Licensing Advice from Chris Muggleton

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Sell-Off(Posted: 14-09-2009)

By Chris Muggleton

Hello!

Well it is September and if you are returning from Holiday I trust you had a good break.

This month we will discuss the issue of Sell Off.

So what is it?  Sell-Off is a period of time, usually of 90 days after the contract has ended, whereby the Licensee is permitted to sell and dispose off all remaining stock of Licensed Articles.

Are Royalties due?  Of course they are - its Licensing! The main issue is how those royalties are to be calculated; Licensors will not want products sold at exceptionally low prices (“dumping”) and will consequently stipulate that the royalty due for each unit sold must be equal to the average declared for the previous twelve months.

It is imperative that any Sell-Off clause clearly incorporates the following:

·          A clear description of the mechanics of the Sell-Off period, highlighting that such a period is not automatically granted but is triggered by the Licensee supplying detailed inventory statements by a certain date at the end of the contract period and is for a specific length of time i.e. 90 days.  Furthermore, a Sell-Off period may not be granted where a Licensee has breached the License Agreement.

·          Ensures that no further purchases/manufacture of stock may be made during the last 30 days of the contractual term.

·          Prohibits the dumping of Licensed Articles at low prices and states that Royalties paid are to be no less than the average royalty per product previously declared.

·          Royalties not maybe be offset against any Advance or Guarantee balance. Furthermore, Royalties may not be credited for Returns of products in the Sell-Off period.

·          Grants the Licensor the right to purchase some or all remaining stock at cost price.

·          Stipulates that any remaining stock after the Sell-Off period should be destroyed.

Obviously there are a number of steps that Licensors and Licensees can each do.

For Licensors, we would advise the following:

·          Establish a procedure for notifying Licensees of their requirement to submit inventory statements at the end of the contract period in order that the Licensor may grant a Sell-Off period.

·          Review a Licensee’s Sell-Off declaration thoroughly. Examine the units sold to those stated on the submitted inventory listing and look for unusually low unit prices or returns.

·          Follow up with Licensee that remaining stock has been destroyed and destruction certificates are obtained.

·          Perform an Audit of the Licensee.

For Licensees, we would advise the following:

·          Read your Sell Off clause; make sure you do what is required. Do not rely on an automatic granting off a Sell-Off period. Far better to pay royalties during a permitted Sell-Off period than be faced with punitive damages for sales of unlicensed products.

·          Destroy all remaining stock and get the destruction certified.

As ever we have only scratched the surface in this small space. However do feel free to get in touch should you require any further explanation. I can be reached at chris@licensingadvice.com

Next month I will discuss Ownership of the Property.

Chris