COVID-19 & Force Majeure – Guaranteed Minimum Royalties No More?
Is it still true, as the old saying goes, that it is better to offer no excuse than a bad one?
The old adage has trouble holding up in today’s climate. Because of the significant and detrimental impact that COVID-19 has had on the economy, and especially the apparel industry, good excuses are aplenty for licensees in the apparel licensing industry.
Due to the pandemic, brand apparel licensees that have entered into license agreements with licensors to use their brand names have had unanticipated difficulty meeting the minimum sales standards and paying minimum royalties. In addition, those licensees are now rightfully asking, what options, if any, do they have under their license agreement to excuse their performance due to COVID-19?
First, the licensee must conduct a full review of the provisions of the license agreement, to see whether any specific relief is provided. Specifically, does their license have any provisions relating to force majeure, obligations involving performance (such as minimum sales, production, or royalty requirements, or timing requirements) and cancellation or termination of the agreement.
A force majeure clause, one of the most commonly used provisions to excuse performance, protects a party from liability when circumstances beyond their reasonable control prevents them from performing. These circumstances include acts of God, riots, power outages, embargos, and sometimes, pandemics. If a license agreement contains a force majeure provision, the licensee must evaluate how it defines force majeure - some clauses expressly include pandemics, viruses, travel restrictions, quarantines or some type of catchall provision that protect licensees. Next, the licensee must consider whether that force majeure provision has any limitations with respect to application. For example, if there is limiting language stating it does not apply to material provisions of the license agreement, it is unlikely that a licensee can use the clause to excuse the non-payment of minimum royalties. If however, the force majeure clause does excuse performance, the licensee must then take all necessary steps provided for in the license to invoke the provision. Generally, this entails some form of notice, in prescribed form and within specified timeframes.
Even if the license agreement does not include an applicable force majeure provision, it may include a termination clause that may provide the licensee an opportunity to terminate or suspend the license due to circumstances outside of their control. This type of provision may allow this by way of specified notice procedure, payment of liquidated damages, or alternatively offer the temporary suspension of contractual obligations in lieu of termination.
If neither of these provisions are in the license, the licensee still has some remaining additional arguments to potentially excuse their non-performance. For example, the licensee can argue that their non-performance is excused on the grounds of impossibility or impracticality, because the unforeseeable nature of COVID-19 created extreme and unreasonably difficult expenses and losses. In addition, the licensee can argue that their duties to perform should be suspended, abated, deferred or discharged because the principal purpose in entering into the contract was frustrated by an unforeseeable event outside of their control.
These are unprecedented times in which parties are now scrutinizing their license agreements and legal positions in order to protect their businesses from forces outside of their control. SGR attorneys are experienced in the apparel business and are ready to assist clients with their licensing needs as the industry adapts to the new reality.
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