For emerging licensees, the biggest risk isn’t the term of the deal — it’s what happens after you’ve proven the market.
If your company is about to invest in launching a licensed product or brand in a new territory or product category, the most important provisions in the licensing agreement are generally the ones governing what happens when the license term ends. Simply put, the time to protect market-creation value is usually before it exists. Once you have proven the market and demonstrated opportunity, the leverage that could have secured renewal rights, ownership protections, and an orderly exit may already belong to the licensor.
Consider the scenario. Rarely does a company receive a ready-made market, and that is especially true if you’re an emerging company taking a license for an unfamiliar brand in a new market. You may need to localize the product, work through regulatory approval, educate customers, build distribution, train personnel, fund advertising, and develop relationships with retailers and strategic partners. By year two, those efforts can begin to pay off, transforming an unfamiliar brand or technology into a commercially viable opportunity. In year three, the license expires, and the licensor, now holding proof of what the market is worth, may be free to negotiate with a larger competitor, which inherits the market you built at a fraction of the cost of creating it.
Why Incentives Diverge
At signing, the licensor needs a partner willing to accept early-stage risk. That is a narrow field, and an emerging company can win the deal on willingness alone. Once demand is proven, however, the licensor may prefer to work with a company with access to greater capital, broader distribution, or the ability to pay a larger minimum guarantee. The larger company that passed on the unproven opportunity may have been waiting and watching the new market expand.
A conventional fixed-term license can therefore produce an unintended result: the better the licensee performs, the more attractive the opportunity becomes to its replacement.
You may believe you hold a first-mover advantage. Customer familiarity, retailer relationships, and operational experience are real advantages, but none of them survives the loss of the right to sell the product. Exclusivity during the term does not solve the problem either. Nor does a general renewal provision that leaves renewal subject to the parties’ future agreement. Astute attorneys disdain that sort of “happy talk” since agreeing to agree is not worth very much in the long run. By the time renewal negotiations begin, your investment is sunk, your business depends on continuity, and the licensor has evidence of the market’s value. That is often the weakest possible negotiating position, and it is entirely predictable from the day you sign.
Negotiate Protection Up Front
Provisions that tie continued licensing rights to objective performance rather than future goodwill are usually more protective. A licensee that meets defined sales, launch, compliance, and payment milestones may receive an automatic extension, an option to renew, or a right of first negotiation or first refusal. The strongest structure is usually a renewal option with pricing set by an agreed formula, rather than a promise to negotiate later in good faith.
Performance conditions work as protection only when they are realistic and within your control. In practice, that means minimum sales targets that accurately contemplate ramp-up, supply constraints, regulatory delays, and the licensor’s own delivery obligations. Licensees frequently negotiate carve-outs as well, so that a missed target does not automatically forfeit exclusivity or renewal rights where the shortfall traces to the licensor’s actions or inactions, force majeure, product unavailability, or other agreed causes. Notice and cure rights can matter as much as the targets themselves.
Decide Now Who Owns What You Build
Much of what you create cannot easily be carried with you when the term expires. Customer lists, market data, localized marketing materials, regulatory dossiers, translations, distributor relationships, domain names, and market-specific goodwill are frequently worth more than the remaining physical inventory. Agreements that address this directly specify who owns each category, what may be used after termination, and whether the licensor can transfer licensee-developed materials or relationships to a successor. Confidentiality language alone is often insufficient because it may not cover derived data, accumulated know-how, or commercial relationships that were never confidential to begin with.
Plan the Exit Before the Launch
A balanced and thoughtful agreement will usually include a defined sell-off period for inventory and work in progress, continued trademark access and technical support during that period, and rules preventing the licensor from disrupting customer relationships before the transition is complete. Depending on the scale of your investment, you may want to consider seeking reimbursement of unamortized, pre-approved market-development expenditures if the licensor declines to renew despite satisfactory performance, or a termination payment tied to revenue, customers, or remaining investment.
Post-term competitive protections require careful tailoring. A licensor will likely resist any broad restriction on appointing a successor licensee, and reasonably so. But narrower provisions can accomplish much of the same without freezing the market. For example, a limited non-solicitation of customers introduced by the licensee, a restriction on the licensor’s use of your market intelligence, or a transition fee if identified accounts are transferred to a successor can protect the licensee.
Another excellent strategy for the licensee to consider is negotiating a matching right that operates during the term of the license, specifically, the right to match any third party offer intended to take effect at the end of the term. The well-heeled competitor watching the market grow now may have to bid against the first-mover licensee that built the market, and the licensor arrives at a genuine market price either way.
What to Negotiate While You Still Have Leverage
To quickly summarize, the provisions that can help address these risks include:
- Renewal or extension triggered by defined, measurable milestones, not mutual agreement
- Renewal pricing set by formula and calculable in advance
- Performance targets adjusted for ramp-up, supply, and regulatory delay
- Carve-outs for shortfalls caused by the licensor, force majeure, or product unavailability
- Notice and cure rights before any loss of exclusivity or renewal
- Stated ownership and post-term use rights for data, dossiers, materials, and relationships
- Limits on transferring what you developed to a successor
- A sell-off period with continued trademark access and technical support
- Reimbursement of unamortized, pre-approved market-development spend on non-renewal
- A right to match competing offers, exercisable during the term
The Commercial Point
A license in a new market is rarely just permission to use intellectual property. It can be a joint value-creation arrangement: the licensee supplies capital, execution, and local knowledge, and the licensor supplies the underlying property. A licensing agreement that reflects this economic reality can offer a far better starting point for the licensee.
Having negotiated these agreements from both sides, I would add one thing: the licensors who moved on were likely not acting in bad faith. They were responding to incentives the contract left in place. The opportunity worth negotiating for is not only the right to build a market, but a fair chance to keep the one you build.
Bradford Auerbach is a Partner with OGC and leads the firm’s Sports, Entertainment and Media practice. He brings over three decades of senior in-house counsel experience (at Disney, Philips, Qualcomm and HP) in the media, entertainment and technology industries. Brad has been involved in structuring many groundbreaking deals with a diverse range of rights holders, including NFL, NBA, NHL, HBO, MTV, ESPN, Sesame Workshop, Nickelodeon, Live Nation, Marvel Entertainment, International Olympic Committee, English Premier League, Screen Actors Guild, every significant Hollywood studio, each of the major record labels, many major book and news publishers, several world class photographers and Getty Images, among numerous others.