Licensing Law Exposed: Red Flags, Audits & Million Dollar Mistakes

Think licensing is just about paying royalties? Think again.

David Schnider, licensing attorney at Nolan Heimann, reveals the legal minefields hidden in every licensing contract. From his journey licensing Top Gun costumes to negotiating Disney deals, David exposes the costly mistakes that can destroy licensing partnerships before they begin.

In this episode, learn:
- The three financial elements that make or break deals
- Why "net sales" definitions can cost you thousands
- Transfer fees that eat 25% of your company sale
- How audits find "mistakes" 95% of the time
- The approval trap that turns revenue into penalties
- Insurance requirements that surprise every licensee
- Why "inspired by" products kill licensing careers

From selling outside territories to the Steamboat Willie trademark trap, David shares real client stories and hard-won wisdom from thousands of contracts reviewed.

⚖️ Contact David: nolanheimann.com
📧 Email: dschnider@nolanheimann.com

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Transcript

I sold a million dollars of that costume in the first year. I started very traditionally at a large law firm, was a national law firm, about 300 lawyers. And I realized this is horrible and I don't want to do this for the rest of my life. 

 It took you 10 years? 

 It took me 10 years. I had a meeting with Paramount and there was Top Gun. Nobody wanted it. And I took that back to the office to go for it. And she said, what's Top Gun? 

 Tell me some sneaky red flags that inexperienced licensees often miss. 

 I think licensees have a tendency to look at the business terms and not both with the legal terms. But there can be a lot of traps in their net sales. New licensees come to me thinking they're paying 10% of their profits and they're. 

 Not one of your clients who saved an enormous amount of money when they were selling their business. 

 Had we not negotiated that cap, they would have paid at least tens of thousands, if not hundreds of thousands more. This industry is really built on trust. 

 What's your view on what people can and can't do with Steamboat Willie now that it's in the public domain? 

 Foreign. 

 Licensing contracts can be a minefield for those that are unprepared. Hidden clauses about transfer fees, audit provisions and net sales definitions can cost licensees thousands or even derail entire businesses. Entertainment lawyer David Schneider has seen it all. From Disney deals to costume collaborations and today he reveals the legal pitfalls that catch first time licensees and how to navigate licensing agreements like a pro. This is one you'll have to pay really close attention to. Before we dive into today's show, I wanted to share something really exciting with you. For the first time ever, I'm opening my vault of nearly 20 years of licensing experience through my online course, Learn to License. 

 Whether you're just starting out or looking to level up your licensing game, this is everything I wish I'd known when I began my journey from deal structures to finding the right license, knowing if you're ready and how to pitch like a pro. It's all there, the fundamentals that separate successful licensors from everyone else. Visit learntolicense.com and let's get you from curious to confident. Now let's jump into today's episode. David, I've really been looking forward to this conversation because we'll be tackling the legalities of licensing. We know it can be a bit of a minefield and I'm thrilled to have someone with your level of experience on the podcast to really help us understand the legal side of licensing, but today we're not here to intimidate anyone who's new to the world. 

 We want to give them the confidence and the knowledge of what to expect. So, David, thanks for joining us on Born to License. 

 It's my pleasure. I'm really excited to be here, and I've been enjoying the podcast. 

 Thank you. So, before we dive into the legal complexities of licensing, I'd love for our listeners to understand your unique journey. Tell us a bit about yourself and how licensing has played a role in your career. 

 Yeah, absolutely. So I had a somewhat unusual path for a lawyer. I started very traditionally at a large law firm doing litigation. It was a national law firm, about 300 lawyers, and I was primarily handling intellectual property cases, so copyright and trademark litigation. And about 10 years into that, I had an epiphany and I realized, this is horrible, and I don't want to do this for the rest of my life. 

 It took you 10 years? 

 It took me 10 years. I was enjoying some of it. I was very good at it, but it was not my personality. And so I left that law firm and I joined one of my clients, a company called Leg Avenue that sells lingerie and costumes. They're mostly known for their sexy adult costumes. And I joined them as their general counsel. And when I was working there, I went to my boss and I said, you know, there's this $4 billion licensed costume industry, and we're not doing anything there. Maybe we should. And he said, that's a great idea. I said, good, then let's hire a licensing agent. And he said, no, you just do it yourself. So I went to licensing show. 

 I had a friend working at one of the studios there from high school, and she walked me around to every studio booth, introduced me to the licensing person in each booth, and said, you need to know, David. He's looking for licenses, and there's a very large player in that field, Ruby's Costumes. And so they held most of the major licenses. So I was looking for something. You know, were a brand new licensee. We were looking for something to start with. And I had a meeting with Paramount, and they were flipping through their book of what I would call D properties. And there was Top Gun. And this was between the two movies, and nobody wanted it. And I took that back to the office and I talked to our creative director, and I said, I think I found the thing to go for. 

 And she said, what's Top Gun? 

 Yeah. 

 So she agreed to go home and watch it at night. And she came back the next day and she said, I don't understand. Why do you think people want costumes from a 20 year old movie about gay guys playing volleyball? And there was one male designer in the room and she turned to him and said, what do you think? And he said, dudes will wear it. And so we got that license and it was an instant hit. We sold a million dollars of that costume in the first year. And so that was sort of started us down the path. We ultimately got up to a Disney license and that's how I got started in licensing. And when I left that company, I went out on my own and eventually joined the law firm I'm at now. 

 And so much of my practice has been around working with other companies, primarily licensees, in a similar situation, who are trying to get into the industry. 

 Such an amazing story. At what point did you say I told you so to your old boss? 

 I kept it very quiet. He actually sent me a thank you email, which was very rare for him. But when we got the Disney license, I think that was the moment where he realized it had worked. 

 Yeah. Oh, well done. That's such a great story. So, David, let's imagine someone listening, has a great brand or product, they're about to enter their first licensing deal. Before we get into the complex legal language, can you break down sort of the basic commercial framework of a licensing agreement? Essentially, who pays what to whom, when they might pay it, what each party gets in return. And can you try and explain it to us in a way that someone completely new to licensing can really understand the fundamental business exchange that's happening? 

 Yeah. So at base, there are really three elements to any license agreement, at least financial elements, the advance, the guarantee, and the royalty. So basically what you have is the licensee, the company that is making the products is going to the licensor who has the brand, the content, whatever it is being licensed, and getting permission to use that content on their products. And so in exchange for that, they're going to pay the licensor for the right to do it. And so the three elements, advance, guarantee and royalty, often are interrelated. So the advance is usually money that the licensee pays upfront to the licensor, usually when they sign the contract. But it's not unusual now to have those paid over time or at different times. And it's basically money so that the licensee has skin in the game from the beginning. 

 They have incentive to get product on the market and to do well because they have already given up money, committed Money to the project. 

 So this is before they've even made the product, before they're even selling product. They have to come to the table with an advance. There's an upfront investment there. 

 Yeah, typically. Not always, but typically the license floor will want money upfront. Typically, right when the contract is signed, there's an initial payment to lock the licensee in and make sure that they're committed to the project and can't just blow it off. 

 I think if there's. If there's anyone listening to this who is like, well, that's just greedy. How dare they ask when we haven't started selling? You have to bear in mind that these licensors have limited resource and limited legal resource in particular. They can't just, you know, draft zero upfront contracts all the time because they essentially need to pay for their team. They need to. Yeah, as you said, make sure that the licensee has skin in the game, that they're incentivized to actually go through, make the product and start selling it. 

 Yeah. So I think some of it is just to get money in, but really the advance is more about putting some pressure on the licensee to perform. So, you know, a contract is nice. You enter into a partnership, everybody is happy, you're going to do something together. But things change. People don't always follow what they say they're going to do. And so that payment is meant to give the licensee some incentive to pay attention to this product, to really focus on it and to do good work so that they will earn back the money they've paid. 

 So that's the advance. Tell us about the other two areas that you mentioned. 

 Yeah, so the guarantee. So the guarantee is usually a minimum amount of royalties that the licensee is guaranteeing the licensor they will receive every year. So I'll get to the royalty in a minute. But basically it's a percentage of whatever the sales revenues are, and it. The guarantee is a minimum amount that the licensor is going to get. And it's for a similar purpose as the advance. It is to make sure that the licensee is seeing the project through and that they are selling enough to make it worthwhile to the licensor. For big licensors, that can be a very large amount. I don't know where it's at now, but the NFL used to have a minimum guarantee of $100,000 a year. Royalties below that, and they weren't interested. For a lot of licenses, it can be less than that. 

 But the idea is essentially to make sure that the licensor is going to earn at least a bare minimum from the deal and to make sure that the licensee has incentive to generate those sales so that it's collects the guarantee. 

 And some minimum guarantees are probably even a lot more than a hundred thousand. Right. Like with that, they can be millions and millions, right? 

 Yeah, they can be way higher. If, if you are a large company dealing with a major property like a Batman, a Superman marvel, those kinds of licenses typically have much higher guarantees because you're going to be able to sell more. And those companies expect the licensee to be able to sell more. And if a licensee can't commit to doing that, they don't want to work with them. 

 Exactly. And take us through the royalty. 

 Yeah. So the royalty is a percentage of sales. That is sort of deceptively simple. So at base, the licensee sells products, they make money, and then they rate a percentage of that to the licensor. That percentage depends on the strength of the license and the category. So they can be as little as 1 or 2%, though that's rare. They can be as high as 25 or 30%, though that's also rare. I think in most categories I see them somewhere in the 8 to 15% range. But whatever it may be, it's always a percentage of the sales as they come in. So typically the licensee makes sales and once a quarter they will then calculate the royalties and pay those royalties to the licensor. And that's really, that's the primary way that licensors earn money from a licensing deal. 

 And the royalty rate, as you mentioned, it can be as low as 2%, as high as 25, even 30%. What is determining that? Is it depending on what their distribution is, what category it is, who the licensor is. 

 Yet it's all of those factors. So if you have. So I've done deals where there is a third party brand. So some, there's a toy company making toys, they're licensing in characters to do that. But there's a classic brand they want to use that they don't own because they know that will have nostalgic value. So they're going to pay a fairly decent royalty for the character for a Batman or a Superman. So the brand they're licensing in, it's not quite as valuable to them. They can do the product without that. They just think it adds something to entice consumers to buy, to make the product more interesting. And for that third party brand who's no longer selling Product or maybe is selling minimal product or in different categories, it's worthwhile to have that little bit of revenue. 

 And so those I've seen be in lower percentages. Those can be just a few percent. On the other hand, where I've seen in some cases very high end production, very unique with very valuable properties, those sometimes go to higher percentages because there's so much of a larger margin in that field. If you are selling unique art pieces for $100,000 each, then you might have a higher royalty because the licensor feels like there's a lot of value there, you've got a lot of margin and they're entitled to more of it. 

 I've done a lot of work in my career in fmcg, so anyone that doesn't know that it's fast moving consumer goods and it's very much, you know, food, beverage, health and beauty, and particularly food and beverage that have very low margins, they are known to have low, minimum, low royalty rates as well. You know, it can be as low as 3% can be, you know, 6, 7% also. Have you experienced that too with FMCG deals? 

 Yeah. So I've seen a lot of it depends on margin for the product. So just as I gave the example of a high end piece of art where there's a lot of margin, food goods have much tighter margins. Sometimes consumer goods do as well, depending on what they are. And so it's not reasonable for a licensee to pay a huge royalty when they're not making that much money to begin with. And in fact, if they had a huge royalty, they probably couldn't do the deal because it wouldn't be profitable for them. These partnerships work best when everybody is making money and the product is really good and consumers enjoy it. It's sort of a win, win. 

 And that only works where the royalty percentages are adjusted to the right point, where the licensor is making the amount they should, but not eating too much of the licensee's profits. 

 So let's get into a bit more detail. David, I'm sure you've reviewed hundreds if not thousands of licensing contracts in your career. Tell me some sneaky red flags that inexperienced licensees often miss when it comes to the fine print. 

 Yeah, so there's some key ones. You know, I think licensees have a tendency to look at the business terms and not bother with the legal terms, figuring it's a standard contract and I can't change it anyways. But there can be a lot of traps in there. They're not even necessarily traps. They're just contract provisions that if you're not familiar with or don't know what to look for, can be a problem later on. So one of the most important ones is the definition of net sales. So, you know, people come to me and say, yeah, I got a 10% royalty. I said, great, 10% of what? It could be your profits, your gross. You know, I have had new licensees come to me thinking they're paying 10% of their profits and they're not. 

 They're paying 10% of their gross, which could be eating a substantial portion of their profits. The typical deal is going to be some variation of net sales. So that means the gross sales less than things that get backed out. But that's a critical definition of what gets backed out. You know, a typical agreement will allow you to back out your sales costs, sorry, your sales tax, maybe platform fees. If you're doing something like a video game that's on a Steam or other platform, but most of them are not going to let you take too much out. There'll be some allowance for returns, there'll be some treatment for trade discounts. One of the biggest mistakes I see people make is they don't read that language. And it'll have say, a 5 or 10% cap on discounts, but they give 20% discounts at wholesale or more. 

 And then when it comes time to report the royalty they are paying on amounts they didn't collect on because they were capped on their discounts and they didn't realize it. So it's really important to read that language and understand specifically what it is you're paying on, in fact. So I typically recommend to new licensees that they get a copy of the licensor's preferred royalty statements if they have them. And most big companies do, some small ones don't. And look at what they have to report and whether they can actually report that. I have actually had situations where a licensee got the licensor's preferred report and could not provide the information needed. And it's good that we looked at it because were able to talk to them and revise it to provide information that we had. 

 But otherwise when it came to do their first reporting, they would have been in breach of their contract immediately. 

 What were some of the things they were asking for that they provide? 

 So I don't recall exactly, but I think that they were looking for retail level details about the sales and prices per product and the client didn't report that way. They had, you know, an invoice per customer with the totals not unit by unit on every invoice. And so we found a way to deal with that, but we had to talk to them in advance and tell them, this is what we do. Will this work for you? And they said, yes, no problem. 

 Yeah, I mean, that's. That's a really good advice. So net sales definition, and if you can get your hands on a royalty report to see what exactly the licensor is going to be asking before you make that commitment, what are some other red flags that you have for us, David? 

 So one of the ones that's come up more in the last few years are transfer fees. So I've seen this. It's now fairly common, but it wasn't 10 years ago. So what I see in a lot of license agreements now is that if the licensee sells their company or changes ownership or takes on an investment, the licensor gets a portion of that. So it's really sort of counterintuitive. The reason they do that is, let's say you're getting a Disney license, you're doing Mickey Mouse T shirts. Disney's view is your company is gaining value because you're using Mickey Mouse on your products. So if because of that, you're able now go sell your company to someone for $10 million, Disney should get a piece of that because it was partially because of the value they brought to the table. I get that. 

 I think most licensees find it offensive, those clauses, while the concept makes some sense, oftentimes the way they work does not. So you can have a company where they have multiple license agreements. No one license really drives the value of their company. And each license has a minimum $100,000 transfer fee. So now you sell the company for $2 million, and you're paying maybe, you know, 500,000 to different licensors and fees. It makes that sale certainly much less enjoyable for me on a licensee. 

 And does the licensor usually expect a flat fee like you just suggested, or do they ever ask for like a percentage of the sale? 

 Yeah, so each contract is different. They do often ask for a percentage of the sale. Sometimes they base it on royalties, so it'll be a multiple of the prior year royalties. My experience is most licensors won't really negotiate that clause out, but they are sometimes willing to put in a cap. And so it's, you know, for licensees, you have to think about where your company is and whether this matters. So I, I had A licensee I worked with who was very conscious of this did a deal with Universal. There was a transfer fee clause in there. We negotiated a cap because we knew were going to be selling the company. And sure enough, a year later, we did sell the company. And we gladly paid that cap because we had our managed expectations. 

 We knew going into our deal to sell the company that were going to be paying it. So it was not a shock. 

 So if anyone right now is thinking, I'm just going to sign this, I'm going to look at the commercial terms and then just sign it without looking into detail. This is like a real case study of one of your clients who saved an enormous amount of money when they were selling their business because they had the right advice when it comes to legal cider licensing. 

 Yeah, absolutely. I mean, had we not negotiated that cap, they would have paid at least tens of thousands, if not hundreds of thousands more as part of that transfer. 

 Yeah. Which certainly would have offset your fees. 

 Yeah, right. I definitely paid for myself in that deal. 

 Yeah. Very good. So net sales, transfer fees. Have you got any other red flags you would ask us to consider? 

 Yeah, so there are a bunch of other things I look for. I look to see what the audit provisions are. So. So a lot of licensees don't realize that almost every license agreement contains an audit provision. And so the idea is that the licensor wants to be able to come in and check that you, the licensee, reported to them accurately. And so it seems very innocuous. Yes. I'll have an accountant come review the books. They'll see we did it. Right. But that's not how it goes down. So when licensors bring in auditors, especially the big companies, typically they are doing an aggressive audit and they are looking for every mistake. Did you sell a product before you add approval? And this is a key mistake new licensees make. They figure, well, it's in the approval process. 

 I'm going to get the approval within a few weeks. I'll just start selling it now. It won't be a problem. And it isn't until the auditor comes in and said, you had three weeks of sales without approval. And some of the licensor's contracts say that if you do that, we get your gross revenue, not just the royalty. Every dollar you got for that, those products sold without approval, you now have to pay us in the audit. Plus interest, by the way, plus the audit fees. 

 Goodness. So the. When you say approval, David, you're saying, like going through the product approval process, getting that final stage of final production signed officially by the licensor. So then you can start selling the product. 

 Yeah, and very official, formally in their system. So not just someone said, yes, it'll be fine, we're going to approve it, but an actual checkoff in the system saying this has been approved for sale. It's such an easy thing to start selling before that because everything is going well and you think you're on track, but you will get bit for that if there's not it later. Similarly, if you're selling outside the territory, sometimes there are. You know, if a. A license is geared towards a movie, there's a launch date you can't launch before then. Even if you sell just a few days before every sale you have before, they're going to come after you for your gross invoiced billings, the total amount you received for that product. 

 And then they also look into the royalty, the actual royalty reports, don't they? They really scrutinize those. They look to cross check with other documentation that might be available to make sure that the volumes of sales being reported were actually accurate. 

 Yeah, absolutely. They will check to see that you reported everything. They often will look at your general ledger to see if maybe their sales you misclassified, so you didn't properly report the royalty on that maybe you didn't pay the guarantee on time. And for larger companies who have multiple guarantees, it's really difficult to track and make sure you do it on time. So these little details about compliance really important and can have a real cost to them later on if there's an audit. So for new licensees, they shouldn't be intimidated by it, but it's important to get on top of it and make sure they understand what all the requirements are and do their best to comply with all. 

 And not every licensee will experience an audit. The licensor is allowed to do it per their contract, but they don't have the resource to audit every single possible licensee. So you might be lucky. 

 Yeah, it depends who you're dealing with. So a company like Disney has lots of resources and audits almost every licensee. Other studios are beginning to do it more, but they don't audit everyone. Smaller licensors tend to do it far less because there's a cost up front, but it still can happen. And I think a lot of licensees tend to think I only have to worry about it if I'm engaging in misconduct. And that's not really the case. Most audits are not expecting to find misconduct, they're expecting to find mistakes. 

 And would you say that auditing often pays for itself? The licensor puts that in place and all their auditing costs, essentially they'll find something and they will have it paid for. Essentially. 

 I'm laughing about the question because years ago. So most of the audit clauses say that the licensor has to pay the cost initially, but if they find a mistake, a discrepancy of 5% or more, then the costs shift and the licensee has to pay for it. So years ago I was talking to a royalty auditor who had been doing, I think for 25 years or so. And so after his presentation, I went to talk to him. I said, so you mentioned this 5% clause and I've seen that. I said, in your career 25 years, how many times have you had an audit where you didn't find at least 5%? And he thought about it and he said, never. 

 It's always there. There's always something. 

 I, I have had a couple of licensees who went through audits where the auditor did not find 5%, but it's pretty rare. 

 Okay, those are good, well behaved licensees then. So we covered all. 

 Not just behaving, it's really being very detail oriented and making sure you don't make any major mistakes. 

 Yeah. So we talked about three points. Net sales, transfer fees, audit provisions, all great advice. Are there any seemingly innocent clauses that have caused the most pain for your clients over the years? 

 Maybe a couple of simple ones. So almost every license agreement is limited to specific territories. So you can only sell, let's say, in the United States. And so I had a client who was selling products within the United States. What they did not realize at the time was that the purchases were outside of the United States and the address they were giving was a logistics company. And so they were ordering products, having it shipped to that logistics company and then shipping it out of the territory. And this was happening regularly. And in the auditor said, well, you should have realized that what we're shipping to was not a person or not a business. It was a third party logistics company. And so you were knowingly selling outside the territory. We worked that out. 

 But it's one of those sort of innocuous things where you think, yeah, no problem, I'm selling only to the US but it requires a little bit more attention to see if that is in fact what you're doing. 

 A quick pause here. If what we're discussing is really resonating with you. You're going to love what I've put together in Learn to License. This isn't just another course. It's two decades of real world licensing experience distilled into actionable strategies you can use immediately. I've worked with everyone from startups to Fortune 500 brands and the patterns for success are surprisingly consistent. The course covers all things that you need to consider when it comes to licensing, particularly those who are just starting out. So visit learntolicence.com your future licensing deals will thank you all. Right, back to our conversation and why would a. Why would a licensor have a problem with that? Like we talk about, licenses have very specific language as it relates to territories where you're allowed to sell products, where you're not allowed to sell product. 

 I'm guessing the problem here is that if it's going to a logistics company within the territory that's in the agreement, but then going out to South America or Europe or somewhere else, it has the effect, the potential to affect the licensor's business, become a conflict of interest with their partners in those particular markets. Is that the reason why this is such a problem? 

 That's the simplest reason, is because they may be working with other licensees there. And so if they've given some, let's say you're selling shirts, they've given us someone else exclusive rights to sell shirts in Brazil and you're now shipping to Brazil, you're causing a problem, interfering with their relationship. And there's also a potential marketing impact. You know, the goods that are marketed in the US may not be the same as the goods that are marketed in Brazil or in Asia. And so if US Goods are coming in or goods from another territory are coming in, they can interfere with the company's marketing strategy, sometimes even very negatively. If there are cultural sensitivities around certain topics and if you have products coming in that are causing consternation among people in that territory, you could actually be undermining the brand by selling outside the territory. 

 So that was something that you were able to work out on that occasion? 

 We did. So thankfully it was a good relationship. We talked about why it happened, how to fix it in the future, and the licensor was happy with that resolution. 

 Good, good. Well done, well done. So let's get practical. David, walk us through one real world scenario you've encountered where a licensee found themselves in legal hot water. What went wrong, what listeners can learn from that situation to avoid the same fate. Now, you don't have to tell Us who it was, you know, all of that confidentiality stuff. But is there anything that sort of springs to mind that you're able to share? 

 Yeah, so. So one situation comes to mind. I was dealing with a client that was selling consumer packaged goods. So this was, I don't want to get too specific, but it was body care products and they were selling with Disney characters on them and they were selling into multiple channels. But a lot of it, they're low cost products. And so they were selling to dollar stores and to the 99 cent only stores. And when they had pitched to their licensing person at Disney, they gave projections and they said all these stores that they would be selling to, but when they wrote their actual contract, it excluded 99 cent stores from their market. 

 And so the client understood that to mean Those little individual 99 cent store shops that you see all over cities like Los Angeles that are just a single shop owned by a single person selling cheap goods, sometimes knockoff goods. The client didn't take that to mean 99 cent only stores, which were a chain store at the time. When it came to review the sales, it created a big issue because the licensor felt that we had sold outside of the channel and we as the licensee felt that we had done exactly what we said were going to do and complied with the contract. And so that ended up being a very difficult discussion and it's probably something we could have resolved. 

 I was not involved in the negotiation of the contract, but we probably could have resolved it had we brought it up at the beginning and just been upfront with the licensor and made sure that were on the same page. 

 And so what was the outcome of that situation? 

 We actually found that other people were selling in the 99 cent only stores and brought them pictures showing that and they said, okay, we'll let it go. 

 Okay, so that's a good outcome as well. 

 But it was very hard fought. We spent months and months going back and forth on this issue and it looked like it was going to be a big fight and ultimately we resolved it. 

 Yeah, good. There's a consistent thread across all these case studies is that you are able to resolve it. So I think that says a lot about your patience and your negotiation skills. So well done on that. 

 One of the sort of the nature of the licensing industry is these deals are all built on mutually beneficial partnerships. And so if you go in with understanding on both sides, you know, the licensors don't typically want to lose their licensees, even if They're a big licensor with a lot of licensees. They'd rather maintain the relationship. And same for the licensees. Most of them want to continue with the license or have other licenses. And so there are usually ways to work it out. So can you can find ways to work together going forward? 

 Yeah, I mean, licensing is a partnership and it's in everybody's best interest for the licensee to have a huge success and then renew and continue reporting royalties and build their business with that particular licensor. So, you know, I think that the licensors are not out there to kind of, you know, pester you for everything that you might be doing wrong or mistakes that you're making. They have these rules in place that need to be followed because it's really important for their business for them to maintain a strong licensing business. But at the same time, they do want you to succeed as well. 

 Yeah, it doesn't always feel that way when you're a licensee in an audit. But short of that, generally I agree. I think it's a partnership and both sides are looking to make a good product. Usually, you know, licensees make products they want to have happy customers. Licensors want people experience their brand, experiencing their brands in different ways. And so there's really a symbiotic relationship most of the time. 

 So every negotiation involves some give and some take. From your experience, what are the hills worth dying on in a licensing negotiation versus the areas where flexibility actually really strengthens your position? And how do you coach your clients? Kind of know the difference. Where should they say, okay, we're going to agree to that even if we don't want to? And where should they really dig their heels in? 

 Yeah, so I think it's most important for licensees, for any company really to think about their specific business and what things matter. So oftentimes a license agreement is a template. So it's written for any kind of transaction and it doesn't apply in all of them. So for example, when I was working at Leg Avenue, the product, Halloween costumes are a seasonal product. So you have pretty much all of your sales in one or two quarters of the year and then none in the other quarters. So if you have a license agreement, it might have a sell off period at the end, but if it says a lot of them have limitations on how much you can sell, you can't exceed what you sold in the prior quarters. Well, for a seasonal business, that makes no sense. 

 Basically means you have no sell off because you sold nothing in the prior quarters. And so it's important to look for things like that, even simple things like how many samples the licensor gets. If you are selling a very large product or a very high end product, it may not make sense to give them 10 samples that might be prohibited, even though that's sort of a standard thing. And so you need to look through and just think through the way you do business and will these standard terms work. And oftentimes the licensors are going to be very flexible when there's a practical issue like that. So that's one area where I think licensees need to spend time and fight hard for what they need. The second one is on the royalty and definite. Well, the economics in general and the definition of net sales. 

 Licensees have a tendency to rush into deals, very excited. They will tell the licensor, I'm going to sell millions of dollars of this stuff. And the licenser comes back and says, great, then give us a guarantee in that amount. I had a situation with a client where were very excited about a license. We got overly hyped internally about what we could sell and we committed to a guarantee that was more than we could sell. And in the end we probably lost money on the product, not because we didn't sell it, but because we had paid too high a guarantee and we didn't earn it back in the royalties. And so that's a really important point for licensees is to make sure that you're being realistic about what your projections are and what your advances and guarantees will be. 

 Yeah, I really feel like there's a sweet spot here when it comes to. Because you want to put forward projections to a licensor that will really impress them, get them really excited. But you don't want to go too far because they're going to base the commercial terms sort of on your. So you need to find a really happy place that's enough to get them excited, but not overboard so that you're just taking on so much risk to deal with. 

 That's exactly right. And so I think that's probably the most critical point when planning a license agreement and negotiating it is to figure out what you can realistically sell and what to offer. My experience has been most licensors would rather you give them a practical projection and commitments on finances rather than over project or under project. If you over project, they don't mind taking your money. But it's not going to be a great long term relationship. So it's really about being realistic, but not overly cautious. 

 Are there any terms that a licensor will not change? It doesn't matter how you approach it, they're just not going to budge. 

 Yeah, there are a lot of them. They won't change and it depends on the licensor. So typically, most of the contracts have some structure for guarantees, warranties, so representations, warranties and indemnities. What that really boils down to is them saying, yeah, we own this, and what's going to happen if someone makes an infringement claim? So, you know, let's say you go to a licensor and they say, you can use my character on your product, and you go and sell that product in a territory you've been given, but it turns out someone else in that territory says, no, I own rights to that. And you wouldn't think it would happen, but it does on occasion. Who's going to be responsible for that? And different licensors approach that different ways. I've actually seen contracts from some big licensors that say, it's not our problem. 

 You, the licensee, are completely responsible, even though it's our character. Most are the other way. Most, they say we own it. We guarantee we own it. Sometimes when you're dealing internationally, they won't guarantee use in every country because they just don't know they believe they own your character. But strange things happen in territories, so those kinds of provisions are generally not negotiable. I do sometimes try to negotiate them anyways, but it's important just for the licensee to be aware of what risk they're taking and decide whether they need to do anything to check the markets they're selling into. Now, if you're selling a Mickey Mouse shirt in the United States, I think it's very low risk. 

 If you picked up a property from a YouTuber and you're selling that into Germany, that might be a much higher risk because maybe someone else already has something like that there. And this YouTuber hasn't cleared any rights. So it's really just a question of being conscious of what the property is and what risks you're taking. And I think lawyers can be handy there because that language is really hard to read, and we read it every day, so we're fairly used to it. 

 Some of the other things that I think licensees that are new to licensing are surprised by the insurance provisions. Talk us through that. 

 Yeah. So licensors are always concerned that the products being sold by their licensees might cause some harm. They're also concerned sometimes about employment claims or other types of claims that might come up. And they really don't want to be responsible for anything that their licensee is doing reasonably. So that's the whole reason they're doing licensing instead of doing it themselves. They make less money, but they don't take the risk. And so almost every licensing agreement requires that the licensee have insurance. I actually find it's interesting because the standard insurance in the US is not the same as it is in Europe. And so European licensees dealing with U.S. licensors are often surprised by the insurance they have to have. The standard is commercial general liability insurance. 

 That's almost always going to be in there, usually in somewhere in the 2 to 3 million dollars range and sometimes much more, depending. Oftentimes licensors will ask for product liability insurance. So that's if someone is harmed by your product, they want to make sure there's a lot of insurance there to protect. You know, the level might depend on the product you're selling. If you're selling a shirt, there's not a high risk. If you're selling food, there's a much higher risk. If you're selling healthcare products, much higher risk. 

 Well, like baby products, they're high risk products. 

 Right. Have a very high risk. And then sometimes they will ask for employment practices, liability insurance, and various other things as well. What I typically recommend to licensees is you'll typically get a template from the licensor that has their requirements in there. And I suggest that licensees run that by their insurance broker and see what they have. And if they have it, no worries. If they don't have it, there is no harm in going back to the licensor and saying what they actually do have. So here are the coverages we have. Here are the amounts. Is that okay? A lot of licensors will accept that. And again, it depends. These contracts are written for all kinds of different products. 

 And so they will look at the specific product at issue and evaluate the risks and either say, yes, what you have is fine, or no, you need to get more. Thankfully, for most of these coverages, getting more coverage is not that expensive. But it is almost never the case that a licensor will say, well, you don't have to have any coverage, we're fine. 

 One that I've seen coming up a lot is cyber insurance. It's becoming more and more important. 

 Yeah. For businesses in general, it's becoming kind of critical and especially if the licensee is a company that is collecting user information and that's I'M not talking about Social Security numbers. Even if you are doing a newsletter and collecting emails and you're collecting names, if you are collecting kids information in particular, you have all this data and you have, if you have a data breach, that's going to be problematic for the licensor. And so they want to make sure that the licensee has cyber insurance in place so that if something like that happens, they have resources to bring in to help deal with it. 

 You've mentioned Disney a few times without breaking confidentiality. Are there any key elements you can share that sort of make or break negotiations with entertainment giants like Disney, like Universal, like the really big players in licensing. 

 So they, the bigger studios tend to be less flexible about their contract terms. They have a standard contract and they're not as willing to deviate from it. Although there are sometimes exceptions just like there are for anything for them. Where you really have some room to negotiate is in the deal terms. So the way these contracts are typically structured is you have standard terms and conditions that are all the legalese that never changes. And then a deal memo that has things like what property is being licensed, what territories the licensee can sell in, what the term of the contract is, so how long they can do it, the advance, the guarantee, the royalty, like all the things that could change. And in those sections they have a lot more flexibility. And so that's really where with those companies you can negotiate. 

 It's important to review the standard terms and just be aware of what the requirements are like sell it periods, transfer fees, computation, net royalties. It's also important to understand that a lot of these contracts, Disney I think is a 40 page contract. These are contracts that studios have written over time and changed over time as they learned from experience. So they get burned by something, they update the contract. And so there's a lot of language in there that is meant to cover a variety of different situations that may or may not apply to a particular licensee. 

 So it's really a question of, for licensees just being aware of what's in there, what applies to them and how to manage it, and then really negotiating the particular business terms that apply to their business and discussing with these major studios any of the standard terms that are problematic and seeing if they can get them revised. 

 Let's change gears a little bit. I really want to talk to you about the differences between counterfeit product and inspired by product because we get a lot of companies come to us and they say we want to get into licensing. I go onto their website and they're already selling to the naked eye is licensed product. But actually when I bring that up to them, they say, oh, no, it's inspired by, you know, no, it's not official. We're not using official artwork. We're not saying the name of the brand. We're not doing this, we're not doing that. And I have to help them understand that you're still trading off very popular IP and it's going to be extremely problematic. 

 And if you've got any chance of getting into the licensing space, you need to remove all records of that from your website, from your socials, and put yourself in the best position to. To take on licenses. Tell me about your opinion when it comes to inspired by product, counterfeit product and where they cross over. 

 Yeah, so there's one extreme is truly counterfeit products. The truly counterfeit is where the seller is copying the brand. Maybe not exactly, but copying the brand, copying the artwork. And selling a product that is meant to look like it's official when it's not. You have this maybe slighter gradation, which are knockoff products which are not using the brand, but are still selling the same product, which may or may not be infringing, depending on the type of product. And then the inspired by products which are not intending to infringe the brand, but are clearly trading off the characters. Working at a costume company, I have very firsthand experience with that. Prior to doing it, we did a license for the Disney princesses, and prior to doing that, we sold princess costume. 

 The Disney princess cost properties in particular are really interesting because they are pretty much all based on fairy tale characters. Disney doesn't own the fairy tale characters, but it does own its artwork and its variation on those characters. And so if you want to do a Cinderella costume, anybody can do a Cinderella costume. Anybody can do a Cinderella movie. They just can't do Disney's Cinderella. There's an artist, Jaycott J. Scott Campbell, who made an entire business out of doing this. He did an entire line of princesses. None of them are the Disney princesses. He just happened to pick all the same stories. But what makes what he did okay is that he did his own original artwork. When I was at Leg Amity, what made our costumes okay was were not copying the Disney costumes. We oftentimes went to the fairy tales. 

 They were such that consumers knew what were doing and they knew the characters, but were not copying the costumes from the show. And so they were inspired, but not knockoff. I will say though, when went to get the Disney license. One of the conditions was we had to cancel all of those products. They did not want the Inspired by products competing against the Disney licensed products, which makes perfect sense. And for a licensee, it's usually worthwhile. If you can get the official product and use the artwork and use the name and take advantage of the licensor's marketing, you're going to sell much better doing that. One of the mistakes I think people make and that I might be leading people to make by telling this story is thinking that if you do the Inspired by products, that will help you get the license. 

 And were sort of a unique situation, and it's usually the opposite. They were willing to turn a blind eye to what we had done in the past. Normally, looking at that, they would say, we won't work with you because we only want people who are not knocking off, who are taking advantage of our properties and who are doing official licenses. 

 I think that's really good advice. And I would like to say that the licensing world, the licensing community is pretty small. So even if you go to a licensor that you're. If you're selling inspired product and you go to a licensor and it's not their IP that you're selling, Inspired product of the licensing world is still really small and they will have a problem with it. And so you might get blacklisted across the entire licensing community and never get a license because of the inspired products that you're selling. Have you seen that before? 

 Yeah. And I would add, I would say, despite the lengthy contracts that you may have, this industry is really built on trust. When a licensor chooses a partner to work with, they're putting a lot of faith in that company and they're taking some risk because they're giving them a very valuable property. So again, I'll go back to Leg Avenue. When we did the Disney princess costumes, they were sassy. So they were a little more risque than you would normally see for a Disney property. And we had one of our retail stores issued a press release calling them sexy Disney costumes. And that was a disaster. They were not allowed to do that. We ended up on the phone with the VP of licensing at Disney, and that is a major issue. 

 And that's the kind of risk those brands take by working with a partner. And so they want to make sure that they know who their partners are and that they feel they can trust them. And so if they go to the potential licensees website and see that it is doing all kinds of inspired by our knockoff products, even if not their own brands of other people's brands, that's going to undermine that trust and they're going to be less likely to work with that partner. They may still have a conversation as to why are you doing that, but it makes it harder to get that deal in place. 

 David, I'd love to get your thoughts on Steamboat Willie. So Steamboat Willie recently came to the public domain. In the last couple of years I saw a few weeks ago, Disney have taken a Hong Kong based company to court over product that has Steamboat Willie artwork on it. But instead of copyright, they're actually suing for trademark, which is quite interesting. What's your view on what people can and can't do with Steamboat Willie now that it's in the public domain? 

 Yeah, I mean, the hardest question is what will Disney sue you for doing? So there's a distinction between copyright and trademark laws. So copyright protects original works of art, a book, a movie, a piece of artwork. Trademark is to protect brands and they exist for different reasons, so the protections are different. So with copyright, the rights exist just by creating it and they last for a very long time. It varies depending on situations, but it's 90 plus years. And the idea is that the author created the work, they should get the benefit of it for a period of time. Then once that time ends their public domain, anyone can use them. So we've seen that with Winnie the Pooh to some extent. With Steamboat We Willie, Sherlock Holmes has partially fallen into the public domain. 

 And so we're starting to see uses of that as well. With trademark, it's different. So a trademark is a word, name, symbol or device that identifies the source of a product. It's your brand. And the whole idea is that when you see that brand, you know it comes from their company and you can trust it. When you see the golden arches, you know what kind of meal you're going to be getting. Whether you think it's good or bad, it's consistent, you know, with Disney, their characters, and other companies like them as well. Their characters often become trademarks. So Mickey Mouse on the front of a shirt is just a piece of artwork. But when you put a picture of Mickey Mouse on the hang tag, everybody now knows you could have something else on the front of that shirt. 

 It's still a Disney product and you know it because you see that symbol. And so that symbol is not just a creative work, it is also a a source identifier. It is a brand. And so the argument Disney is making with Steamboat Willie is that they use that artwork as a brand and so that if other people are using that brand on similar products, it's infringing their trademark, even if they no longer have any copyright rights. And so it's kind of a balancing act and somewhat subjective. But I think if people want to use Steamboat Willie, art will work for creative works. They can do that now. They can write a story about Steamboat Willie. They can create artwork of Steamboat Willie. 

 If they are putting a small picture of Steamboat Willie, say, on a corner pocket of a shirt, that's a problem because now it looks like a source identifier. If they are doing a Steamboat Willie website and selling pajamas, probably a problem because Disney sells pajamas using that logo. So. But it's a bit of a balancing act because you can't be sure exactly when they'll make it claim and when they won't. And for them, that's the whole point. They want, the big studios want to keep people on their toes about that so that they're dissuaded from using those public domain characters. 

 And if you're on the. On the receiving end of a legal letter from Disney, it's not a good place to be in. 

 No. From any really. From any major studio or any major company. You really don't want to be fighting an infringement claim. It's. Even if you're in the right, it's a lot of expense and a of lot of time. 

 Yeah. Before we wrap up, I couldn't help but notice the toys that you have in the background. We have that in common. I've got some fun things happening behind me as well as both a licensing attorney and a toy collector. How does your personal passion influence how you structure deals for toys and collectible companies? And do you ever find yourself sort of like geeking out during these transactions? 

 Oh, absolutely. One of the companies I work with is Sideshow. In fact, one of the statues behind me is a statue they gave me. And so when I'm working with them on a deal, it's sometimes hard because I will be excited about the product and I need to distance myself and make sure I'm not doing the deal just so I want them to make it, but so that they're good and getting good deal terms. And for me, I have a side business with some clients doing Robotech helmets. And so I'm doing licensing deals myself for that. And it's really. I love seeing what products people make. One of my favorite things when I was in house, I would work with a creative design Room. And they would say, okay, go get a license. 

 So I would go out, I would negotiate the license, do all the terms, and then it was almost like pulling the pin on the grenade. Okay, I got Flashdance. Boom. Go. What have you got? And then seeing what they came up with. And it's fascinating me to see when you take an existing property and give it to creative people and say, now do your product with this property. They come up with amazing things. And it is so much fun to see that. It's fun to see the creativity. It is fun to see how people interact with it. One of the greatest things for me, we did an Assassin's Creed costume, and it was a bit. It was unusual for the costume industry at the time. The price point was twice as high as most costumes. It was really a risk. 

 And then I was at Comic Con and saw people wearing our costume for cosplay, and that was. It just thrilled me. It was a great victory. 

 Amazing. I mean, this is the industry we're in. It's very much a, you know, pinch yourself every day. You know, even though a lot of licensing is kind of, you know, legal things and royalties and stuff like that, it's still really fun, isn't it? You still. Every day is different, and you still get to work with brands that you really love. 

 Yeah. And creative people who are coming up with ways to express those brands in new ways, whether it's new artwork for Mickey Mouse on a T shirt or finding an old property that's sort of gone out of style and bringing it back. Even brand extensions you see a lot now in the food category, Coke did an Oreo flavored Coca Cola. That's very unusual. But it's fun to see the mashups people come up with and the interesting things they do. And it just makes it. Every year, the industry is new and there's new stuff and new ideas and makes it exciting. 

 Oreo flavored Coca Cola. I think I'll pass on that. 

 It was not as bad as the KFC flavored toothpaste, which I will never try on. 

 Yes. No, that sounds horrible as well. Well, it's been incredibly interesting talk to you. I think this has been a really valuable conversation for those listening. I know a lot of them will want to learn more about how you and the team at Nolan Hyman can help then navigate these complex waters. What's the best way for people to reach out to directly if they'd like to discuss their licensing challenges or opportunities? 

 Yeah, absolutely. So they can go to our website@nolanhyman.com, that's n o l a n H e I m a n n.com or they can email me. So it's David Snyder, the email-s c h n I d e r nolanhyman.com and I'm happy to work with people, talk to them about the industry and see how we can help them. Cool. 

 Great. Thanks, David. Really appreciate you coming on. 

 Yes, my great pleasure. 

 I hope you've enjoyed this episode of the Born to License podcast. Don't forget to like and subscribe. And if you're eager to learn more about licensing, I encourage you take a look at my course, Learn to License. I've condensed almost 20 years of learning in my licensing career to help others understand how licensing works. And as a reward for sticking around, here is a discount code for you to put in. That code is born to license 25. I hope to see you there.