By Daniel C. Marotta, Partner
Whether you have been developing a brand name for years, or have just launched a new product line, licensing your brand name out to others builds value for your trademark.This article points out some helpful hints on how to choose a potential licensee to manufacture products using your trademark, the value of licensing, and the importance of finding the right licensing partner.The information offered here is not intended as legal advice, which should always be obtained by consulting an attorney.
What is a Trademark?
A trademark is a word, name, symbol or device used in trade to indicate the source of origin of goods and to distinguish them from the goods or services of others. Your trademark is your brand name. The strength and value of your trademark depends on the amount of name recognition and "good will" you have built in your company's products or services. Simply put, the more that consumers see your trademark, the more name brand recognition it achieves. The brand name represents a certain degree of quality to the consumer.
Trademarks are registered with the United States Patent and Trademark Office by the class and category of product. A company's trademark rights are generally limited to the category of products, industry, and geographic area where the trademark is used and known. One company may have one trademark, or it can have many trademarks for the various products it produces. Some companies have a "house mark" for their general business and develop trademarked sub-brands for each niche market or new product line.
For example, the Tommy Hilfiger Corporation has various brands of fragrances and bath products, such as True Starperfume and Tommy Girl cologne. The company holds separate trademark registrations for the Tommy Girl cologne, True Star perfume, and its women's clothing categories. Hilfiger Denim, Hilfiger Red Label Hilfiger White Label, and Hilfiger Blue Label are other registered trademarks held by the company. Tommy Hilfiger also markets various product lines under the Karl Lagerfeld label, such as Lagerfeld Gallery, which is marketed as an "innovative, luxury women's ready-to-wear and accessories collection." While Tommy Hilfiger is the brand as well as the legal name of the corporation, the two need not be the same. Quaker Oats Company is a food company, owned by Pepsi (Pepsico), which has many brands such as Cap'n Crunch cereal and Aunt Jemima pancake syrups; consumers recognize the cereal name and know it is a brand, i.e. made by a single source, and it matters not whether they know that the source is specifically the Quaker Oats Company. Notwithstanding, Quaker itself is a powerful trademark, registered with the US PTO, and the company has registrations in various classes such as cereal (class 30), yogurts (class 29), etc.
The same is true for wine and spirits brands. Seagrams (the former Seagram Company Ltd.) was the largest distiller of alcoholic beverages in the world. Its distilled beverages division was acquired by Pernod Ricard, a French company that has traditionally been known for its anise liqueurs and pastis. Pernod owns the Seagram trademarks, such as Seagrams Gin, and it also owns Absolut Vodka. Under the Seagrams brand, Pernod makes many different brands and products such as Seagrams Gin, Seagram's Seven Crown, ginger ale, and sparkling seltzer.
The strength and value of a trademark ultimately depend on the degree of name recognition and "good will" the company has built into its products or services. The more often consumers see a trademark, the more name brand recognition it achieves. Similarly, the more product that you produce under a brand name, and the more new markets that you develop, the more consumers will see it and be exposed to it. "Good will" is intangible, but you know you have it when others are willing to pay money for your brand name products or are interested in purchasing or licensing your trademark.
Why Should I License My Trademark?
Licensing a trademark creates opportunities in new markets and exposes the brand name to audiences who might not otherwise see it.
New marketing strategies should build upon and reinforce the image you have already created. For example, for a company that sells apparel, but not shoes or accessories, you can grant someone the rights under a limited license to manufacture shoes in places where you have never even sold, such as Europe and Asia. More importantly, - enhance your image or create one in a part of the world or in an industry where it never existed before.
The delicate part is that you when you license your trademark to a third party, you are giving up some control.
License agreements are always carefully worded to state that all good will accrues to the benefit of the trademark owner/licensor. In summary, licensing offers the benefits of:
● New Revenue Sources and Royalty Streams;
● Increased Good Will built on the strength of the brand and its image;
● Identifying new marketing strategies;
● Globalization by expanding trademark rights to new product lines or markets; and
● Trademark Enforcement through licensees' help in identifying unauthorized uses or knock-offs of products overseas
A company with an aggressive trademark licensing strategy will seek out licensing partners to help develop image and marketing strategies, penetrate new markets and to register the company trademark(s) in foreign countries and in new product categories.
Finding the Right Fit
Licensing agreements spell out the geographical area of exclusive rights (the "territory"), the specific products that can be manufactured using the trademark, and the number of years the license is valid. A three-year license typically has a six-month sell-off period during which the licensee liquidates all existing inventory and returns all marketing materials, molds, patterns, and samples to the licensor. A licensee who is willing to pay large advances or guarantee a minimum annual royalty can often negotiate for renewal terms or options.
A successful licensor can have many licensees, each with their own defined geographic market or specific product lines. Often, a company engages a brand manager who oversees all licensing arrangements and enforces payment and compliance. Regardless, the challenge is to find the right licensees with the appropriate resources and experience in specialized markets. A licensee must also have financial stability to ensure that royalties and advances are paid in a timely manner.
Choosing the right licensing partner requires an exhaustive due diligence analysis. Dave O'Donnell, former Visual Director for Exeter Brands Group/Nike Inc. has said that the goal is to find "a partner that follows the rules of the brand strategy and is true to the brand and its overall mission in the market place." Looking through the lens of an apparel footwear and accessories brand, Dave said, "We also look for quality in product, materials execution packaging and merchandising, and the relationship licensees have with potential retail distribution channels."
After targeting potential licensees, the licensor must obtain background information on the various companies. Does the licensee have ideas on brand applications? What is the company's preliminary proposal for competitive strategy and positioning of the brand? The licensee should have a clear concept for the proposed product profile and should be able to articulate a proposed sales and channel strategy. Sales expectations should be discussed in order to create a reasonable basis for negotiating advances and minimum royalty payments. A follow-up meeting should take place at the licensee's offices, which allows the licensor to develop a feel for the capabilities, quality of operations, and management philosophy of the licensee.
If it appears that there is a good fit, the licensor and potential licensee should investigate the other's financial and legal status. Both parties will want to know if either is involved in pending litigation or whether there is a history of licensing disputes. Available trade references and current financials—profit and loss statements, the company's balance sheet, funding sources, Annual Report, and 10k and recent SEC filings for publicly traded companies—should be checked. Meet with key executives and marketing staff. Verify financial information and confirm the company's manufacturing and distribution capabilities. If the licensor has any lingering doubts about a licensee but nevertheless wishes to proceed, the licensor should try to shorten the term of the licensing agreement and withhold renewal rights so that the company does not become stuck in an unfavorable relationship.
Risks & Rewards
The burden is on the licensor to identify the appropriate players and ultimately pick the right licensee for its brand. The inherent difficulty of licensing trademarks to third parties is that by giving up some control over its products, the licensor assumes a measure of risk. The good will of the company and its trademark is placed in someone else's hands. Carefully worded licensing agreements typically have extensive quality control provisions whereby the licensor approves all advertising materials and manufacturing samples in advance, which allows some damage control. However, a renegade licensee can cause irreparable damage to reputation by producing poor quality goods or creating an image that does not appeal to your main market audience. Mistakes can be quite costly and take years to unravel.
When a licensee does fail to perform under a licensing agreement, or breaches a material term, there should be a clear termination clause that requires the licensee to stop all manufacturing, advertising and any continued use of the brand name.
These caveats notwithstanding, the rewards of sound licensing arrangements are substantial. Licensing offers the opportunity to develop new revenue sources, generate good will, and expand the reach of a company's brand and products.
Daniel C. Marotta is a partner in the law firm Gabor & Marotta, LLC.