Licensing Advice from Chris Muggleton

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Licensee Affiliated entities(Posted: 04-05-2012)

By Chris

Hello!

This month we will discuss the issue of Licensee Affiliated entities.

Where a Licensee is part of a large group of companies, with Licensed Articles being transferred internally between the group companies, it is advisable that any License Agreement correctly defines how royalties are to be calculated if Licensed Articles are transferred between Affiliates.

As per our previous articles, our discussions are limited to the “mythical” Standard Merchandise License Agreement.  The aim of any Affiliate clause is to ensure Royalties are paid on all sales/transfers of Licensed Articles and that the Royalty due is no less than that would have been had the Licensee sold to a third party customer.

So why is this so important? Well, as mentioned above, it is to ensure that consistent Royalty revenue is paid. I have audited Licensees who have declared royalties on sales to an affiliated entity calculated on Net Invoice Billings ^1.which were in reality either: the stock value; the cost price; or transferred at a zero/nominal value. In each instance it was the affiliated entity which sold the Licensed Article to third party customers at the normal selling price. The effect being that the royalty owed to the Licensor had been greatly reduced.

It is imperative that any Affiliate clause incorporates the following:

·          Defines what an affiliate is, be it via shareholding, relationship (business or personal) or common control;

·          That the Licensee should declare all sales or transfers of Licensed Articles to an affiliate;

·          That Royalties owed on such movements should not be less than those owed on an sale to an non-affiliated entity;

·          Should an affiliate be a Re-Seller of Licensed Articles the Royalties owed should be the greater of the Royalties calculated on the sale to third party customers or the transfer price to the affiliates.

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

Okay well I am off to sort out my arrangements for the Licensing Show in Las Vegas.

Next month I will discuss Giveaways & Promotions.

Chris

^1. For more discussion regarding Net Invoice Billings, please refer to our Article for February.