Sixteen months ago, companies in all facets of the licensing community were scrambling to adjust to a world turned upside down. Our webinar on “Creative Solutions to Licensing Issues Caused by Coronavirus” drew the largest attendance of any we’d ever done to that point, as manufacturers, brand owners and agents tried to find ways to deal with market conditions none could have anticipated. The everyday business vocabulary suddenly included references to “force majeure.”

Fast forward to today, and it’s difficult to gauge whether agreement adaptations made during 2020 are carrying forward into (cliché alert!) a new normal.

Reverting to Pre-COVID Norms
Judging by conversations we’ve had in the past few days, the licensing business in large part has reverted to pre-COVID norms, particularly for big entertainment properties, though not without pushback from licensees who are cognizant of how many big properties were delayed into 2022 and beyond, creating a potential glut.

But that doesn’t mean there haven’t been shifts. There’s much closer scrutiny of force majeure – a term that carried decidedly less prominence pre-pandemic – and in some cases, dropping annual minimum guarantees (MGs) from contracts and replacing them with sales thresholds that are required to be met or risk losing the license.

Says Steven Heller, founder of The Brand Liasion (and the person who presented the webinar cited above): “We have done a few ‘shopping licenses,’ where we are working closely between brand owner and licensee to develop the collection, and sampling, and together approach the key appropriate retailers. If we get the program, then the license is business as usual.  But the licensee didn’t have to pay up front until we all know it was placed.”

Eye on eComm, DTC, POD
An increasing number of brand owners are looking with a more critical eye on potential licensees’ eCommerce, direct-to-consumer (DTC) and, in some cases, print-on-demand (POD) capabilities and relationships. Some contracts have separate provisions for these businesses, creating situations in which separate agreements — one for wholesale and another for POD – are crafted with the same licensee, or with different companies.

“With so many consumers purchasing online during the pandemic, licensors are looking for licensees that have an ecommerce business or print-on-demand or strictly ecommerce because that is very appealing to them,” says one agency executive. “They will carve out deals for that platform even if they already have another licensee on board because having that channel is quickly becoming a requirement. They can charge guarantee and royalty and they aren’t cannibalizing a business.”

The POD and DTC strategies and clauses are examples of “more abstract conversations around performance metrics and more creative thinking around ways to get to an agreement,” says one toy licensee. “The days when studios were dictating what their properties could get are waning for the most part. Certainly, with TV properties and wide swath of movie properties, where they once called their terms and expect universal interest are waning because it’s just too competitive now.”

Force majeure clauses in licensing contracts, which existed but didn’t draw much attention or definition, are part of the conversation now.  Part of it is the natural pull and tug of negotiation. “The tension is coming from both sides because both are looking to protect against a worst-case scenario,” says one agent. “Licensees want reduced obligations, and licensors don’t want to be hung out to dry or have a force majeure ripcord that allows a licensee out of their marketing and financial requirements.”

And some licensees, despite asking for it, realize that dropping annual MGs from agreements and going with a royalty payment-only contract is “pie in the sky,” says an executive at a European apparel licensee. “What is the point of having a licensee in place if you are not going to get any guarantees about anything?” says executive. “You might as well do the business yourself.”

In some cases, that hard line has softened coming out of a year like no other. More than one brand owner and agent tells of extending a license’s term in order to have sales from two holiday seasons to draw from in trying to meet MGs.

“Some licensors are allowing licensees to extend out to earn out their guarantee because this is still not a normal year” given that many companies haven’t been able yet to make up business lost in 2020,” says another agency executive. “Many licensees plan their business a year out and know already whether they are going to do really well or have a shortfall in which another holiday season means they will able to meet the MG.”

Yet the hangover from a year ago is making some licensee hesitant to take on new properties until markets fully stabilize.

“If I was looking a new property now, it would be very difficult to sign up for any type of commitment,” says Ross Patterson, President of home goods supplier Robinson Home Products, which was given extensions by Hearst (Delish Essential bakeware, kitchen tools and gadgets, dinnerware) and Nickelodeon (SpongeBob SquarePants, JoJo Siwa and Paw Patrol Chip Clips) for products that were introduced during the pandemic.

“It’s the world we are in right now. If things to return to normal, licensors will probably ratchet things back up, but right now we are finding them open and receptive to conversations regarding contract terms or redefinitions.

“We signed the terms under normal economic conditions, not a global pandemic. Licensors have to be somewhat accepting of that. If they played a heavy hand, it might hurt their chances of renewing a contract. So there is some level of flexibility.”