While the full impact of this health crisis still looms with uncertainty, the Covid-19 pandemic has had a huge impact on brand owners and how they do business in light of the decreased consumer demand for licensed products, especially apparel and accessories. The luxury and retail sector, meanwhile, seem to have taken the most immediate and direct hit. The food, beverage, hotel, tourism and even automotive sectors are all feeling the pinch, necessitating, amongst other measures, a reassessment of their relationships and agreements with licensees, franchisees, suppliers and distributors in each jurisdiction in which they are trading.

According to Tiffany Conley, a senior associate in Baker McKenzie’s Hong Kong office, licensees have begun to reach out to their licensors, asking for relief from their partners, in an effort to preserve cash or their businesses during this period.

“Licensors or brand owners may need to consider receiving lower royalties as a result of fewer sales,” she says. “In addition, if there is no relief for these licensees, the licensor could risk losing the licensee in entirety. So, brand owners have the arduous task of trying to maintain current contractual relationships with licensees through dialogue and renegotiation or terminating such agreements and relationships.”

Because of this decrease in consumer demand, closure of stores and governmental restrictions, licensees and franchisees have either sought to delay and/or avoid performance of their contractual obligations and the related liabilities. While some of the reasons for this appear to be legitimate, there is also a fair number of licensees and franchisees simply using Covid-19 as a reason simply to escape what they view to be a bad deal.

Conley says that there are three main situations in this case: a licensee wanting to terminate, a licensee becoming insolvent and a licensee seeking to delay performance and renegotiate terms.

“Some licensees would want to terminate the license agreements by relying on frustration (in common law countries) and force majeure provisions set out in the contracts and the legal equivalent under local law,” she says. “From a practical point of view, if a licensee wishes to terminate the license agreement, in most instances, the brand owner would settle with them and terminate the license agreement on agreed terms, rather than bringing them to the court to determine whether any such frustration or force majeure claims are valid. If, as a brand owner, you have been unhappy with the performance of any licensee, you may simply take this opportunity to terminate the license agreement with them. The application of these concepts is subject to the relevant governing law of the contract.

Conley says that although the termination of license agreements (by whatever means available) is certainly an option for brand owners, for the sake of business continuity, brand owners often wish to maintain the license agreements and provide support where the licensees have genuine difficulties in performing the license agreements.

To this end, Conley says that the firm has seen an increase in the following types of requests by licensees:

• Delay payment of royalties, such as from monthly to bi-annually, or to have longer payment term, such as 90 days instead of 30 days;
• Waive royalties or lower the amount of royalties payable, such as from 10% to 8%;
• Readjust sales targets, minimum royalties and business plans; and
• To open up e-commerce channels to sell online.

Termination and renegotiation

Addressing these challenges come primiarly in two methods, either through termination or through renegotiation.

Says Conley: “If as a brand owner, you decide to terminate the license agreement, such termination will need to be managed properly, especially in higher-risk jurisdictions such as China, where the licensee may be given the right to manufacture as well. The brand owner will need to make sure that the inventory of the licensed products as claimed by the licensees matches its records and has been verified if at all possible. There is also a need to have the proper return of IP and the moulds used in production to minimize the risk that the licensees (or their contractors) will continue to make the licensor’s products after termination, or make more than usual before termination and sell them as factory overruns thereafter.”

These measures are particularly important during this time, as many Chinese factories are suffering from the trade war and closure during the pandemic and are desperate to increase their revenue.

“They may cross the line and go into the business of counterfeiting,” Conley says.

As for renegotiation, Conley says that brand owners may wish to consider renegotiating minimum royalties and sales targets and allowing online distribution. “This is making concessions such as resetting the sales targets and minimum royalties for the current year in exchange for higher sales targets and minimum royalties next year in the recovery market,” she says. “Some brand owners also choose to put in place a regular review mechanism to allow parties to respond to the changing market conditions.

In terms of allowing online distribution, she adds: “Brand owners are reviewing the distribution provisions and are considering allowing distribution channels which – outside of Covid-19 – have not been perceived as reflecting the brand image and reputation. Such concessions may even be necessary and required from a legal perspective as both parties have the obligation to mitigate the potential damage caused by the Covid-19 pandemic. This can, for instance, include allowing online sales. While parties are generally free to renegotiate the commercial terms, it will be important to properly document any such amendment to the original license agreement in accordance with the terms, to avoid unintentionally granting more rights i.e. in more than one jurisdiction, to the licensees than intended or being regarded as giving a broad waiver in favour of the licensees for non-performance. Specific contractual provisions may be drafted to impose a territorial restriction on the use of IP rights, subject to any restriction under the applicable competition law.”

Furthermore, many business and brand owners already have crisis management teams in place and are looking to develop a business continuity plan to navigate through this crisis.

“The purpose of the business continuity plan is to identify risks and scenarios and the associated financial impact and then as far as possible, forecast the liquidity of the business,” says Conley. “Business continuity plans need to specifically address supply chain and operations (that includes the review of contractual obligations including license agreements); workforce (which will need to factor in franchisees and distributors); finance and external factors in the wider economy; and the impact on day-to-day business.”

In Singapore, to address the challenges and hardships brought about by the pandemic, the government enacted the COVID-19 (Temporary Measures) Act on April 7, 2020. The purpose of the act was to offer temporary relief to businesses and individuals who were unable to perform their contractual obligations due on or after February 1, 2020, because of Covid-19. The measures covered relevant contractual obligations that were to be performed on or after February 1, 2020, for contracts that were entered into before March 25, 2020. The types of contracts covered under the act are:

• Leases or licences for non-residential immovable property (e.g. lease for factory premises);
• Construction contracts or supply contracts (e.g., a contract for the supply of materials);
• Contracts for the provision of goods and services (e.g. venue, catering) for events (e.g. weddings, business meetings);
• Certain contracts for goods or services for visitors to Singapore, domestic tourists or outbound tourists, or promotion of tourism (e.g. cruises, hotel accommodation bookings); and
• Certain loan facilities granted by a bank or a finance company to small and medium enterprises (SMEs).

The act prohibits a contracting party from taking the following legal actions against a non-performing party:

• Court or insolvency proceedings;
• Enforcement of a security over immovable property, as well as over movable property that is used for the purposes of business or trade;
• Calling on a performance bond given pursuant to a construction contract; and
• Termination of leases of non-residential premises.

“The timeliness of the act is seen best from the report of the senior minister of state for law in Parliament, that within the first five weeks of the act coming into effect, 3,943 notifications for relief had been served,” says Yvonne Tang, a director at Drew & Napier in Singapore. “A mere two months later, enhancements were introduced to the act by way of the COVID-19 (Temporary Measures) (Amendment) Act, passed in Parliament on June 5, 2020. Amongst others, the enhancements provided a rental relief framework for SMEs and enhanced the relief available for businesses, organizations and individuals. The act was not meant to be a ‘super-drug’ or a ‘wonder cure’ for Singapore businesses surviving Covid-19. Nevertheless, the measures under the act certainly go some way in assisting businesses, because of the recourse to financial relief.”

She adds: “The dark Covid-19 cloud still hangs above our heads, and it will be some time before it passes. The silver lining, however, is that businesses are forced to evaluate existing business models and operations, some of which may be staid or even inefficient. The review may, in turn, make way for better and improved business practices or policies, that will ultimately be beneficial to all.”

Brand opportunities

In the midst of this health crisis, however, there are still many opportunities for various brands, including through brand extension licensing.

“As a result of Covid-19, we have seen an increased appetite for brand owners to expand their current line of licenses,” Conley says. “Brands may wish to take advantage of additional licensing opportunities to make up for the decrease in sales in their established business by extending the brand to product categories that they do not usually cover. As a notable example, a luxury down jacket brand announced earlier this month that it entered into an exclusive worldwide license agreement for fragrances; the licensee will create and produce perfumes and related products and will distribute them in the brand owner's stores, as well as selected department stores.”

She lists ways for brand owners to accomplish this:

• Clearly define the IP rights that will be licensed, and the scope of the license (i.e., what activities the licensee are allowed to do using the IP rights);
• Make sure that you as the brand owner have the right to license;
• Review your trademark portfolio to make sure that you have adequate coverage and attend to trademark filings for your “new” products if needed as soon as possible; and
• Expanding to new product categories outside the usual business also poses risks to branding and the license agreement should contain strong safeguards on the use of IP for brand owners to maintain quality control and brand integrity.

Conley suggests developing a stronger and closer relationship with licensees and create a positive corporate image and PR.

“We are all in this together and we are stronger together,” says Conley. “Brand owners may consider taking this opportunity to work closely with the licensees and develop a stronger relationship by providing more support to the extent commercially practicable. It is also an opportunity to demonstrate corporate social responsibility and create positive PR.”

She adds that some examples of practical measures taken by Fortune 500 companies in the F&B sector include:

• Creating apps to make sure employees and licensees were armed with timely information. This allows such employees and licensees to adapt central guidance to their own local situations, in terms of disease conditions and local public health measures.
• Deferring all 2020 capital obligations for licensees for remodels and new unit development through the end of this year and working with brand owners to implement royalty deferrals and advertising adjustments
• Encouraging mental wellness by offering 20 therapy session a year to all employees and each of their eligible family members

There may be additional issues moving forward into this “new normal,” but, as Conley says: “As we move toward what our firm has identified as the recovery stage of the pandemic for businesses, there is reason to be optimistic about the future of licensing. However, brands will need to move swiftly if they wish to recapture consumer loyalty and spending. Licensing is a marketing tool that provides brands added exposure to new products categories as a way to reinforce and strengthen the core brand. This crisis presents a fresh opportunity to brand owners to bring about fundamental, lasting and positive changes to the way we do business and live our lives.”