Last Updated: March 14, 2023
What is a Merchandising License Agreement?
A merchandising agreement is a legal agreement (a contract) between two parties that allows one party (the licensor) to grant another party (the licensee) a merchandising license to use the licensor's intellectual property (branding features such as trademarks, logos, and copyrights) to manufacture and sell products, in exchange for royalties or other compensation based on sales by the licensee.
In a nutshell, merchandising rights autorize a company (the licensee) to use the branding, characters, or other intellectual property of another company (the licensor) to create and sell products, typically for a specific period of time and in specific markets or territories. The licensor retains ownership of their intellectual property and grants the licensee the right and license to use it for a defined purpose and within certain guidelines.
A merchandise license is an essential part of a merchandising agreement.
What are the Benefits of a Merchandising License Agreement?
Benefits to Licensors
* Additional Revenue Streams (Other Marketers Selling For You): Merchandising rights allow a licensor to monetize their intellectual property by granting a licensee the right to use it in the production and sale of merchandise. This can create a new revenue stream for the licensor.
* Increased Brand Awareness (Leverage Your Brand): Merchandise bearing a licensor's intellectual property can increase brand awareness and exposure, mainly if the merchandise is sold in stores or online retailers that are not traditionally associated with the licensor.
* Quality Control (Protects Your Trademarks): A merchandising license agreement allows the licensor to maintain control over how their intellectual property is used and presented. This ensures that the quality of the merchandise meets the standards of the licensor and that the brand's reputation is not compromised.
* Limited Risk (Depends on Choosing the Right licensee): Merchandising rights allow a licensor to grant the right to use their intellectual property to a licensee without assuming the risks and costs associated with manufacturing and selling merchandise.
Benefits to Licensees
* Established Brand Recognition (Assumes the Brand Has Positive Market Recognition): A merchandising license agreement allows a licensee to capitalize on the established brand recognition of the licensor's intellectual property. This can increase consumer demand for the merchandise and provide a competitive advantage.
* Access to Established Markets (Depends on Market Penetration in Desired Market): A merchandising license agreement can provide a licensee with access to established markets that they may not have been able to penetrate on their own. This can help the licensee increase their sales and profitability.
* Limited Risk (Assumes You Have Chosen Wisely): Merchandising rights allows a licensee to produce and sell merchandise without having to assume the risks and costs associated with developing and marketing a new brand.
* Increased Revenue (Depends on Your Marketing Success): A merchandising agreement can provide a licensee with a new revenue stream that can increase their profitability and long-term financial stability.
Merchandising Rights - Concerns and Challenges
Licensor Concerns and Challenges with Merchandising Agreements
* Failure to Protect Intellectual Property Rights (The #1 Priority): Licensors should ensure that they have the necessary legal rights to the intellectual property that is the subject of the merchandise license. This includes obtaining appropriate registrations for trademarks and copyrights and ensuring that they are not infringing on the rights of others. If the licensor's intellectual property is not properly protected, they may not be able to enforce their rights if the licensee violates the agreement.
* Lack of Control Over Use of Intellectual Property (Supports The #1 Priority): Licensors should maintain some level of control over the use of their intellectual property by the licensee. This includes specifying how the property can be used, how it should be displayed, and what products it can be used on. Without these controls, the licensor may find their intellectual property being used in ways that they do not approve of or that damage their reputation. Quality control is essential for trademark licensing).
* Insufficient Royalty Rates (The Basis of the Licensor's Bargain): The royalty rate is a critical component of a merchandising agreement. Licensors should ensure that they are receiving a fair and reasonable royalty rate for the use of their intellectual property. If the royalty rate is too low, the licensor may not receive sufficient compensation for the use of their intellectual property.
* Failure to Monitor Licensee's Compliance (Trust, But Verify): Licensors should monitor the licensee's compliance with the merchandising agreement to ensure that their intellectual property is being used correctly and that they are receiving appropriate compensation. Failure to monitor the licensee's compliance may result in the licensor losing control over their intellectual property or missing out on royalties which they are entitled to.
* Inadequate Termination Provisions (If the Transaction Falls Apart): Licensors should ensure that the merchandising agreement includes provisions for terminating the agreement if the licensee breaches the agreement or fails to meet certain performance criteria. Without these provisions, the licensor may be unable to terminate the agreement if the licensee is not living up to their obligations.
* Insufficient Legal Counsel (Better Than Just a Template): Licensors should ensure that they have adequate legal counsel when negotiating and drafting a merchandising agreement. Failure to have sufficient legal counsel can result in the licensor agreeing to unfavorable terms or provisions that are not enforceable.
Licensee Concerns and Challenges with Merchandising Agreements
* Infringing on Intellectual Property Rights (Avoiding Legal Liability): Licensees must ensure that they have the necessary legal rights to use the intellectual property they are licensing with the grant of a merchandise license from the licensor. This includes verifying that the licensor has the legal right to license the intellectual property and that the licensee is not infringing on the rights of others. If the licensee's use of the intellectual property is found to be infringing, they may be subject to legal action, including costly lawsuits.
* Intellectual Property Licensing Restrictions (For Licensor's IP Protection, But Limits Licensee's Marketing opportunities): Licensees must understand that they will have limited control over the intellectual property that they are licensing. The licensor may have specific rules regarding how their intellectual property can be used and how it should be displayed. Trademark licensing requires quality control restrictions. If the licensee fails to comply with these rules, they may be in breach of the agreement and subject to legal action.
* Insufficient Profit Margins (The Basis of Licensee's Bargain: Licensees should ensure that the royalty rates they are paying to the licensor are reasonable and provide sufficient profit margins for their business. If the royalty rates are too high, the licensee may not be able to make a profit on the products they are producing and selling.
* Failure to Meet Quality Standards (Quality Control is Required in Trademark Licensing): Licensees should ensure that they are meeting the quality standards set by the licensor for the products they are producing. Failure to meet these standards can damage the reputation of the licensor and harm the overall success of the merchandising agreement.
* Failure to Monitor Sales and Royalties (Failure Can Lead to Breach of Contract): Licensees must monitor their sales and royalty payments to ensure that they are meeting the requirements set by the agreement. Failure to do so can result in legal action by the licensor for breach of contract or failure to pay royalties.
* Inadequate Termination Provisions (If the Transaction Falls Apart): Licensees should ensure that the merchandising agreement includes provisions for terminating the agreement if the licensor breaches the agreement or fails to meet certain performance criteria. Without these provisions, the licensee may be unable to terminate the agreement if the licensor is not living up to their obligations.
* Insufficient Legal Counsel (Better Than Just a Template): Licensees should ensure that they have adequate legal counsel when negotiating and drafting a merchandising agreement. Failure to have sufficient legal counsel can result in the licensee agreeing to unfavorable terms or provisions that are not enforceable.
How I Can Help You
I help product licensors monetize their intellectual property and maintain quality control with a merchandising license agreement tailored to their requirements.
I help product licensees capitalize on established brand recognition and access new markets. A tailored merchandise license agreement is essential for success.
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My Background
- Juris Doctor Degree, Wake Forest University School of Law
- Adjunct Professor of Law, Wake Forest University School of Law (20 years)
- Martindale-Hubbell Highest Attorney Peer Rating – AV® PREEMINENT™
- Co-Founder & CEO, FTCGuardian.com, #1 in FTC Compliance Training