Are Licensors Trying To Shirk Their Responsibilities?

The licensing industry has matured over the past few decades, evolving from the early years when a license was frequently concluded over lunch and relationships were paramount.

Over the years, two precepts have driven the industry. Licensors were responsible for developing and protecting their Property, and licensees were responsible for commercializing such Property on ancillary or collateral products. That was the grand bargain. In exchange, licensees paid royalties and even guarantees to the licensor. While license agreements have expanded from short-form letter agreements to lengthier, formal agreements, these two basic precepts have survived.

These two precepts are typically memorialized in the representations and warranties section in license agreements and the companion indemnification sections. The licensor represents and warrants that it owns or controls the Property, has taken steps to protect the Property, and that the licensee’s use of the Property will not infringe the rights of any third party. Similarly, the licensee represents and warrants that it has the ability to enter into the agreement, will use its reasonable efforts to commercialize the Property, will not engage in any conduct that would impair or negatively impact the Property, and will abide by the various provisions of the agreement, including the payment of royalties and guarantees.

These basic precepts form the basis of the bargain and are why licensees are willing to pay compensation through royalties and guarantees to the Licensor. They assured the licensee that they could market their products free from competition from unlicensed sources and safe from litigation by third parties challenging their right to use the Property.

A review of various license agreements over the past couple of years suggests that these basic precepts may be changing as licensors seek to reduce potential liability while abrogating their essential responsibilities as a licensor. Specifically, we’ve seen licensors:

• Expressly refuse to provide any warranty or indemnity for any liability arising from any claim that the licensee’s use of the Property infringes any trademark right of any third party or otherwise constitutes unfair competition. Some even advise the licensee to conduct its own searches and investigations to confirm that its use of the Property does not infringe the rights of any third party since the licensor shall not be liable to the licensee if such infringement occurs.
• Refuse to defend and hold the licensee harmless from any claim in any country by a third party that the licensee’s use of the Property is in breach of any third party’s rights; or
• Refuse to provide any representation and warranty or companion indemnity that the licensee’s use of the licensed Property will not infringe the rights of any third party but, perhaps worse yet, require the licensee to defend and indemnify the licensor should such an action be brought against both the licensor and licensee by such third party.

In today’s litigious society, it is certainly understandable that parties are looking to protect themselves and minimize liability. That said, the licensing industry is based on certain fundamental precepts, i.e., 1) the licensor must protect and stand behind its Property and 2) the licensee should be safe from actions brought by third parties challenging the licensee’s use of such Property; and 3) in exchange, the licensee pays the licensor royalties. Those precepts are fundamental…even in a litigious society. Perhaps even more so.