Merchandise licensing can be profitable for both the licensor and the licensee. A well-executed licensing program can provide the licensor with additional income, publicity and recognition, and can provide the licensee with an opportunity to profit from the goodwill associated with the licensor’s properties. Before entering into a license transaction, the licensor and licensee should agree on the terms of the license, and should sign a written license agreement to serve as the road map for their relationship.

In a merchandise license transaction, an artist, designer, trademark owner or celebrity (the “licensor”) grants a license to a manufacturer or retailer (the “licensee”) to manufacture and/or sell articles of merchandise which use the property that is the subject of the license, in exchange for a royalty from sales of those articles of merchandise.  Typical licensed properties include artwork, characters, trademarks, celebrity names and likenesses, and book, television and movie titles.  Licensed merchandise may include clothing, greeting cards, toys, games, housewares, jewelry, dinnerware, cosmetics and collectibles.

A licensor will want to ensure that each license granted is covered by a comprehensive license agreement that defines the works licensed, the products to be produced and the royalties to be paid.  A licensor will also want to ensure that the licensee will bring the licensed products to market within a reasonable time, will keep those products in the market for the term of the license, will give appropriate credit to the licensor and will abide by the licensor’s quality control standards.  The licensor and the licensee will both want to have appropriate copyright and trademark registrations in place to protect the licensed property against infringement.

Licensing programs can be very short-term, or they can last for many years, depending on the type of property licensed and the consumer appeal of that property.  Individual character and trademark properties tend to have longer lives than art properties, but art licensing programs which are built around an artist’s name and style can continue for as long as that artist continues to produce artwork.

The license agreement is at the heart of every merchandise licensing transaction. While there are some generally accepted rules in the industry, the licensor and the licensee are usually free to put together the best deal that each can negotiate. Some of the key issues to be addressed in a merchandise license agreement are discussed below:

The Licensed Property

The license agreement should clearly identify the property or properties to be licensed (e.g. character, design, trademark, etc.), and, if applicable, copies of the licensed property should be attached as exhibits to the agreement. The licensee should determine that the property is protectable under copyright, trademark or other applicable laws, and may want registration numbers to be listed in the agreement. If the licensed property is a trademark, the licensee may also want to require that the mark be registered for use on the types of merchandise to be produced under the license agreement.

The Licensed Products

The agreement should contain a complete description of the licensed merchandise, including dimensions, colors and materials. In most cases, the licensor will want to limit the licensee’s rights to the specified merchandise only, and will want the right to approve any changes in that merchandise. The licensee may want an option or a right of first refusal in the event the licensor decides to license the property for certain other product lines.

The Grant of Rights

The agreement should grant the licensee the right to manufacture, import, market, distribute and sell licensed products, and should specify whether the grant will be exclusive or nonexclusive. If the grant is exclusive, the licensor will not be able to grant the same rights to any other licensee in the territory. If the grant is nonexclusive, the licensor will be able to grant the same rights to others, provided it does not try to do on an exclusive basis. In addition to manufacturing, importation and distribution rights, the licensee should acquire the right to use the licensed property in or on advertising for the merchandise to be produced.

The Territory and Channels of Distribution

The license agreement should specify the geographic areas and channels of trade in which the licensed merchandise can be sold. The licensor will want to limit the territory to countries in which the licensee has a presence, and may want to limit the channels of trade (e.g. upstairs department stores, mid-tier department stores, or mass market stores) in which the licensee can sell merchandise. The licensor will want to prohibit the licensee from selling to any of the licensee’s affiliates at below market prices.

Sales Efforts

The licensor will want to insure that the licensee makes a good faith effort to manufacture and sell licensed products, particularly if the license is exclusive. Some of the provisions that can be used to insure licensed product sales are as follows: The license agreement provisions used to insure licensed product sales are guaranty, minimum sales requirements, product introduction and sales dates, advertising commitment, and partial termination.

Royalties

In negotiating the compensation for a licensing deal, it is important to look at both the royalty percentage and the base against which that percentage will be applied. Royalties are usually based on net sales of licensed products, but the definition of net sales can vary considerably from one agreement to another. The license agreement should address the royalty rate, royalty base, and F.O.B. Sales, with respect to the calculation of royalties.

Other key issues that may be addressed in a merchandise license agreement are the following topics: quality control, statements and payments, audit rights, notices and credits, indemnification and insurance, license term, termination, and sales after termination

The Corporate Practice Group and the Tax Practice Group at Yedid & Zeitoune, PLLC, work closely with each client to ultimately put together the best possible license agreement in connection with the needs of each client’s particular business needs, taking into account all favorable tax treatments allowable. May we all have great success in our business endeavors- amen.

The attorneys in the Corporate Practice Group and the Tax Practice Group at Yedid & Zeitoune have a combined 15 years of legal experience and are ready to assist you with all your corporate/tax needs.

Isaac Yedid, Esq.  &  Raymond Zeitoune, Esq.

Yedid & Zeitoune, PLLC

1172 Coney Island Avenue Brooklyn, New York 11230

Phone: (347) 461-9800          Fax: (718) 421-1695               Email: [email protected]

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