this is a right of termination “for convenience.” Since most people enter into agreements so that the future will be more predictable, neither party is ever keen on giving the other a right of termination for convenience. On the contrary, most license agreements try to keep the parties together by spelling out conditions—usually bad behavior by one party—that must exist for the other party to terminate the agreement

A common ground for this kind of unhappy termination is where the licensee doesn’t pay a promised advance or is chronically late with or under-pays royalties. Not paying the money promised under an agreement is a “breach” or violation of the agreement’s terms. Big violations are called “material” breaches since they go to the heart of what the agreement is about. If the artist refused to turn over promised artwork that would be a material breach. Often a license agreement will expressly authorize either party to terminate in the event of the other party’s material breach.

Often the right to terminate requires you to first put your contract partner on notice and give them a chance to fix the problem. The agreement will specify a period of time (generally 30-90 days) in which the other must “cure” the issue. The “right to cure” is one of those legalese terms you’ll find in all sorts of commercial contracts. Let's look at a hypothetical situation. Our example takes it to the extreme, just for the sake of demonstrating how things might play out. Let's say you have a license agreement in which the licensee’s failure to bring a licensed product to market within a certain time frame is a specified breach of the agreement. If they missed that deadline, you’d typically have to send them a notice of default or breach telling them what they’d done wrong and demanding that they fix the situation, i.e., “cure” the problem by bringing the product to market. If the manufacturer did not timely cure the problem, then you’d have the option of treating the agreement as terminated. If you did, you’d notify the manufacturer of the termination and why. If they then went ahead and used the artwork—now in effect without permission—you might have to go to court for an order stopping them, but you’d point to the termination clause and the fact of their failure to cure as grounds for granting your request.

Still other matters listed in the agreement can be treated as grounds for “immediate” termination. A typical example would be where the manufacturer “assigns” or transfers the license to another manufacturer without your consent. The last thing you want is for your artwork to be given over to a complete stranger. By having the agreement automatically terminate if the licensee assigns the agreement without your consent, you'd be free to license the work elsewhere and to prevent both the licensee and the assignee from making and selling licensed products.

In still other situations, you might have a “partial” termination, for example, where the licensee fails to cure a defect in a licensed product and the artist refuses to approve, but several other licensed products have been successfully approved and put to market. You may want to terminate as to a specific licensed product but affirm the contract as to the remainder.

The Big Picture

Generally termination for cause, even a partial termination, is a strong measure. So long as the parties still have a mutual economic interest in the agreement, there will be a good reason to work things out without terminating or even threatening termination.

On Thursday we’ll get to the “show me the money” part, as we look at payment terms and royalties!

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.