5 Essential Legal Insights from My Conversation with Entertainment Attorney David Schnider
After two decades in licensing, I've learned that the best deals aren't just commercially sound - they're legally bulletproof. And yet, I've watched countless licensees rush into agreements, eyes fixed on the exciting brand partnership ahead, only to stumble over legal landmines they never saw coming.
After two decades in licensing, I've learned that the best deals aren't just commercially sound—they're legally bulletproof. And yet, I've watched countless licensees rush into agreements, eyes fixed on the exciting brand partnership ahead, only to stumble over legal landmines they never saw coming.
That's why I was thrilled to sit down with David Schnider, partner at Nolan Heimann LLP, whose journey into licensing law is as unconventional as it is instructive. After spending 10 years in litigation (which he candidly admits was "horrible"), David joined Leg Avenue as general counsel and pitched his boss on entering the licensed costume space. His boss's response? "That's a great idea. You just do it yourself."
What followed was a masterclass in learning licensing from the ground up. David walked the licensing show floor, negotiated deals for properties nobody else wanted (like Top Gun between the two movies), and eventually secured a Disney license—all while serving as both deal-maker and legal counsel. That dual perspective—attorney and practitioner—gives him insights that pure lawyers or pure business people simply can't match.
In our conversation, David pulled back the curtain on the legal complexities that trip up even experienced licensees. From deceptively simple definitions to clauses that seem innocent until an audit, here are five critical legal insights every licensing professional needs to understand.
1. The Definition of "Net Sales" Can Make or Break Your Deal—And Most Licensees Don't Read It Carefully Enough
The Insight: When someone tells you they have a "10% royalty," your first question should be "10% of what?"—because that answer determines whether your deal is profitable or devastating.
David was emphatic about this:
"People come to me and say, 'yeah, I got a 10% royalty.' I said, great, 10% of what? That could be your profits, your gross. 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 uses "net sales," but what constitutes "net" varies dramatically: "That means the gross sales less some things that get backed out. But that's a critical definition of what gets backed out. A typical agreement will allow you to back out your sales tax, maybe platform fees if you're doing something like a video game. But most of them are not gonna let you take too much out."
David highlighted a mistake that catches licensees constantly: "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."
His recommendation?
"I typically recommend to new licensees that they get a copy of the licensor's preferred royalty statements if they have them 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."
Why It Matters: This isn't academic language—it's the difference between a profitable licensing program and one that bleeds money with every sale. If you're calculating your margins based on paying royalties on net sales with certain deductions, but the contract caps those deductions differently than you assumed, your entire financial model collapses.
The Takeaway: Before signing any licensing agreement, get three things: 1) The exact definition of net sales from the contract, 2) A blank copy of the licensor's royalty reporting template, and 3) Confirmation from your finance team that you can actually report what's required. Run your typical discount structure, returns policy, and platform fees through that definition to see what you'll actually be paying. If it doesn't work, negotiate it before signing—not after your first royalty payment is due.
2. Transfer Fees Are the Hidden Landmine in Your Exit Strategy—And They're Increasingly Common
The Insight: That licensing deal you're signing today could cost you hundreds of thousands of dollars when you sell your company tomorrow—and most licensees don't realize it until it's too late.
David explained this relatively new phenomenon: "I've seen this. It's now fairly common, but it wasn't 10 years ago. 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."
The licensor's logic?
"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 to now 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."
But the execution is often problematic: "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 $500,000 to different licensors in fees."
David shared a success story:
"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 we 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 managed expectations."
Why It Matters: Transfer fees directly impact your company's valuation and your personal return when you sell. Private equity buyers and strategic acquirers factor these fees into their offers—if you're surprised by $500,000 in transfer fees during diligence, that comes straight out of your proceeds. For founders planning their exit, this can be the difference between a life-changing payout and a disappointing one.
The Takeaway: If you have any plans to sell your company, take investment, or bring on partners within the next 5-10 years, negotiate transfer fee caps into every licensing agreement you sign. Don't wait until you're in discussions to sell—by then it's too late. Even if you have no current plans to sell, negotiate the cap anyway. Companies change hands for unexpected reasons, and future-you will be grateful present-you thought ahead.
3. Audits Aren't About Finding Fraud—They're About Finding Mistakes (And They Almost Always Find Them)
The Insight: Licensors don't audit you because they think you're cheating them. They audit you because even honest, well-intentioned licensees make mistakes—and those mistakes add up.
David's perspective on audits was eye-opening: "Most audits are not expecting to find misconduct. They're expecting to find mistakes. When licensors bring in auditors, especially the big companies, typically they are doing an aggressive audit and they are looking for every mistake."
He shared a telling conversation:
"Years ago, I was talking to a royalty auditor who had been doing it for 25 years. I said, 'you mentioned this 5% clause'—most agreements say if the auditor finds a 5% or greater discrepancy, the licensee pays the audit costs—'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.'"
The types of mistakes auditors find aren't about dishonesty: "Did you sell a product before you had approval? This is a key mistake new licensees make. They figure, 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 says, '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."
Other common findings:
"If you're selling outside the territory, sometimes the 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 invoice billings."
Why It Matters: A Disney-level licensor audits almost every licensee eventually. Smaller licensors are less consistent, but the risk is always there. When an audit finds issues—and they almost always do—you're on the hook for underpaid royalties, interest, and often the audit fees themselves. For a small company, an unexpected $50,000-$100,000 audit bill can be devastating.
The Takeaway: Treat audit compliance as seriously as you treat product approvals. Create internal checklists: Has every product sold received final approval? Are we only shipping to approved territories? Are we respecting launch dates? Are discounts within contracted caps? Are we reporting every sale channel? Consider conducting an internal pre-audit annually—review your own books the way an auditor would, and fix issues before the licensor finds them. The money you spend on good internal controls is nothing compared to what an adverse audit can cost.
4. "Inspired By" Products Aren't a Clever Workaround—They're Career Suicide in Licensing
The Insight: Selling "inspired by" products to build your business before getting official licenses doesn't demonstrate your capability—it destroys your credibility and can blacklist you from the entire industry.
David was unequivocal about this: "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."
He explained the dynamic from his time at Leg Avenue:
"When we 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."
But David cautioned against misinterpreting that success:
"One of the mistakes I think people make is thinking that if you do the inspired-by products, that will help you get the license. We were sort of a unique situation and it's usually the opposite. Normally looking at that, they would say, 'we won't work with you because we only want people who are not knocking off or taking advantage of our properties and who are doing official licenses.'"
The industry's small size amplifies the problem: "I would say, despite the licensing world being pretty big, the licensing community is pretty small. So even if you go to a licensor and it's not their IP that you're selling inspired product of, they will have a problem with it. You might get blacklisted across the entire licensing community and never get a license."
David clarified where the line is: "There's one extreme which is truly counterfeit products—copying the brand, copying their artwork. Then knockoff products which may or may not be infringing. And then the inspired-by products which are not intending to infringe the brand but are clearly trading off the characters."
Why It Matters: Licensors aren't just licensing their IP—they're betting their reputation on your integrity and competence. If your website shows "inspired by" Disney products, or "not officially licensed" Marvel items, you're telling every licensor that you're willing to exploit IP without permission. That's not the partner they're looking for. The licensing industry is built on relationships, and those relationships require trust.
The Takeaway: If you currently sell any "inspired by" or unofficial products, stop immediately if you want to enter legitimate licensing. Scrub them from your website, your social media, your Amazon storefront—everywhere. Wait at least 6-12 months to put distance between your past and your licensing aspirations. When you approach licensors, be transparent about your history if asked, but demonstrate you understand why it was wrong and what you've changed. Your future licensing opportunities depend on proving you respect IP rights—and there's no way to prove that while actively exploiting them.
5. Territory Restrictions Require More Vigilance Than Most Licensees Realize—And Violations Can Be Expensive
The Insight: Just because you're shipping to an address within your licensed territory doesn't mean you're complying with your territory restrictions—and auditors know all the tricks.
David shared a revealing case study:
"I had a client who was selling products within the United States. What they did not realize at the time was that the purchasers were outside of the United States, and the address they were giving was a logistics company. So they were ordering products, having it shipped to that logistics company, and then shipping it out of the territory."
The licensor's response during the audit? "The auditor said, 'well, you should have realized that what you were 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.'"
David explained why licensors care so much:
"The simplest reason is because they may be working with other licensees there. If they've given 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."
But there's a deeper brand issue too:
"The goods that are marketed in the US may not be the same as the goods that are marketed in Brazil or in Asia. 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. There are cultural sensitivities around certain topics. If you have products coming in that are causing consternation among people in that territory, you could actually be undermining the brand."
Why It Matters: Territory violations aren't just contract breaches—they can damage the licensor's relationships with other partners and harm the brand in markets where messaging and product design have been carefully calibrated for local audiences. That's why licensors take these violations seriously and why auditors specifically look for them. In worst-case scenarios, you could be paying royalties on gross sales (not just the royalty percentage) for every out-of-territory sale.
The Takeaway: Implement systems to flag potential territory violations before they happen. Screen customer addresses against known freight forwarders and logistics companies. Monitor your IP address data for patterns suggesting international buyers using US addresses. Set up alerts for large orders going to commercial addresses in border areas. If you're selling online, use geo-blocking for countries outside your territory. The cost of these preventive measures is nothing compared to what you'll pay if an audit uncovers systematic territory violations.
The Bottom Line
David Schnider's journey from litigator to in-house counsel to licensing attorney gives him a perspective few lawyers can match: he's negotiated deals from the licensee side, defended them in litigation, and now counsels clients through every pitfall he learned about the hard way.
His overarching message isn't that licensing agreements are traps or that licensors are adversaries. It's that these partnerships work best when licensees truly understand what they're committing to. The contracts are long and complex for a reason—they're protecting relationships, brands, and businesses built over decades or even centuries.
As David put it:
"These deals are all built on mutually beneficial partnerships. 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 you can find ways to work together going forward."
But that partnership only works when licensees take the legal side as seriously as the creative and commercial sides. Read the contracts. Understand the definitions. Know what compliance actually requires. And when you're not sure—before you sign, not after—talk to someone who's seen these issues play out hundreds of times.
Because in licensing, the most expensive legal advice is the advice you don't get until it's too late.
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