Anatomy of Licensing Agreements – Part 2

Previously The Legal Supplement discussed the anatomy of a licensing agreement. These sections dealt with intellectual property grants, restrictions, ownership and enforcement obligations. Plus other important provisions like royalty payment percentages and calculations. There’s more to licensing agreements. Lets continue looking at the anatomy of a licensing agreement in the context of athlete endorsement deals.

Quality Control/Enforcement of Rights

When an athlete attaches his or her name to a product or company he or she will need to maintain some level of quality control over the company product. For example, an athlete who’s endorsing sweat pants, which turn out to be low quality, will be associated by consumers with this particular manufacturer or brand. And this association likely will hurt the athlete’s bargaining position in future athlete endorsement deals. .

Another key section is determining who must enforce the athlete’s licensed intellectual property from third party infringement. For example, if someone is selling counterfeit Tiger Woods golf apparel, will Nike or Tiger Woods be responsible for taking the initiative, and incurring legal expenses and costs, to enforce Tiger Wood’s intellectual property rights against the counterfeiter. If this is an exclusive license, then typically Nike would have the obligation to enforce Tiger’s intellectual property rights. However, Tiger or any athlete will want to make sure to reserve the right to take action if the company fails to do so within a specified time period and to seek reimbursement from the company. If the licensing agreement is non-exclusive, then typically the athlete will be the one to enforce his or her intellectual property against a third party.

A licensing agreement also contains a number of other provisions, such as liability insurance, duties to defend and indemnify, forum selection (where a dispute will be litigated) and what state laws will govern the dispute.

Indemnification and Duty To Defend

When a licensing agreement is exclusive, the endorsement company has a duty to defend that athlete. This means that should any lawsuit by a third party arise, the company has an obligation under most circumstances to provide the athlete with a defense to the lawsuit.

A related, but separate, provision deals with indemnification. The question answered here is which party, endorsement company or athlete, is responsible for paying and/or reimbursing any settlement or judgment. Generally speaking, it’s the party that can be control the risk that leads to a lawsuit. For example, an athlete whose name is associated with sporting equipment that contains a defective condition causing a user injury, has little to no ability to control the risk that occurs during product design and/or manufacturer. So the endorsement company, who is the manufacturer or who outsources it to another company, is best able to control the risk. And the endorsement company should be the party responsible for indemnifying the athlete. The athlete will also want to consider whether the indemnity agreement is general or specific.

Insurance

Most often the party responsible for providing a defense and indemnity does so through liability insurance. Insurance is essentially the shifting of risk from yourself to a third party in exchange for premium payments. So using the above licensing agreement example, the endorsement company will purchase liability insurance up to adequate limits and the athlete will want to ensure that he or she is listed as an additional insured. So the user and injured party, who sues both the athlete and endorsement company, ultimately looks to the insurance company to pay for his or her damages, while the athlete and endorsement company look to the insurance company to provide a defense and to indemnify (party the injured party’s reasonable damages).

Notice

The licensing agreement must provide how notice by the endorsement company to athlete, and vice versa, should occur. Whether by mail, e-mail or through a designated representative. Notice may come up if one party breaches the licensing agreement and the other gives the breaching party the opportunity to cure. If may come up where the athlete in the product defect example is served with the lawsuit and he or she must notify the endorsement company. It may come up if one party seeks to modify the terms of the licensing agreement or exercises its right to renew.

Forum Selection and Choice of Law

Going into the creation of a licensing agreement, both the endorsement company and athlete are on good terms going into the relationship that both will make money. But unfortunately, relationships can go side-ways, obligations are not fulfilled and expectations not met. When disputes do occur, which state laws govern the licensing agreement, and where disputes must be litigated. Licensing agreements are a unique animal in that the intellectual property is most often governed by federal law, but the agreement itself is a contract governed by state law. States adopt and use different laws so an outcome may be decided in significant party by what state laws govern the licensing agreement. And the party with superior bargaining position will want disputes to be litigated on his, her or its home turf. Or some parties desire that disputes be governed through binding arbitration outside the court system or the parties make a good faith attempt to mediate before filing a lawsuit.

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