Common Pitfalls in Cannabis Brand License Agreements

Hashish corporations and (relying on the state) manufacturers usually use license agreements to develop their manufacturers. If completed accurately, they could be a big driver of income for the manufacturers and licensees, and might develop the nice will of the model throughout a specific territory. Nevertheless, they’re notoriously straightforward to botch. A foul license settlement may be devastating for a hashish model. On this put up, I’ll study a number of the commonest issues I’ve seen in license agreements throughout a number of various states.

It might assist if I first clarify what I imply by “license settlement.” I’m utilizing the time period loosely to seek advice from a scenario the place an organization (a licensor) licenses its mental property (like its model title) to a 3rd social gathering to make use of in an outlined manner. There are 1,000,000 other ways license agreements can take form.

One widespread instance can be a license of IP to a hashish firm for functions of producing and promoting the branded merchandise. Normally, that is the sort of license settlement I need to deal with on this put up.

#1 Failure to think about regulatory impression

Hashish is a extremely regulated business. So it ought to come as little shock that regulators usually care loads in regards to the kinds of people who licensed entities take care of. Mental property licensors are one such group. Many states put roadblocks in entrance of IP licensors, making it tough and even inconceivable to do license agreements. Generally, laws are so onerous that offers have to be fully reformatted, prone to nice penalty to at least one or each events.

I say this loads right here, but it surely’s actually vital to determine this out earlier than paying an lawyer to draft and negotiate a license settlement. Not solely will events probably waste cash by failing to try this, however they may even probably put themselves prone to regulatory penalties later down the highway.

#2 Poorly outlined fee phrases

I’ve completed extra license agreements than I can depend. Normally, they begin with a shopper or opposing counsel relaying agreed-in-principle deal phrases. And infrequently, I hear one thing like “royalties will probably be X%.” My subsequent query is at all times, “X% of what?” You’d in all probability be shocked how usually I hear crickets in response.

It usually takes quite a lot of handholding or wrangling to determine the exact calculation of royalties. And that’s simply considered one of myriad fee phrases. Issues like fee timing, expense funds, invoicing and price disputes, credit, and many others. all require extra thought and element. Events usually don’t respect {that a} license settlement units the state for a long-term, generally multi-year relationship, and so are very totally different from one-time buy agreements. If events execute license agreements with unclear or obscure fee provisions, they shouldn’t be shocked when disputes inevitably come up.

#3 Unclear order course of

Whereas I spend quite a lot of time working my manner by unclear fee phrases, by far the most typical challenge I see in license agreements is an unclear order course of. Generally, license agreements fully fail to say something in regards to the course of for making and/or ordering items. In an settlement the place the entire objective is the manufacture and sale of products, that is… an issue. But it surely occurs on a regular basis.

To be truthful, some license agreements might not require an order course of to be spelled out intimately. If an unlicensed model (in a state that allows it!) licenses IP to a hashish firm to make and promote merchandise to whomever it may well promote them, then that hashish firm might have discretion as to how and when to make merchandise. However license agreements might not be as clear as that and you might even see conditions the place each the licensor and licensee conform to market and promote merchandise.

In a lot of these circumstances, the licensor will want some readability about the way it can order merchandise, how a lot of a lead time there have to be to take action, and so forth. If it’s not clear how the events will dictate or request for these processes to occur, then issues are certain to go south.

#4 Pricing issues

Let’s return to the instance of an unlicensed model licensing its IP to a hashish firm for a full suite of producing and distribution companies. Chances are high the model will probably be paid a royalty that’s some share of the gross sales worth of every unit of product bought. So clearly, the model will need the gross sales worth to be as excessive as doable. There are a number of potential issues that manufacturers can get actually incorrect right here.

First, some license agreements might not say something about gross sales costs. In an excessive case, the licensee may promote the merchandise at such a low price that the model obtained little again. Then again, if a model units a minimal gross sales worth too excessive, the licensee might not be capable to promote any product and each events are out of luck. I’ve seen corporations on the verge of litigation over these points. For my part, quite a lot of that is simply avoidable.

Savvy manufacturers have a number of choices right here. On the very least, they might embrace a contractual obligation to make use of “greatest” or “commercially cheap” efforts to promote the merchandise for the best doable worth. However that is nonetheless fairly squishy and up for debate. Manufacturers may additionally embrace “tiered” pricing choices, setting a “goal” worth and a decrease minimal worth. That manner the licensee would wish to strive for the goal worth, however may have wiggle room to decrease it a bit. Or, the events may agree on a worth however choose to revisit it periodically relying on gross sales ranges.

#5 Packaging and labeling fiascos

I’ve seen loads of license agreements that give the licensor full discretion over what goes on a product’s packaging or labeling. Which may be effective for merchandise that aren’t over-regulated, however it may be an issue for hashish transactions. Hashish label legal guidelines are notoriously difficult – a lot in order that I’ve had a minimum of a number of adjustments on one hundred pc of the labels I’ve reviewed. For instance, California has totally different units of detailed necessities that apply to manufactured and non-manufactured merchandise which can be extraordinarily technical and sophisticated all the way down to issues like font measurement and textual content placement.

Even placing laws apart, a licensee in all probability desires a minimum of some stage of assurance that its licensor isn’t going to do one thing that brings an infringement case on the licensee (see right here for some examples). So leaving a label as much as a licensor, who might not even be a licensed firm, is a significant danger.

When I’m representing the IP licensee, one of many first issues I do is take a look at who makes the decision on labeling content material. I don’t see a ton of pushback when licensee shoppers ask for some approval rights over label content material. In actual fact, we normally find yourself with a licensor creating the preliminary label and modifying it based mostly on inputs from the licensee. However as with anything, it’s vital to get this within the contract in order that there usually are not disputes later down the highway.

#6 No guardrails on advertising and marketing

Equally, hashish advertising and marketing legal guidelines are difficult. If a license settlement permits licensees to conduct advertising and marketing actions, the license settlement ought to on the very least obligate the licensee to adjust to legal guidelines whereas doing so. However robust license agreements might take issues additional, and require the licensee to abide by sure requirements or tips above and past what the foundations require. In spite of everything, advertising and marketing supplies can each adjust to the legislation and trigger hurt to the popularity of the licensor or good will of the licensed model.

#7 Failure to guard the licensor and model

The ultimate widespread drawback I’ll handle at present is a license settlement’s failure to adequately defend the licensor or model. With respect to model safety, a great license settlement will embrace a laundry listing of provisions proscribing how the licensee can use, sublicense, or delegate the licensed IP, and would require the licensee to offer help in or take part in mental property disputes. With out locking a licensee’s use in place, the licensor may jeopardize authorized safety for its model. And this completely defeats the aim of the license.

Extra broadly although, license agreements usually fail to deal with potential hurt to the licensor itself. Within the instance I’ve been utilizing right here – a model licensed to an organization for manufacture, distribution, and gross sales – the licensor would don’t have any half within the manufacturing and distribution course of. In that case, it could need to be shielded from legal responsibility to the utmost extent doable. There are a number of contractual provisions that the licensor may embrace to perform this, resembling:

Contractual indemnity provisions, to require the licensee to cowl the licensor’s prices ought to it’s roped right into a lawsuit on account of the licensee’s conduct.
Necessities for the licensee to acquire insurance coverage with extra insured protection for the licensor.
Legal responsibility limitations that may restrict the licensee’s skill to get better from the licensor.
Covenants and different provisions that may make crystal clear that the licensee (and never the licensor) remained accountable for sure conduct.
Carveouts from indemnification or legal responsibility limitation provisions that profit the licensee if the licensee engaged in prohibited conduct.

This final level bears a bit extra clarification. License agreements usually require the licensor to indemnify (i.e., cowl prices) the licensee for sure issues, like if the licensee will get sued by a 3rd social gathering as a result of the licensor’s IP is allegedly infringing. However a licensor-friendly license settlement will usually carve out obligations the place the licensee itself did one thing incorrect. So for instance, if a licensee markets a licensor’s model in a manner that results in a third-party infringement swimsuit, then the licensee might not be entitled to indemnification.

Conclusion

The above points are a number of the extra widespread ones I’ve seen crop up through the years I’ve reviewed, drafted, and negotiated license agreements. They’re not at all unique and there may be many different issues, particularly once you begin stepping into extra “unique” settlement sorts, like tri-party agreements.

For those who’re eager about different vital provision in license agreements or other forms of B2B hashish contracts, try a few of our different posts beneath: