Licensors and licensees can both learn lessons from the recent Court of Appeal decision in Hudson Bay Brands LLC v Umbro International Limited.
While the main issue in dispute was the authority (or lack of it) of a particular individual to bind the licensor, the fact that a dispute occurred in the first place is a salutary reminder to all parties involved in licensing transactions to ensure that licences are clearly drafted (particularly where exclusive licences are granted) and all parties understand the effect of what they have signed.
The case is also a reminder that licensing transactions can go very seriously awry and that licences are living documents which need to be closely administered by both parties – under no circumstances should licensees simply sign the licensor’s standard terms without proper review and consideration. In particular the decision highlights that failure by the licensee to insist that the licensor follows proper procedures set out in the licence as to approvals and amendments can expose licensees to serious problems at a later date if the licensor conducts a review or there is a change in personnel.
Lesson 1 – authority
Licensees – does the person you are dealing with at the licensor, or in cases where an agent is involved, the agent, have the necessary authority to give approvals or to amend the agreement?
In Hudson Bay the licensee was dealing with an employee at the licensor’s subsidiary (J). J negotiated the licence and generally administered it but did not have authority to sign it or to agree commercial terms for which she had to seek instructions – a fact of which the licensee was fully aware.
The question that came before the court was whether J had authority, whether actual or ostensible, to permit the licensee to make and sell items that did not fall within its licence – items to which J’s replacement strongly took issue with as they potentially placed the licensor in breach of other agreements to which it was a party.
In Hudson Bay it was found that J had no authority to bind the licensor where the matter in question would have required an amendment to the licence. The licensee was therefore in breach of its licence in selling the items in question.
Licensees should insist that all requests for amendments and waivers to a licence are passed to and given by an executive of the licensor. Licensees should further insist that all amendments and waivers are given in writing, particularly where the licence states that all amendments must be in writing; having to argue the effectiveness of an oral amendment or waiver in such circumstances is an uphill struggle.
Licensees should, where they are not dealing directly with the licensor, additionally insist in writing that the licensor is at all times kept informed of the actions being taken on its behalf. A key factor against the licensee in Hudson Bay was that the licensor was unaware of J’s actions. This is particularly the case where the licensee may be dealing with an agent acting on behalf of the licensor.
Licensees should additionally insist that any approvals process contains a clear statement as to who in the licensor’s organisation (or its agent) is able to give approvals and that the approvals process is followed to the letter by both parties, including the need for approvals to be given in writing. If in practice it is found that the approvals process does not work and needs amendment or the parties adopt an alternative procedure then this should be set out in writing in a signed amendment. Licensees who proceed on the basis of an approval that is not given in accordance with the agreement run the risk of a claim later should the licensor conduct an audit and find that the licence agreement has not been followed. The licensee may well have certain arguments it can run but the risk is easily avoided at the outset.
Licensors – ensure you have clear internal procedures as to how approvals and waivers are given and that staff know their respective roles and limits. Any objections to licensee’s behaviour should be raised immediately.
Lesson 2 – clear drafting
A main cause of the dispute in Hudson Bay was the definition of ‘Products’ that the licensee was licensed to produce and sell, namely ‘off-field apparel (meaning all apparel products that are not specifically intended to be used on the field of play)’. The use of words such as ‘not specifically intended’ raises difficult interpretational questions as to whose intention is to be taken into account and the precise meaning of these words.
Parties should therefore avoid using words that are open to interpretation in this way, particularly in exclusive licences, and ideally should set out precisely what is permitted under the licence.
Lesson 3 – understand what you are signing
Licensees are often tempted to sign the licensor’s standard form document without review – this is often due to a desire not to incur legal fees or not to be seen by the licensor as a troublesome licensee.
It is important, however, that licensees are clear as to their rights, obligations and liabilities under the agreement from the outset; the impact of an indemnity for example can be enormous and go well beyond what is appropriate or what would be considered acceptable by the licensee if it took advice; a brief review by an experienced lawyer will be far cheaper and quicker than litigation, the costs of which can be ruinous (before one considers management time and aggravation). Further, clauses requiring licensees to seek certain forms of insurance or waivers of subrogation may need engagement with insurers. Such matters must not be ignored.
Each party should additionally consider the appropriate law to govern the agreement. The choice of jurisdiction can also be important and advice should be sought as to whether any judgment will be enforceable. In Hudson Bay the licensee, a US company, was required by the licence to take action in the English courts, a no doubt enormously costly, time-consuming and generally troublesome requirement. As both parties had assets in the US an alternative formulation in the licence may have been for each party to have reserved the right to sue in the US courts. Such issues should not be overlooked.
For further information as to the issues raised in this case or to discuss licensing issues in general please contact Nicholas Tall, Partner, Speechly Bircham LLP on 020 7427 6697 or at firstname.lastname@example.org.