June 8, 2011

The Nitty-Gritty of Brand Licensing

What is a Brand?Before one can truly understand the nature of "Brand Licensing" as a whole, one must first understand what a brand is. A brand, often referred to as a Trademark, is generally accepted as being a name, term, symbol, collection of words, phrase, or combination of these, that distinguishes a product or c...

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What is a Brand?
Before one can truly understand the nature of “Brand Licensing” as a whole, one must first understand what a brand is. A brand, often referred to as a Trademark, is generally accepted as being a name, term, symbol, collection of words, phrase, or combination of these, that distinguishes a product or company’s origin and puts it apart from its competitors. It is often the case that a brand has attained the status of trademark either via registration or use. In short a brand/ trade mark is a link between the source and the product.

What is Brand Licensing?
The practice of brand licensing is a long-established mechanism whereby the owner of a brand effectively leases that protected property to another party for an agreed period of time, within an agreed territory.

The basis of such a process is a contractual agreement between the owner of the trademark, the “Licensor” and the “Licensee,” often a manufacturer, retailer, or distributor. Generally, upon the grant of a license, the Licensor will present certain contractual stipulations to be abided by in conjunction with the use of his trade mark. Such terms and conditions may include, for example, the overriding purpose of use, the territory within which this license operates and a defined period for this permission of use. In return the Licensor will receive a guaranteed fee or royalties directly proportional with a percentage of the overall sale of the licensed product.

It is useful to note, that a licensing agreement can take may forms, a Licensing Agreement, a Franchising Agreement, and an Incorporated in a Joint Venture Agreement, being but a few examples.

Why license your brand?
Companies who are self aware will often be able to identify opportunities within their branding systems to add significant value to their enterprise. Licensing offers a proprietor the opportunity to realise the potential of a product by satisfying any latent demand that may exist for their product outside of their own market. Licensing a brand, releases the constraint of sole manufacturing and distribution rights for a business.

There are numerous additional benefit to licensing a brand, as already discussed, to take such action would undoubtedly strengthen the status of a brand by pushing it beyond it natural boundaries, thereby building upon the value of a brand. As a result, awareness of the brand is significantly increased and its core products are given more exposure among buyers who would be otherwise oblivious to that specific brand. This widening of a product or company’s marketplace allows for an influx of new customer’s and a solidification of a brand’s place within its market.

Brand licensing has also proven to be effective in widening trade by establishing new entry into new aspects of a market. Meaning one can generate capital far beyond the normal “revenue and profit stream of a brand owner.”

One could even argue that by licensing a brand one increases the protection as granted to their trademarks by increasing and broadening its use.

What are the benefits to the Licensee??
Establishing a licensing agreement with a major brand obviously enables a Licensee to access the quality and goodwill that the brand enjoys in respect of the products that it is used upon. This in turn allows a licensee to benefit from the reputation and pulling power that these brands have developed in the marketplace. This, of course, gives Licensees significant standing in the business world whereby they receive inherently the trust earned by the proprietor. Such respect opens up a number of retail avenues and grants the holder of a license a significant advantage over their competitors. Brand association gives a Licensee the credibility generated by a brand, which will allow a company to increase awareness of existing products, drawing customers in through the brand.

What are the risks attributed to licensing your brand?
Primarily, the Licensor should consider the fact that as a mode for entry into an international market this method may prove to be less profitable than some other vehicles of trade, as returns are shared between two parties. On a related note, selection of a partner is a very important issue, with trust being a major issue. Also in international terms there are additional barriers that may prove difficult to overcome, including, culture, law, language, political risks and fluxuations in currency.

In addition to the risks as have been discussed above, there is the danger that after some years of use the Licensee may attempt to adopt the trademark on his own, as a consequence of a Licensor’s inability to exercise his control. In some instances a Licensee may go further by attempting to register his interest in the mark, deeming the Licensor a, ‘Silent spectator.’ There is even the possibility that the Licensee may claim the past use of the mark as his own, in spite of a clause mentioned in the license agreement, restricting the same. The biggest risk that the Licensor is exposed to is the uniformity in quality. If strict control is not exercised by the Licensor over the quality the reputation can suffer a great deal.

What is trafficking of a Trademark?
At one time it was set in statute that “trafficking” a trademark applied in a situation where one dealt with a trademark as a commodity in and of itself, rather than using it as a way to identify or promote a product. In situations where there is no identifiable trade connection between the owner of a mark and the licensee, one would label the grant of a license as “trafficking” that mark.

Although this word is no longer in statute, the notion itself has not become obsolete. Should a Licensor use a trademark as a commodity in this way, any goodwill that results from the license shall accrue to the Licensee. If, consequently, a dispute arises between Licensor and Licensee, the Licensee has the option of challenging the validity of the mark and the Licensor faces the prospect of loosing his protection.

What to consider when drafting your licensing-agreement?
For many Li censors the prospect of licensing their brand often translates to loss of control. This however does not have to be the case. Through careful construction of the licensing agreement one can ensure the licensee promotes the brand in an acceptable manner whilst not damaging the reputation and goodwill built up by the Licensor.

In order to protect their position Licensor’s should ensure the Licensing agreement covers the following:

  • A detailed breakdown of the distribution of royalties or payments, together with date of payment and the action to be taken in case of default.
  • Strict quality control
  • A overview of the territories the license intends to cover.
  • The period of the license.
  • Procedure for termination of the license.
  • What rights, both general and as they relate to intellectual property, does the license grant to the licensee.
  • Indemnities given by each party and insurance provisions.

A Licensee should note that a Licensor would expect them, and all their employee’s, to be familiar with all obligations as they appear under the contract, to ensure compliance.

It is important, that while drafting a trademark license agreement, one is careful to strike a balance between maintaining the value of the mark and not instigating too stringent policies of interference by the Licensor.

The Licensor should also be careful to insert conditions regarding his license, should his mark be unregistered, to ensure that the Licensee will be prevented from challenging title or validity. A Licensor should also avoid the inclusion of his trademark within an unrelated Licensee’s company name, in which the Licensor has no say, as there is the possibility that at termination the Licensee could claim a continuing right. It would also be prudent for the Licensor to include a transitional period within his agreement so that the Licensee is able to sell or pass on existing stock without breaching the Licensor’s trademark and causing further problems.

A Franchise or Licensing?
To begin with there is the obvious, the primary difference between a license and franchise opportunity is the amount of control that the Franchiser or Licensor exercises over its respective franchisees and licensees.

Purchasing the use of a trademark allows the Licensee more freedom from the Licensor. The Licensee must comply with the trademark license agreement and must maintain the integrity of the Brand, but does so without the day-to-day Franchiser looking over the Franchisee’s head. The Licensor has the right to protect the value of the trademark including demand for “Brand continuity” and if the Licensee chooses to violate these provisions or alter the logo in any manner, the Licensee can lose his right to the use of the Trademark.

A franchise is simply an opportunity for someone to set up their own business, and not have to worry about creating brand or creating brand awareness. The new business is completely separate from the franchiser, but in most cases the franchisee pays a monthly or annual fee for licensing the brand.

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