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License Agreements – Addressing Difficult Supply Chain Issues

The spotlight has  clearly focused on the global supply chain for apparel, accessories and footwear  - in particular, wages and working conditions in garment factories in Bangladesh and other low wage countries. Many companies are now working to improve factory conditions  as part of corporate social responsibility initiatives, and to address consumer concerns and avoid potential reputational damage.  It is generally difficult for companies to balance competing concerns about production cost ( and ultimate price to the consumer), supply chain transparency and factory working conditions, when their manufacturing facilities are company owned or contract factories. The issue is even more complex when products are manufactured by a third party under a licensing agreement.

Typically, license agreements for apparel, accessories or footwear include specific provisions addressing the licensee’s owned or contract factories. The nature and extent of these provisions vary widely , depending upon the relative bargaining power and resources of the licensor and licensee.

Here are a few of the most common variations of these provisions and some observations on each:

Adherence to Licensee’s Codes

If a licensee is a large company and/or a public company, it may have written corporate codes of conduct addressing such issues as child labor, slave labor, working conditions, discrimination, wages and collective bargaining at the factories that produce its products. The licensor may require the licensee to covenant  that all of its factories producing products under the license  adhere to the licensee’s codes. However, even if the licensee agrees to such a covenant, it is unlikely to agree not to amend its codes  ( or to seek consent to amend its codes from the licensor), so that the licensor may not be assured of continuing protection . Accordingly, a licensor might also seek a covenant along the lines described below.

Assurances that the Licensee’s Factories Meet Specified Standards

A licensor may seek assurances that the licensee’s factories meet specified  standards. The standards might be one or more of the following “compliance with all applicable federal, state and foreign laws and ethical industry standards”, “conformity with best industry practices and standards” or a full listing of the actual standards that must be complied with – similar to what would be found in  actual corporate codes of conduct. Certainly, the third approach is the clearest and most specific. Compliance with applicable laws and ethical industry standards may be too vague a standard to enforce in certain cases. And, it may be difficult to determine “best practices” in light of the wide variety of practices across geographic areas ( and to determine whether a particular practice in a single factory raises the bar).

For either  type of covenant,  the licensee may want a materiality, or knowledge, qualifier in order to minimize the risk of a breach of this covenant since it is generally difficult to assure continual compliance. On the other hand, the licensor may seek to have each factory certify in writing that it complies with the applicable standard, may  require the licensee to periodically verify such compliance and may seek access to the factories to ascertain compliance.

In addition, the licensor will typically  seek specific remedies for breach of these covenants. The remedies may include one or more of the following: a  covenant to promptly terminate a non-compliant supplier, termination of the license agreement,  loss of renewal rights, and/or damages for any interruption in supply due to a change in suppliers. These remedy provisions often provide a notice process in which  the licensor notifies the licensee of a possible breach and the  licensee has a specified period of time to cure the breach before the remedy applies.

Given the importance and visibility of supply chain issues, it is important that these license agreement provisions be drafted and negotiated with care.

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