Most sellers of apparel today recognize the value of selling products under a brand name. The Licensing Industry Merchandisers’ Association has reported that there were annually more than $32 billion in global retail sales of licensed fashion products.
The licensing of brand names is today more popular and prevalent than ever before in the sale of apparel. Many apparel sellers and licensees are therefore routinely entering into license agreements with the owners of brand names.
While many of the issues that are confronted by a licensee in negotiating a license agreement are readily apparent — such as royalty rates, exclusivity, guarantees, territory and the like — there are a number of concepts that are not as obvious, yet can be critical to ending up with an agreement that will protect the licensee down the road.
The following are examples of issues licensees should be cognizant of when negotiating a license agreement.
Require That the Licensor Not Use Any Name Similar to the Licensed Trademark
Most license agreements provide that the licensee has the exclusive right to use the licensed trademark in the licensed territory in connection with the products covered by the agreement. Under such an agreement, the licensor cannot use the trademark in connection with the same products in the licensed territory.
The licensor might not be precluded from using a similar or derivative mark in connection with those products in the licensed territory. For example, if the licensee licenses the exclusive right to use a specific trademark, the licensor would be permitted to use that same trademark followed by the word “classic” or “vintage” or any such other term.
Accordingly, it is critical to include language in the agreement which precludes the licensor from using any similar or derivative mark in the territory — otherwise the expected and bargained for exclusivity is essentially eliminated.
Address What Happens in the Event the Licensor Enters Into an Agreement With a Retailer That Gives That Retailer an Exclusive Right to the Licensed Brand
It is becoming more and more common for a brand to make an agreement with a retailer that provides that the brand will become exclusive to that retailer. Such an arrangement between a brand and a retailer will likely be publicly announced — or may otherwise become publicly known — well in advance of the exclusive arrangement going into effect, and at a time that the brand has licenses in place that are winding down.
In such event, during the balance of the term of any license agreement that a licensee may have with that brand, it will become difficult or impossible to make meaningful sales in the market as other retailers will not be interested in continuing to buy and market a brand that they will not be able to sell in the near future when the brand becomes exclusive to the specific retailer. In that case, the problem is compounded because the licensee may also find it difficult to make sufficient sales to meet its minimum royalty obligation.
Therefore, a licensee needs to provide in the agreement that, in the event of a future exclusivity agreement, the licensee has the right to terminate the agreement with a reduction or elimination of any obligation to pay minimum royalties.
Prevent Licensor’s Use of the Licensed Trademark in Connection With Distribution Channels Lower Than the Licensed Channels
A license agreement will set forth the specific retailers or retail segments to which the licensee may sell the licensed products. It will almost always be detrimental to the licensee’s ability to sell in the licensed channels if the licensor uses, or authorizes any third party to use, the licensed trademark in connection with the sale of products similar to the licensed products to any channel or retailer that is below the retailers to which the licensee is permitted to sell.
Given this reality, provision should be made to preclude such sales by the licensor; or at a minimum to reserve the right to terminate the agreement in the event of such down streaming of the licensed trademark.
Dealing With the Usual Provision That Disputes Be Resolved in the Licensor’s Jurisdiction
The first drafts of license agreements are typically drafted by the licensor and usually contain a provision that any disputes between the parties be resolved exclusively in the licensor’s jurisdiction. If, for example, the licensor is located in California and the licensee is in New York, it is a benefit to the licensor and a burden on the licensee to have to litigate all disputes in California.
There is really no reason why disputes should be resolved exclusively in either the licensor’s or licensee’s jurisdiction. One equitable solution is to propose that any claims brought by licensor shall be brought in the licensee’s jurisdiction, and any claims brought by licensee shall be brought in the licensor’s jurisdiction. It is a fair way to resolve this issue and has the added benefit of making it more likely that the parties will resolve their dispute before litigation as any party contemplating bringing an action will now have to bring it in the other party’s jurisdiction.
Precluding the Licensor From Modifying the Primary Name of the Brand in Only the Licensed Product Category
Many license agreements provide the licensor with the right to modify the licensed trademark as part of a branding/marketing strategy. This is generally acceptable as part of the licensor’s right to control the brand and its image. Provision should be made in the agreement that, if any modification is made in the licensed trademark, such change must be across the board for all products sold under the brand and not just a change to the trademark used for the products which are the subject of the agreement.
There are many provisions that are critical to a licensee — and licensor — in achieving a license arrangement which protects their interests. The above are just a few of the important issues for a licensee to consider that might otherwise not be readily apparent. The best way to avoid common pitfalls is to retain counsel with significant experience in negotiating license agreements.
Kenneth Schulman is a partner at Pryor Cashman with deep experience in licensing in the fashion, apparel and entertainment industries.