Licensing Is Lucrative, But Tread Carefully

oreign licensing of craft works is a tricky business. Whenever artists allow someone in another country to manufacture, distribute or sell their work, they have to watch that the licensee (the artist is the licensor) doesn’t juggle the sales numbers, filch royalties, diminish the quality of the work, or sell the work out the backdoor. Although these problems can occur in any licensing deal, they become aggravated the further the production gets from home.

The most important issue that arises when entering into a foreign license has to do with people, not paper. You can have a bulletproof foreign license agreement, but if the other party is a scoundrel, cheat, or simply inept, it doesn’t matter what’s printed on the agreement. When problems arise, you’re going to have to chase them into court in a foreign country and — assuming you’re lucky enough to win — you’ll still have to collect your judgment before the licensee goes bankrupt or shuts down their business.

Questions to Ask Before the Deal

Before focusing on foreign licensing issues, start by asking two questions. First, has this company or person ever licensed from a U.S. craft artist be-fore? Remember the business maxim that “a pioneer is the person with the arrow in his back.” In other words, don’t be the first American craft artist to deal with a particular foreign licensee.

If an overseas company has no experience with American licensors, then you’ll need a strong reason to proceed with them. (For example, even though the foreign company is new, the principals are all experienced in international licensing.)

The second question to ask the potential licensee is what other U.S. craft artists do they have under a licensing agreement? Get the names and contact info for all — not just those recommended by the company — of the artists who license with this foreign company. Find out whether they’re satisfied with the company’s quality, accounting and general responsiveness.

Crafting the Agreement

Assuming you’re satisfied that the company is reliable, you’ll either be given a standard licensing agreement or you’ll have to furnish one. (For a sample license agreement, see my book, “Crafts Law.”) Here is a summary of some important foreign licensing issues to keep in mind when preparing your contract.

Jurisdiction. Sometimes referred to as personal jurisdiction, this is the power of a court to bind the parties by its decision. The only way to get a foreign licensee into a U.S. court — unless the company does substantial business in the states — is to include a provision in the license that requires the licensee to consent to U.S. jurisdiction.

Choice of Law. Every country (and every state) has laws as to how contracts are interpreted. The licensee company will want the disputes to be resolved under the laws of its country. Unless you’re interested in learning about the laws of Sierra Leone or Singapore, try to have disputes resolved under U.S. law for copyright purposes and the laws of your state when it comes to contract issues.

Arbitration. Instead of filing a lawsuit, under arbitration the parties hire one or more arbitrators to evaluate the dispute and make a determination. You’ll almost always benefit in time and expense by agreeing to have disputes arbitrated.

Hopefully, the licensee will agree to arbitrate the matter in the U.S. If not, there are three popular spots for international arbitration: London (The London Court of International Arbitration), Paris (The International Court of Arbitration of the International Chamber of Commerce), and Stockholm (The Arbitration Institute of the Stockholm Chamber of Commerce). Also, if possible, your agreement should award attorney fees to the victor in the arbitration.

Approval of Licensed Goods. When major U.S. manufacturers license products abroad, they often arrange periodic inspections of the manufacturing facilities to ensure the quality of the goods (and also to monitor whether the licensee is siphoning off products or engaging in illegal labor practices). It’s unlikely you’ll be able to afford such on-site inspections but you can demand that copies of your licensed work be sent to you on a regular basis for approval. This offers you some assurance of consistency and quality for your work.

Foreign Registrations. If your works are already protected by U.S. intellectual property laws, like copyright or design patent law, determine whether you want to obtain foreign registration in the countries where your work is being manufactured or distributed. Often licensors require that the licensee handle these administrative tasks as part of the license.

Understand Royalties and Accounting. Payment of royalties from a foreign licensee can get tricky especially when you consider issues like currency conversion rates (probably best to always insist on payment in U.S. currency), how the money will be paid (best to use wire transfers), and what taxes may be applied against your sales or royalties (before signing the license inquire into national or local tariffs or taxes that may apply).

Also, although it’s unlikely you can afford to hire an accountant in India or Malaysia, it’s still wise to include an audit provision (which allows you to inspect the foreign licensee’s books).

Learn the Lingo of Trade Agreements.

Become familiar with international trade terminology and rules so you can speak knowledgeably about things like “F.O.B.” and “letters of credit.” Even if you have an attorney review your documents, as a businessperson you need to thoroughly understand your agreement. You can get a crash course by reviewing the Resources included with this column.

If in doubt about the company or the provisions of your license agreement, don’t do the deal. Don’t let your desire to earn
royalties overcome your common sense. Always keep in mind that no foreign license is better than a bad foreign license.

Richard Stim is an attorney and the author of several books, including “Getting Permission: How to License and Clear Copyrighted Material Online and Off” (Nolo). He works as an editor at Nolo.com, an online, self-help law center.