Licensing programs that extend across international territories are a fact of life today. In fact, 37% of retail sales of licensed products worldwide occur outside the U.S. and Canada, according to The Licensing Letter’s report.
Furthermore, while US and Canadian retail sales of licensed merchandise have remained steady, other markets in Europe and Asia have been increasing since 2017.
Implementing a global licensing program can bring significant challenges, some of which are beyond your control. It’ expensive to open office around the globe and expect to comprehend every language, familiarize yourself with every local custom, or control the exchange rate.
It is simply impossible to work 24/7 across every time zone to answer questions or help licensees in faraway territories areas.
And no, you can’t make the world stop spinning all by yourself.
In order to smooth some of the bumps in the road, you can build consistency inside your organization, ensure licensees are all on the same page, strengthen your compliance practices, and tighten up your business processes.
All of this can be done with just a little bit of effort in the right areas. This will allow you to improve quality and product delivery times, and also mine more revenue and gain peace of mind.
Some of the key issues we will review in this whitepaper include:
- How to refine contract terms, including net sales, for maximum clarity.
- How to outline audit rights clearly and completely.
- How to carefully define the grant of rights, including authorized products, territory, and distribution, in detail.
- How to set up an efficient automated system to streamline royalty reporting.
DEFINING NET SALES
Defining net sales can be one of the most contentious issues in contract negotiation. Typically, net sales are defined as actual invoiced billings (sales quantity times selling price) for articles sold, less allowable deductions.
Deductions can include product returns (actual returns or allowances for returns) and discounts.
There are various types of discounts, depending on the customary and trade practices in each country.
For example, in Taiwan and China, price breaks for large-volume orders on international branded items are common and have become a customary discount practice.
Some typical scenarios globally involve volume discounts given by a retailer based on:
- The quantity of products purchased
- Discounts taken by a retailer for advertising expenses incurred
- Markdown discounts taken on sale items
- Defective-goods discounts for products that cannot be sold
- Early payment discounts
- New-store discounts for products sold by retailers in just-opened outlets
Some discounts are tied to identifiable, specific products that can be verified in a vendor agreement and traced to a licensor. These deductions from net sales are reflected on the invoice and usually are allowed.
Off-invoice discounts, on the other hand, are given to a customer for its overall business and are difficult to trace back to a single licensor. Most licensors do not allow them.
A third option is a flat discount percentage, which can be given as an allowance in lieu of actual returns.
It is vital to strongly word the definition of “net sales” in the contract to eliminate potential confusion later. Many contracts contain weak definitions of net sales, such as “net sales shall mean gross invoiced price billed to customers less customary and trade discounts.”
This does not clearly define what “customary” and “trade discounts” are nor does it clearly define what actual discounts are. Therefore, diligent contract management is absolutely critical. You must clearly refine these kinds of definitions so avoid confusion.
For example, it would be better to say:
Net sales shall mean gross invoiced price billed to customers less “allowable deductions.”
Allowable Deductions shall mean:
- Volume discounts and other discounts from invoice price (or post-invoice credits) imposed in regular course of business by Licensee’s customers, so long as Licensee can document such discounts and credits to Licensor’s satisfaction.
- The following discounts are not allowable, whether granted on invoice or as post-invoice credits. Early payment discounts, advertising allowances, markdown allowances, etc.
- Licensors must include precise language in the contract to define unauthorized uses of intellectual property and licensed products. These can include prohibiting:
- The sale of counterfeit or unapproved products.
- Selling in distribution channels or territories that are not included in the agreement.
- Selling products after the contract ends and the three- to six-month sell-off period is over.
- Sublicensing or subcontracting without licensor approval.
The definition of unauthorized uses included in the contract should be as specific as possible. Again, many contracts are quite vague, and only include verbiage such as:
- License granted under this agreement extends only to the Distribution Channels in the Territory. The licensor specifically reserves the right to manufacture, distribute, and sell licensed product outside the territory or inside the territory – other than through the distribution channels.
This general definition only mentions distribution channels and territory by name.
A more refined and better definition would be:
- Licensee shall not use the intellectual property in any way other than as authorized in this agreement. Unlicensed uses include, but are not limited to, unauthorized product, unauthorized distribution channel sales, unauthorized territory sales, or sales after authorized sell-off. Licensee agrees that any unlicensed distribution or sale of articles or items bearing intellectual property shall constitute trademark or copyright infringement, or both.
This reworded clause not only contains as many specific unauthorized uses as possible, but also notes that unauthorized uses are not limited to these examples.
In addition to defining unauthorized uses in as much detail as possible, licensors should retain the right to assess damages when unauthorized uses occur. Such uses can harm the value of the licensor’s intellectual property, reputation, brand image, and cause it to lose royalty and guaranteed income that it is entitled to.
Unauthorized uses also harm the authorized licensees since they may lose sales due to competitive disadvantages.
Many contracts do not specifically mention damages aside from a general termination clause, such as “Licensor has the right to terminate the license agreement if the licensee breaches any provision relating to the unauthorized assertions of rights.”
Damages should be outlined in the contract, and they can take many forms. Some licensors opt to charge net revenues (gross margin) for each unauthorized product sold, in which case a clause would be included in the contract that looks something like this:
- Licensee agrees that it is extremely difficult to fix actual damages which may proximately arise from such unauthorized use. Licensee agrees that the net revenues (that is, gross revenues minus only the cost of manufacturing and distribution of such products) from any such unauthorized use of the intellectual property without written authorization from licensor shall be immediately payable to licensor as damages.
Other licensors assess a penalty of double or triple the royalties due on each unauthorized product. Using a contract management system is the best solution for the predicament. All terms, conditions, and legal aspects of a contract are entered into the system.
A comprehensive contract management software will automatically cross reference your contracts and alert you instantly of any breaches or noncompliance of the contract.
The audit clause, which includes the right for a licensor to audit its licensees’ books and the requirement for licensees to retain records, is a key part of international licensing contracts. This also outlines which party covers the cost of the audit.
The requirement for licensees to maintain complete and accurate records of all transactions relating to the agreement seems straightforward, but several issues often arise.
Licensees and licensors may disagree on what “records” consist of, with licensees citing confidentiality as a reason for not granting licensors full access to sales and production records. Licensors should expect full visibility of all licensees’ records, not just those related specifically to their own activity.
This will give them a reasonable comfort level that everything has been reported. Licensors also need access to any of the licensee’s affiliates or sublicensees that are involved in the licensing agreement.
Licensors should not only demand approval of all such companies, but also ensure they have access to all their records during an audit.
Another provision of the audit clause relates to the reimbursement of audit costs. Licensors typically demand that licensees pay audit costs if they under report net sales or royalties by a certain percentage.
They also need to consider what term will trigger the reimbursement: the audit period, a set time frame (such as a quarter), or the term of the contract.
It is important to define whether the audit threshold is triggered by discrepancies in net sales or by discrepancies in royalties.
Say a licensee correctly reports net sales of $500,000 in a quarter, but calculates $50,000 in royalties using a 10% rate, rather than the 12% stated in the contract. If the contract’s audit clause states, “Audit Costs are due if net sales are underreported by 5% in any quarter,” – there would be no audit cost reimbursement because net sales were correctly reported.
However, if the contract says, “Audit Costs are due if royalties are underreported by 5% in any quarter,” – the audit threshold would be triggered, because royalties were underreported by $10,000, or 20%.
Up to now, we’ve been talking about the need to manage expectations by creating the strongest possible contract terms. But there are other factors that are key to a successful global licensing program, and they kick in once the contract is signed and the day-to-day licensing relationship begins.
One issue is the sharing of content, from style guides to samples to artwork.
The easier the mechanism is for sharing content, the faster and more efficient the product development management and approval workflow will be. Managing brand licensing digital assets in an automated system will ensure that all products developed meet contractual requirements.
This is something that may not happen without an online system, since the personnel involved in product development are not involved in contract negotiations and often have not read the contract.
Digital asset management software allows licensors to share brand licensing digital assets, approved images, text fonts, and pre-approved messaging directly with licensees.
This can be incredibly useful for brands with multiple images or other branded digital assets. Hence, licensors are enabled to give access to authorized licensees to images, guidelines, and suggestions for product development, as well as allow licensees to post images for approvals whenever needed, across any time zones.
Licensees can submit samples, link with approval history and check submission status anytime. Licensors also can limit access for new parties who are interested in the property, but not yet authorized licensees.
Developing a standardized reporting template for all licensees requires two main components: First, it must be simple for licensee to properly fill out and it must give you, as the licensor, all the information that you need – and when you need it.
Better yet, licensees can just send data generated by a system in the properly formatted files licensors accept with little to no manual intervention.
Royalty management software allows you to spot errors in royalty rates, distribution or territory violations, unauthorized or unapproved products, and other discrepancies early – often when they are easiest to rectify.
Rather than waiting for an audit to kick in two to four years down the road, you will be proactively addressing issues in real time. You can also reduce costs by keeping the process simple and lowering staffing requirements. Revenues can increase because this system will catch any late or unpaid royalties as soon as contractual deadlines occur. And it can even provide a heads-up about contracts that are about to expire, so they can be renewed or terminated in a timely manner.
Some of the discrepancies that will be detected right away include:
- Late-payment interest,
- Deduction issues,
- Incorrect guarantee offsets,
- Disallowed royalty-free sales,
- Unauthorized uses including unapproved products or territorial or distribution gaffes.
Automated royalty reporting does not only reduce costs and increase revenues – it also allows management to make better business decisions and to communicate those decisions to all licensees involved in the program.
You can spot trends, both positive and negative, highlight areas for growth, and detect important developments that might have gone unnoticed without automation.
It is simple, for example, to monitor sales by geographic region down to the zip code level, or by licensee, category, SKU, or IPs such as individual characters or images.
Using a comprehensive system with mutually acceptable automated processes and procedures, licensors and licensees gain an understanding of each other’s’ businesses and comply with the terms and conditions or trademark management.
Managing a global licensing program can possess certain challenges but these tips can be proven useful:
- Be proactive in spelling out terms and expectations.
- Clearly define terms and reporting requirements to alleviate differences in interpretation.
- Maximize communication so the right hand knows what the left is doing.
- Keep audit periods short to catch discrepancies early.
- Allow a licensing management software to easily access contracts and share information securely with relevant parties.
- Do your best to work with licensees and compromise where possible so that everyone is happy.
Streamlining licensing processes up front will enhance communications, alleviate challenges, and increase financial benefits, particularly if your licensing program is global in scope. Once systems are in place, you can expect more from your licensees and have better controls in place to ensure that your licensees, as well as your internal staff, can help you achieve your goals.
If you have any further questions about setting up a brand licensing software to integrate your contracts, royalties, and brand licensing assets, please reach out to our team at Dependable Solutions at +1 877-289-8431, +1 424-213-6663 and +44 203 882 3370 (UK) or Email us firstname.lastname@example.org.