Pitfalls in Negotiating and Drafting Exclusive Licensing Deals: Lessons from Macy’s Dispute with JcPenney’s Over its Martha Stewart Product Line

When a new client contacts me for assistance in negotiating a licensing deal, the client almost always informs me that the deal is going to be an exclusive licensing arrangement.  However, when I engage the client further to tell me more about the proposed exclusivity deal, in most cases the proposed terms on the table are extremely murky and so convoluted that the exclusivity being extended is entirely subject to interpretation and often looks more like a nonexclusive relationship than the exclusive relationship that is supposedly intended.

A Forbes report on the latest developments in Macy's ongoing case against JcPenney's is a good reminder of why parties should exercise caution in entering into murky exclusive licensing contracts.  In that case, Martha Stewart  had entered into an exclusive licensing agreement in 2006 with Macy's and then entered into a second exclusive licensing agreement in 2011 with JcPenney's that attempted to work around the prior agreement with Macy's.  As might be expected. a dispute ensued and ended up in litigation, which continues four years later.

In general, I always encourage clients not to jump head-first into exclusive licensing deals because they will inevitably tie their hands with respect to limiting their ability to capitalize on future licensing opportunities, as clearly happened with Martha Stewart in its contract with Macy's.  However, clients tend to disregard this advice when they have a potential licensing deal on the table and proceed anyway, typically opting to limit the scope of exclusivity to the extent possible.  Thus, I tend to see creative drafting proposed in such agreements with terms that are only understood by the two parties in discussions and not by anyone who is not directly involved in the negotiations.  Obviously the danger in such arrangements is that the other side may conveniently decide at some point to "forget" the agreed upon interpretation and no one else will apply the same interpretation to the language previously agreed upon by the parties.

So, what are some lessons to take away from this dispute about licensing negotiations?

First of all, if you are looking to maximize the commercial licensing value of intellectual property that you own, stick to nonexclusive license negotiations and refrain from entertaining exclusive licensing offers.  Exclusive licensing offers should have a higher price tag attached to them, but just because a potential licensee is pressuring you to make your licensing offer "exclusive" does not mean that you have to cave in to its demands.

Second of all, if you agree to offer an exclusive license, refrain from offering a worldwide license and limit the scope of the license by clearly defined geographic territories such as states or regions.  Worldwide territories obviously leave open very little room for negotiation with third parties for other licensing rights.  Besides, it may make more sense to test out the commercial success of a limited territory first with the licensee before expanding the licensee's territory further.

Third of all, if you try to carve down the scope of exclusivity by something other than a geographic territory, define the scope by a clearly defined "field of use" such as an industry or specialty field.  If whatever field you limit exclusivity to is not defined so clearly that any third party could pick up the contract and understand what is intended, then your field is not sufficiently clear.  A well-drafted field of use clause will only have one easily understood interpretation and will not require further explanation by either you or the licensee to be understood.

Fourth, build in parameters to the license so that if the licensee is not meeting your revenue requirements, you can either terminate the agreement, or eliminate the exclusivity.  If you are not making the money you expected to off the business arrangement, why be stuck in a long-term, unprofitable relationship?  You are more likely to make bad decisions that get you into trouble if you are stuck in bad relationship that you cannot get out of than you would be if you had a limited arrangement that proved not to work out, since you will then have the ability to walk away from the unprofitable deal.

Fifth, consider limiting the period of exclusivity so that you can re-evaluate the scope of the relationship from time to time, and move on from a relationship that is not generating the revenues  you were anticipating.  If you have a fixed time when you can terminate an unprofitable relationship, this will allow you to jump ship and make you less inclined to try to circumvent an existing unprofitable licensing agreement.

Sixth, do not hesitate to buy a third party out of an agreement that is not working for you so that you can move on to an arrangement that is.  When you enter into a bad deal, sometimes asking for a "divorce" is the best option.  Indeed, putting some money on the table to buy your way out of the arrangement may make more sense than attempting to circumvent the existing deal, creating bad feelings with the existing licensee, and ultimately stumbling into an expensive litigation.  If the relationship is not profitable for you, it is unlikely to be profitable for the licensee either, and a mutual agreement to part ways with a buy out attached may make more sense than continuing on in a relationship that is no longer beneficial for either party.

All in all, I think that the Macy's dispute provides a good example of why intellectual property owners should proceed with caution when presented with exclusive licensing opportunities.  While exclusive offers can be very tempting, the party receiving exclusivity generally has to pay dearly for that right and is going to be commercially inclined to defend its rights to preserve the exclusivity.  The inclination to propose creative wording to carve out the scope of exclusivity is likely a good sign that you have reservations about the relationship that should probably prompt you to step back and reconsider whether a nonexclusive relationship is a better fit for your commercial needs than the exclusive relationship that has been proposed.