Before I proceed with a new topic I realise I have been remiss in leaving out an important sub-topic to the discussion of Minimum Guarantees and Payment Schedules.
The concept of Cross-Collateralisation and Non-Cross-Collateralisation comes into play in the discussion of how Minimum Guarantees can be earned out in a License Agreement.
Cross Collateralizing means that whilst there are two (or more) ways to earn out the MG, there is no restriction in how it is done. To give a simple example, if a License Agreement has an MG of US$20,000 and covers Singapore and Malaysia, and the deal is ‘crossing’, it means the MG can be earned out in both Singapore and Malaysia, or only in Singapore, or only in Malaysia.
Likewise, a deal may have one territory but two properties in it – for instance Character A and Character B – in the same way, if the deal is crossing, then it doesn’t matter whether the royalties are earned against Character A or Character B, all earnings contribute without limit to the MG.
In contrast, taking the first example of Singapore and Malaysia, if the deal is “non-crossing”, then it would be indicated that the MG is split -- $12K against Malaysia and $8K against Singapore for instance (totaling $20K). In this instance, the MG is specifically allocated to the two markets. So, if the licensee eventually earned $15K in royalties in Malaysia and only $5K royalties in Singapore, the licensee would actually $3,000 in overages against Malaysia, and will have left $3,000 un-recouped against the Singapore portion.
The same alternative scenario would apply to the second example if within the contract the two Characters (A & B) were non-crossing and had specific amounts allocated to them.
A third way that a deal may be non-crossing is by time period. Let’s say a contract is 3 years in length, and there is a non-crossing MG against each of the contract or calendar years in the agreement. So if in Year one the licensee gets off to a sluggish start with sales and the non-crossing portion for that year is left not fully recouped, then even if in Year 2 if sales take off and subsequently the Year 2 MG portion is fully recouped and then some, any overages recorded in Year 2 cannot go back and cover the short fall in the first year. That un-recouped amount from Year 1 is essentially lost to the licensee.
As such, it is easy to imagine that Licensees will resist any effort to make a deal non-cross collateralizing (in any way), whilst the Licensor’s intent will be the opposite.
The Licensee will want to retain the flexibility to earn out the MG in as many ways as possible to minimize its risk. For the Licensor, on the other hand, they will want to realise the full extent of the potential for all rights placed in a deal, and the best way to do that is to put the Licensee on the hook to deliver in all areas and not let them ‘cover’ for under performance in one area with over performance in another.
All of the above having been said, suffice it to say that most deals are crossing as it is a “Licensee Market” now-a-days what with the abundance of IP options crowding the field. One of the other related impacts of trying to make a deal with multiple rights in some respect non-crossing is that it will put downward pressure on the overall MG (and concomitant sub-MGs assigned to the segmented portions), as Licensees will seek to mitigate whatever additional risk they are taking on by agreeing to a non-crossing component (which again, they will push hard against in the first place….).
NEXT time, I will pick back up on a new topic related to licensing – The Piracy Paradox….