License Agreement Net Sales

Many licensing agreements have a percentage fee that the licensee must pay to the licensee for the sale of licensed products. This percentage is often the main point of negotiations throughout the agreement. However, the royalty base on which this levy is paid – often defined as „net sales“ (the proceeds of the sale invoiced or received decreased from certain authorized deductions) – is almost as important. This contribution focuses below on two aspects of the eligible net deduction element of the royalty base, one of many elements that the parties should carefully consider. In the retail market, the cacheting of licensed branded items has constantly boosted consumer sales. Indeed, a survey by the International Licensing Industry Merchandisers` Association (International Lima) showed that global sales of licensed products increased by 4.4% between 2015 and 2016, well above the 2.9% growth rate in global retail sales. Location of records. Consider requiring the licensee to keep all relevant books and records on their main site at least two years after a review if follow-up disputes occur. Documentation required.

The licence review provision should specify all documents that the taker must provide in the event of a review. This may include performance statements relating to the specific licensing agreement, complete records of the taker`s activities, and information about the company as a whole (including disclosure of other relationships and activities of the licensee). In many licensing agreements, net sales are the focus of concern, as this is generally the basis on which royalties are calculated. However, licensees who do not insist on a carefully thought-out definition of gross sales literally leave money on the table. This is because a licensee wants to have as little space as possible between net and gross sales amounts, with maximum exclusions or restrictions for certificates, credits or discounts that can reduce net sales. The extent of a licensee`s discretion to grant sublicensings (e.g. B if the pre-consent of the sublicensing is required, etc.) is often a highly negotiated aspect of a licensing agreement. However, even if a taker manages to obtain a margin of appreciation for sublicensing, net sales deductions allowed in Pass-Through licensing agreements may act as a „stealing clause“ that neutralizes that benefit. This is due to the fact that these deductions are often negotiated exclusively with the taker`s business model (and not with the business model of an underlicensed future). Therefore, in future sublicensing negotiations, a taker may find that the differences between the deductions allowed in the original licensing agreement and the acceptable deductions for a potential licensee render the entire sub-licensing contract commercially unenforceable.

In this case, the licensee`s participation in negotiations between licensees and sub-licensed (something the taker wanted to avoid) will be inevitable. Since the pressure on margins on retailers will not ease in the near future, it is important that licensees and licensees have more clarity on the financial – not just legal – provisions of their agreements. What for? Consider the sublicensing. In some circumstances, it may be helpful for a licensee to assign a „sublicensing.“ In this scenario, the income the underlicensor receives from the sublicensing holder should be addressed separately from the underwriter`s income from the sale of the goods. Sublicensing royalties collected by the taker should not be considered gross revenue from sales. Instead, royalties would be due on the basis of the sub-licensed`s sales and not royalty revenues from those sales. Alternatively, gross sublicensing revenues (reassages collected by sublicensed) can be distributed with the licensee at a much higher rate than the licence rate, usually 50 per cent.