Cannabis Trademark Licensing: Background Checking Your Licensees

 
 

Cannabis brands are exploding, and a lot of that growth is fueled by trademark licensing agreements.

Trademark licensing agreements offer the promise of exposure to markets that otherwise require government licenses to conduct marijuana operations. As the licensor, you get the benefits of exposure, without the operational compliance burden.

The trademark licensor-licensee relationship is often a long-term, long-distance relationship. Like all long-term, long-distance relationship, there are plenty of opportunities for things to go awry.

Some due diligence up front, and some smart deal structure, can spare your brand from doing a licensing deal with the wrong partner, and can provide assurance and protection in case the licensing deal goes wrong.

Conversely, making accurate judgments about the business and individuals you are dealing with up front can spare you a lot of headaches in the future.

1. On the business side, make sure to verify that the entity your licensing agreement is with a real business, with real operational experience, and real assets. In the event of trouble, you can really only enforce the agreement if the company you are licensing to - the entity signing the agreement - is a real entity, with real assets. An entity that exists solely to hold the licensing agreement is a bright red flag. Make sure the company has sufficient experience, resources, personnel, and requisite government licenses to fulfill its obligations imposed by the licensing agreement. Check the company’s financial statements going back at least a few years, if possible, and run credit checks against the licensee and any guarantors.

2. Be wary of a overly-eager licensees. If a prospective licensee’s offer is “too good to be true,” the relationship may be doomed from the start. A licensee without room to profit has little incentive to do more than the bare minimum necessary to live up to the terms of the licensing agreement. As the licensor, you need to think about how much it will cost to make credible legal threats to enforce your rights, how much you will be able to recover, and how much time and energy this kind of tension will consume.

3. Get personal guarantees. When licensing to privately-held companies, it may be worthwhile to get personal guarantees to backstop the licensing agreement. Verify that the guarantors have sufficient assets to cover any anticipated liability, and make sure they are domestic. As noted above, you will want to run credit checks against the guarantors.

4. Check references. If the licensee licenses other brands, get contact information for those licensors, and be sure to follow up on them. Find out about late royalty payments, any discrepancies identified in past royalty audits, and any complaints or other issues that have ever arisen. Ask around your professional network to obtain independent judgments.

5. Have the tough discussions up front. If you think you see a possible issue, tug on that thread. If there is a dealbreaker there, well, it’s better to know up front than after the deal is done. Is the licensee worried about a potential conflict with a different product line? Is there a potential issue lurking with the licensee’s infrastructure and capacity to meet the obligations the agreement will impose? Is the company potentially interested in competing with you? Is there a risk the company will hijack your product formulations and other trade secrets, and use them to launch competing lines?

Ask uncomfortable questions now, so that you don’t have to later on.