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Hashish corporations and (relying on the state) manufacturers usually use license agreements to develop their manufacturers. If achieved appropriately, they could be a big driver of income for the manufacturers and licensees, and might develop the great will of the model throughout a specific territory. Nonetheless, they’re notoriously simple to botch. A foul license settlement could be devastating for a hashish model. On this publish, I’ll look at a number of the most typical issues I’ve seen in license agreements throughout a number of various states.
It might assist if I first clarify what I imply by “license settlement.” I’m utilizing the time period loosely to seek advice from a state of affairs the place an organization (a licensor) licenses its mental property (like its model title) to a 3rd get together to make use of in an outlined means. There are 1,000,000 alternative ways license agreements can take form.
One frequent instance can be a license of IP to a hashish firm for functions of producing and promoting the branded merchandise. Normally, that is the sort of license settlement I need to concentrate on on this publish.
#1 Failure to think about regulatory affect
Hashish is a extremely regulated trade. So it ought to come as little shock that regulators usually care lots concerning the sorts of people who 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. Typically, rules are so onerous that offers should be fully reformatted, prone to nice penalty to 1 or each events.
I say this lots right here, nevertheless it’s actually necessary to determine this out earlier than paying an lawyer to draft and negotiate a license settlement. Not solely will events doubtlessly waste cash by failing to try this, however they may also doubtlessly put themselves prone to regulatory penalties later down the street.
#2 Poorly outlined fee phrases
I’ve achieved extra license agreements than I can depend. Normally, they begin with a client or opposing counsel relaying agreed-in-principle deal phrases. And infrequently, I hear one thing like “royalties can be X%.” My subsequent query is all the time, “X% of what?” You’d most likely be shocked how usually I hear crickets in response.
It usually takes a variety of handholding or wrangling to determine the exact calculation of royalties. And that’s simply certainly one of myriad fee phrases. Issues like fee timing, expense funds, invoicing and price disputes, credit, and so forth. all require extra thought and element. Events usually don’t admire {that a} license settlement units the state for a long-term, typically multi-year relationship, and so are very completely different from one-time buy agreements. If events execute license agreements with unclear or obscure fee provisions, they shouldn’t be shocked when disputes inevitably come up.
#3 Unclear order course of
Whereas I spend a variety of time working my means via unclear fee phrases, by far the commonest situation I see in license agreements is an unclear order course of. Typically, license agreements fully fail to say something concerning 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. But it surely occurs on a regular basis.
To be honest, 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 will possibly promote them, then that hashish firm could have discretion as to how and when to make merchandise. However license agreements will 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 all these instances, the licensor will want some readability about the way it can order merchandise, how a lot of a lead time there should 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 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 can be paid a royalty that’s some share 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 attainable. There are a couple of potential issues that manufacturers can get actually incorrect 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 obtained little again. Alternatively, if a model units a minimal gross sales worth too excessive, the licensee could not have the ability to 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 variety of that is simply avoidable.
Savvy manufacturers have a couple of choices right here. On the very least, they may embody a contractual obligation to make use of “greatest” or “commercially affordable” efforts to promote the merchandise for the best attainable worth. However that is nonetheless fairly squishy and up for debate. Manufacturers might additionally embody “tiered” pricing choices, setting a “goal” worth and a decrease minimal worth. That means the licensee would wish to strive for the goal worth, however might have wiggle room to decrease it a bit. Or, the events might 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 positive 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 not 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 might be extraordinarily technical and complex right down to issues like font measurement and textual content placement.
Even placing rules apart, a licensee most likely desires not less than some degree of assurance that its licensor will not 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 could 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 clients ask for some approval rights over label content material. In actual fact, we normally find yourself with a licensor creating the preliminary label and modifying it primarily based on inputs from the licensee. However as with the rest, 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
Equally, hashish advertising legal guidelines are sophisticated. 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 sturdy license agreements could take issues additional, and require the licensee to abide by sure requirements or tips above and past what the foundations require. In any case, advertising supplies can each adjust to the regulation 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 downside I’ll handle at present is a license settlement’s failure to adequately defend the licensor or model. With respect to model safety, an excellent 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 usually fail to deal with 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 will need 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, akin to:
- Contractual indemnity provisions, to require the licensee to cowl the licensor’s prices ought to it’s roped right into a lawsuit because of the licensee’s conduct.
- Necessities for the licensee to obtain insurance coverage with extra insured protection for the licensor.
- Legal responsibility limitations that might restrict the licensee’s potential to get well from the licensor.
- Covenants and different provisions that might make crystal clear that the licensee (and never the licensor) remained chargeable 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 rationalization. License agreements usually require the licensor to indemnify (i.e., cowl prices) the licensee for sure issues, like if the licensee will get sued by a 3rd get together as a result of the licensor’s IP is allegedly infringing. However a licensor-friendly license settlement will usually carve out obligations the place the licensee itself did one thing incorrect. So for instance, if a licensee markets a licensor’s model in a means that results in a third-party infringement go well with, then the licensee will not be entitled to indemnification.
Conclusion
The above points are a number of the extra frequent ones I’ve seen crop up over time 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 entering into extra “unique” settlement varieties, like tri-party agreements.
For those who’re interested by different necessary provision in license agreements or different kinds of B2B hashish contracts, take a look at a few of our different posts under:
The post Widespread Pitfalls in Hashish Model License Agreements appeared first on Cramer Law.
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from Cramer Law https://lawyers-auckland1.co.nz/common-pitfalls-in-cannabis-brand-license-agreements/
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