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Every licensor
is faced at some time with the prospect of a licensee that does not
pay minimum royalties due under the license agreement. Occasionally,
this may be due to the contractual breach of the licensor, for example
the licensor's breach of an exclusivity clause. Often, however, this
refusal to pay royalties has nothing to do with licensor misconduct
and is solely of the licensee's making, whether (a) the licensee's having
made a bad deal and agreed to higher minimum royalties than the property
warranted, (b) the licensee's having done a poor job with the property,
or (c) the licensee's simply having run into financial hard times.
We recently obtained a decision and order in Supreme Court, New York
County, which should greatly assist licensors, at least in New York
State, in collecting minimum royalties properly due from nonpaying licensees.
In this case, the Court granted our licensor client, without the time
and expense of a trial, summary judgment awarding $621,562.50 in damages,
representing accelerated minimum royalties due over the remainder of
the term; the reasonable legal fees, costs and disbursements our client
incurred in the lawsuit; and interest at the rate of 18% per year. The
Court also through out all the licensee's claims and defenses relating
to the licensor's alleged breach of the license agreement. Although
this case involved a fashion license, the principles discussed apply
to all license agreements. The guiding principle underlying the Court's
decision was this: a licensee cannot continue to enjoy the benefit of
a license agreement and refuse to pay the minimum royalties due there
under based on a claim that the licensor has breached the Agreement.
If the licensor truly materially breached the Agreement, the licensee
must terminate the License Agreement and sue the licensor for breach
if it wishes to cut off its minimum royalty obligations.
The
Facts
In this case, the licensor was a wholesaler of sweaters both under an
upscale trademark I'll refer to as "XYZ", and a less expensive
trademark I'll refer to as "ABC". In March, 1997, licensor
entered into a License Agreement which granted the licensee, the right
to use the ABC trademark for a term ending December 31, 2000, in connection
with three product categories: (l) men's sweaters; (2) men's woven and
knit shirts; and (3) men's pants, shorts, outerwear and sport coats.
In addition to agreeing to specified percentage royalties on its actual
sales, the licensee agreed to pay minimum royalties to licensor for
each of the ABC sweaters and shirts product categories. As part of the
License Agreement, the licensor agreed not to sell products "competitive
on the basis of price" with licensee's ABC products. In 1998, the
licensee's sales exceeded the $6.5 million of sales on which Minimum
Royalties were based for such year. However, in 1999, the year in which
the licensee would later claim licensor breached the License Agreement,
its sales plunged by more than $4,000,000, to less than $3,000,000,
or almost $6,000,000 less than the $8,775,000 of sales upon which Minimum
Royalties were based. There were several reasons for this decline in
sales. The licensee lost its biggest account, J.C. Penney which accounted
for almost 60% of its business. Its 1999 sales also declined because
it abandoned entire product categories, including shirts. Finally, licensee's
sales also declined in 1999 because it sold more than 56% of its product
at off-price.
Continued
on page 4
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