Intellectual property Litigation
Reasonably Withheld Consent in License Agreements
By Hon-Man Lee, Lauren Korshalla, and Albert Wai-Kit Chan
It’s common to restrict or limit licensee activity in a license agreement by including such language as, “Licensee may not grant sublicenses without consent from licensor, which consent shall not be unreasonably withheld.” However, many license agreements do not further state what the standards of reasonableness are. Hence, there remains a question of when it is reasonable to withhold consent and when it’s not. If the licensor only provides consent under the condition that the licensee accepts certain arrangements of royalty sharing, is it reasonable or unreasonable?
It’s Reasonable When . . .
One reasonable basis for a licensor to refuse consent is when the licensor’s consideration for entering into the license agreement is being impaired. In the Federal Circuit case of Speedplay v. Bebop, the licensors and the licensee entered into an agreement wherein the licensee could not assign its interest in the license without the consent of the licensors. Under the agreement, however, the licensors’ consent to an assignment by the licensee could not “be withheld unreasonably.” The court reasoned that the “[licensors’] only reasonable basis for refusing consent would be the impairment of their consideration for entering the [license agreement].”
Speedplay raises the question of what the licensor’s considerations are for a license agreement. A licensor may enter into a license agreement for further development or commercialization of an intellectual property or invention. A licensor may also grant a license for monetary reasons. For example, a license may be granted for the purpose of obtaining funding for continual development of the invention. The court in Speedplay recognized that an ongoing royalty stream is an example of a licensor’s consideration for a license agreement.
A licensor may reasonably withhold consent for a sublicense or assignment when one of the above considerations is being jeopardized. If the licensee wants to grant a sublicense to a competitor of the licensor, then the licensor’s goal of further development of the intellectual property would be seriously compromised, and the licensor, under this situation, would certainly have reasonable basis to withhold consent. Similarly, if the licensee’s assignment or sublicense would jeopardize the licensor’s ongoing royalty stream, then the licensor may reasonably withhold consent.
In trademark licensing, a licensor may reasonably withhold consent when the licensor is exercising quality control over the mark. For example, a trademark holder has the right to control the quality of the goods manufactured and sold under its trademark, wherein the protection of the mark may be lost if the trademark licensor fails to control the quality of the licensed goods.
The First Circuit case of Rey v. Lafferty involved creator and licensor Margaret Rey’s rejection of proposed merchandise bearing the children’s book character Curious George. In Rey, the licensing contract stated that licensor’s approval “shall not be unreasonably withheld.” Rey had rejected various items for merchandising, such as pajamas, plush toys, and software. In certain instances, other manufacturers disengaged from proposals for the manufacture of Curious George merchandise after hearing of Rey’s harshly worded rejections of prototypes. The court concluded that the rejection was reasonable if the licensor could, at a minimum, articulate a material reason (even if the reason was subjective) for disapproving a product. The licensor could not disapprove for reasons immaterial to the mark, its proposed use or commercial potential, or reasons unrelated to the creator/licensor’s artistic and reputational identification with the mark and ancillary products. Disapproval needs to be communicated, consistent with contractual specifications, within a reasonable time and in a reasonable manner so as to let the licensee rework the product to gain approval. Finally, the reason for withholding product approval could not be so preclusive as to frustrate the fundamental contractual assumptions upon which the license was formed. In other words, the licensor could not impose approval standards that would effectively eliminate all potential for profitable use of the trademark.
Similarly, copyright licensors may reasonably withhold consent when it is based on the exercise of quality control over the intellectual property. Although copyright holders in the United States do not possess moral rights, they may insist, contractually, on approval provisions to assure quality control and high standards in the exploitation of the creative work. In Clifford Ross,a contractual provision calling for the copyright holder’s participation in selecting licensing agents and enjoining the issuance of further licenses absent the copyright holder’s approval was upheld because the court concluded that there would be irreparable harm to the future profitability of the intellectual property and the artistic reputation of the copyright holder if the exploitation of the intellectual property continued without regard to the licensor’s high standards of quality control.
It’s Unreasonable When . . .
On the other hand, it would be unreasonable to withhold consent to coerce a licensee into accepting certain concessions in an attempt to renegotiate the license agreement. In Orange County Choppers v. Olaes Enterprises, Inc., the licensor granted the licensee an exclusive license to use the licensor’s logos, trademarks, and controlled designs. Under the license, the licensee could submit proposed designs to the licensor, and the licensor was required under the license agreement to use reasonable efforts to notify the licensee of its approval or disapproval of any materials submitted. The licensee alleged that the licensor intentionally delayed approval of the licensee’s designs to force renegotiation of the license agreement to obtain more money and concessions from the licensee than that to which the parties had previously agreed. The licensee claimed that it was coerced into signing three amendments to the license to limit the scope of the license in exchange for the licensor’s approval of its designs. The court ruled that the licensor failed to use reasonable effort to notify the licensee of its approval or disapproval when the licensor withheld notice to force renegotiation of the license agreement.
Applying the above standards of reasonableness to the scenario posted at the beginning of this article, i.e., when the licensor conditions his consent on having the licensee accept certain arrangements of royalty sharing, one can argue that the licensor has withheld consent unreasonably. Absent any deficiency or fraud in the original license agreement, and without any evidence that the sublicense may jeopardize the licensor’s ongoing royalty stream, the licensor cannot arguably maintain a reasonable basis of withholding consent. Instead, the conditions put forth by the licensor upon receiving a consent request from the licensee are most likely conditions that are more favorable to the licensor than originally agreed to in the license. Thus, conditioning the granting of consent on the licensee’s acceptance of the new licensor-friendly conditions would arguably amount to unreasonably withholding consent to coerce renegotiation of the license agreement.
Furthermore, it may be advisable, from the licensee’s perspective, to include certain standards of reasonableness when withholding consent in the license agreement. It may benefit the licensee if the agreement includes language that indicates the licensor cannot claim to have reasonably withheld consent unless the licensor’s considerations for entering into the license agreement are being impaired. For example, the license agreement might read, “Unless the licensor reasonably believes that the sublicensee cannot fulfill what is agreed in the license agreement, the licensor cannot reasonably withhold consent.”
Keywords: litigation, intellectual property, withheld consent, license agreements
Hon-Man Lee and Lauren Korshalla are patent attorneys and Albert Wai-Kit Chan is a partner at the Law Offices of Albert Wai-Kit Chan, PLLC.
- Speedplay v. Bebop, 211 F.3d 1245 (Fed. Cir. 2000).
- Id. at 1251-52.
- Id. at 1251.
- Rey v. Lafferty, 990 F.2d 1379, 1393 (1st Cir. 1993).
- See Rey,990 F.2d 1379, 1393 (1st Cir. 1993), citing Clifford Ross Co. v. Nelvana, Ltd., 710 F. Supp. 517 (S.D.N.Y. 1989), aff’d without opinion, 883 F.2d 1022 (2d Cir. 1989).
- Clifford Ross, 710 F. Supp. at 520.
- County Choppers v. Olaes Enterprises, Inc., 497 F. Supp. 2d 541 (S.D.N.Y. 2007).
- Id. at 548–49.
- Id. at 559.
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The scene: You’re in a contract negotiation, representing The Good Guys Company. The other side, Nasty Business Partner Inc., insists on requiring The Good Guys to get NBP’s consent before assigning the agreement. NBP has all the bargaining power; The Good Guys decide they have no choice but to go along.
Trying to salvage the situation, you ask NBP for some additional language: “Consent to assignment may not be unreasonably withheld, delayed, or conditioned.” But NBP refuses.
Have you just screwed your client?
In some jurisdictions, The Good Guys might have benefited from a default rule that Nasty Business Partner Inc. had an implied obligation not to unreasonably withhold consent to an assignment of the contract. See, e.g.,Shoney’s LLC v. MAC East, LLC, 27 So.3d 1216 (Ala. 2009); Pacific First Bank v. New Morgan Park Corp., 876 P.2d 761 (Or. 1994).
But you asked for an express obligation — only to have NBP reject the request — and The Good Guys signed the contract anyway.
A court might therefore conclude that the parties had agreed that NBP would not be under an obligation not to unreasonably withhold its consent to assignment — that NBP could grant or withhold its consent in its sole discretion. This is pretty much what happened, on somewhat-different facts, in both the Shoney’s LLC and Pacific First Bank cases:
- In the Shoney’s LLC case, the contract had an express provision allowing the non-assigning party to use its sole discretion in deciding whether to consent to an assignment. The Alabama Supreme Court held that this clause trumped the general requirement of reasonableness.
- In the Pacific First Bank case, the lease agreement in suit included a consent-not-to-be-unreasonably-withheld requirement for certain sublet arrangements, but it did not include a similar requirement for assignments. The Oregon Supreme Court held that this amounted to an implied agreement that for assignments, the landlord was free to grant or withhold consent in its discretion.
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Illustration: Conan O’Brien’s lawyers win by letting a sleeping dog lie
You might remember that TV talk-show host Conan O’Brien’s stewardship of The Tonight Show proved disappointing to NBC. The network decided to move Jay Leno back into that time slot and bump Conan back to 12:05 a.m. This led Conan to want to leave the show and start over on another network — but if he had, he would arguably have been in breach of his contract with NBC.
Conan’s contract apparently did not state that The Tonight Show would always start at 11:35 p.m. Conan’s lawyers were roundly criticized for that alleged mistake by ex-Wall Streeter Henry Blodget and some of his readers. SeeConan’s Lawyers Screwed Up, Forgot To Specify “Tonight Show” Time Slot (Jan. 11, 2010), especially the reader comments following the article.
But then wiser heads pointed out that Conan’s lawyers might have intentionally not asked for a locked-in start time:
- The Tonight Show had started at 11:35 p.m. for decades; it could have been plausibly argued that this start time was part of the essence of The Tonight Show, and thus was an implied part of the contract.
- Suppose that Conan’s lawyers had asked for the contract to lock in the 11:35 p.m. start time of The Tonight Show, but NBC had refused. In that case, a court might have interpreted the contract as providing that NBC had at least some freedom to move the show’s start time.
- And suppose that Conan had asked to lock in the 11:35 p.m. start time of The Tonight Show, but that NBC had responded by insisting on just the opposite, namely a clause affirmatively stating that NBC was free to choose the start time. Given that NBC had the bargaining power at that point, Conan might have had no choice but to agree, given that he wanted NBC to appoint him as the host of the show. In that case, there’d be no question that NBC had the right to push the start time of the show back to 12:05 p.m.
Ultimately, Conan and NBC settled their dispute, with the network buying out Conan’s contract for a reported $32.5 million. This seems to suggest that NBC was concerned it might indeed be breaching the contract if it were to push back The Tonight Show to 12:05 a.m. as it wanted to do. As an article in The American Lawyer commented:
… If O’Brien had asked that the 11:35 p.m. time slot be spelled out in any agreement — and had NBC refused — the red pompadoured captain of “Team Coco” would be in a weaker position in the current negotiations.
“If you ask and are refused, or even worse, if you ask and the other side pushes for a 180, such as a time slot not being guaranteed, you can end up with something worse,” [attorney Jonathan] Handel adds. Without having their hands bound by language in the contract on when “The Tonight Show” would air, O’Brien’s lawyers are in a better position to negotiate their client’s departure from NBC.
Brian Baxter, Legal Angles Abound as Conan-NBC Standoff Nears Endgame (Jan. 20, 2010).
Judging by the outcome, it may well be that Conan’s lawyers did an A-plus job of playing a comparatively-weak hand during the original contract negotiations with NBC.
The lesson: Be careful what you ask for in a contract negotiation — if the other side rejects your request but you do the deal anyway, that sequence of events might come back to haunt you later.
Related post:Be careful what you ask for in your standard contract form – the other side may demand it for themselves (Dec. 4, 2008).