It’s a sign of the times.

Licensing contracts, often formulaic, are in an increasing number of  cases being rewritten to reflect the changes in business wrought by COVID-19.

While U.S. stores are beginning to re-open, many retailers have canceled, postponed or reduced orders leaving many suppliers saddled with inventory already in production or in transit when the U.S. market shut down in mid-March.

That rapid-fire closure has required a recasting of some licensing agreements to reflect lost sales and the current state of the U.S. market.

Revisiting Contracts
For example, the agency The Brand Liaison recently signed a deal that requires an agreement be “revisited” in 90 days if retail hasn’t re-opened, says its president, Steven Heller. He added that licensees are increasingly pushing for agreements that tie royalty payments to actual revenue instead of invoiced amounts.

The move to change the basis of royalty payments is a trend that came into focus with Toys R Us’ liquidation that left many licensees with steep losses, since they were required to pay royalties on uncollected accounts. And it is picking up speed amid the retail shakeout occurring during the pandemic with Neiman Marcus, Stage Stores and J. Crew filing for bankruptcy and Lord & Taylor planning to liquidate inventory once its 38 stores are re-opened. That doesn’t include other regions of the world such as the UK where Laura Ashley, Oasis, Debenhams and others filed for administration (the equivalent of bankruptcy in the U.S.).

Lack of predictability
“As the climate at retail is so unpredictable, with large and small companies filing for bankruptcy and uncollectable accounts becoming a much more prevalent issue, the definition of Net Sales is being relaxed to allow uncollectable accounts to be an allowed deduction,” says Heller. “And I really do see this a fair and just concession by licensors. Although we have seen it apparel before, the licensing industry really learned a lot from Toys R Us bankruptcy. Now with retailers on even less stable ground during and after the Corona pandemic, this issue is coming to the forefront of negotiations.”

It’s not just about whether retail opens up, but also about whether licensing-rich core activities resume. There’s lots of uncertainty, for example, about when tentpole films will have theaters to populate around the world, and similar questions about U.S. universities – many with large athletically-driven licensing programs. What happens if campuses remain closed and there are no games to be played?

Waiting game
Matt Curran, who heads up licensing at the University of Southern California, says the school is still discussing measures such as waivers and extensions with licensees as he waits to find out about whether and how the campus might reopen in the fall.

“What the real effect is we won’t know for a few months,” says Rick Van Brimmer of Ohio State. “We are considering waiving guarantees or spreading them out, because we get that licensees are having to make choices that affect both them and us.,”

“The longer we go into the summer the less time licensees will have to respond if everything does suddenly open up. It’s not so much cancellations as [that] everything is on hold. That’s really the challenge. If the world turns back by September to the way it had been, how would they get those goods made that were put on hold or cancelled?”

Force Majeure changes
The impact of the coronavirus on the licensing business also may carry with it some changes to the force majeure and other contract clauses, says Esther Jolley of the Stobbs law firm in the UK that represents several English Premier League teams as well as fashion, lifestyle and retail companies.

“We believe force majeure provisions will be better thought through and no longer treated as standard ‘boilerplate,” says Jolley.