Considerations for Trademark Licensees During The COVID-19 Pandemic
The state of emergency surrounding the Novel Coronavirus Disease (COVID-19) Outbreak and the resulting impact on global and domestic business is causing many companies to consider whether present circumstances may excuse or delay their obligations to perform under contracts entered into prior to the pandemic. For brand licensees, the current environment may make it difficult or impossible to meet certain contractual obligations within their licensing agreements, including without limitation minimum royalty, minimum net sales, minimum advertising, and other obligations. Below is a recitation of some of the legal issues that should be considered when evaluating the necessity for performance under brand licensees. In virtually all situations we recommend timely contacting the counterparties to all contractual relations impacted by the current conditions and engaging in a frank and good faith dialogue to try to achieve a mutually beneficial business solution.
• Force Majeure. A licensee in this position should discuss with counsel whether relief from certain obligations may be available under the agreement’s force majeure provisions. This requires a careful reading of these provisions to determine whether (i) the current crisis constitutes a force majeure event under the contract, and (ii) whether the particular nonperformance is one that can be excused. For example, force majeure provisions often will not excuse a licensee’s failure to pay monetary amounts owed to the licensor, meaning the licensee would not be able to rely on this provision for relief from minimum guaranteed royalty obligations or guaranteed minimum advertising payments due directly to the licensor. However, the licensee might be able to rely on this provision to excuse a failure to satisfy guaranteed minimum sales requirements, minimum advertising commitments, or other obligations.
• “Multiple Strikes” Provisions. Some license agreements contain a “multiple strikes allowed” provision, allowing for certain types of breaches to occur once or twice, without giving rise to a termination right for the licensor. Licensees should seek counsel’s advice as to whether there are any such “multiple strikes” concepts built into the agreement, which might allow the agreement to survive certain breaches by licensee.
• Frustration of Purpose and Other Legal Theories. Other legal theories may be available to a licensee looking to terminate a license agreement altogether. For example, a licensee may be able to argue that certain relief is available under the doctrines of frustration of purpose or impossibility of performance, if the licensee’s activities contemplated under the agreement are no longer possible in the current market due to governmental restrictions.
• Notice Requirements. Licensees should be aware that many contracts require written notice to the licensor within a certain timeframe if the licensee anticipates invoking relief options, such as force majeure. Moreover, particularly if a licensee wants to attempt to negotiate adjustments to contractual obligations rather than terminate the contract altogether, reaching out to the licensor in a timely manner is advisable.
For additional information, please feel free to contact Adam Cohen (at 212-519-5146, email@example.com) or Brendan McFeely (at 212-519-5188, firstname.lastname@example.org) in our Intellectual Property Department.
This memo is provided for informational purposes only.
It is not intended as legal advice and readers should consult counsel to discuss how these matters relate to their individual circumstances