Licensing in the Children's Fashion and Products Industry

By Jeremy Richardson

Whether you have a great children’s brand that you want to expand, or a great children’s product that could use the powerful boost of a well-known name, a licensing agreement can take your business to the next level of success. But to get the most out of a licensing opportunity, you need to find the right partner who knows the industry and understands your vision and goals for your brand or product. The benefits can be significant, but licensing partnerships are not without risks.

You Have a Great Brand and Want to License the Name

You’ve worked hard building your brand, so why should you license it to someone else? For starters, there’s the reward of earning income from someone else’s effort selling products in categories that you don’t have the means or expertise to develop yourself. In addition to royalty payments, you will also benefit from the exposure of your brand in new markets and product categories. A drawback is that while the license is in place, you lose the right to use your own brand name for the category of products or services granted to a licensee. A greater concern is the risk of granting a license to the wrong licensee. Be sure to consider the following points before signing on the dotted line.

Know Your Goals: Remember that licensed products bearing your brand name will reflect on your entire brand, so before looking for a licensee, ask yourself:

What products would you be willing to put your brand on?
Will the products be sold internationally, domestically, or both?
Which stores or websites will the products be sold through?
How long will the agreement last?

Know Your Partner:

Have you investigated your prospective partners’ capabilities to manufacture at appropriate quality levels and sell the licensed products in the territories you’re contemplating licensing to them?
Have you examined their track record and business practices to see if they share the same basic philosophies for use of your brand? For example, if your market strategy is to sell luxury products to high-end department stores or specialty boutiques, it might not be a good idea to partner with a company whose products have only been sold in big-box stores.

Set Appropriate Standards: Of course you’ll want to protect your brand’s image by setting appropriate quality standards. But you need to balance that with the practical matter of making the license affordable and attractive to prospective licensees.

Will the standards that you have set be consistent with your marketing goals while attracting licensees with similar philosophies who can profit from the partnership?

Don’t Give Away the Farm: As your brand recognition grows, you’ll have additional licensing opportunities.

Have you limited the scope of the agreement as much as possible to reserve other uses of the brand for yourself or future licensees? For example, rather than granting a license covering all children’s accessories, limit the agreement to specific products (e.g., diaper bags).

Protect the Mark: Apply for trademark registrations in all categories and countries where your licensee will use your brand.

Trademark laws outside the United States are different than they are in the United States. Trademark rights in the United States arise from use in commerce, while in most other countries trademark rights arise from registration. In most cases, your licensees’ use of your mark outside the United States will not give you any trademark rights in those countries. You should apply for trademark registrations in all countries where your product will be sold and for all product categories for which your mark will be used.
While you may be tempted to have your licensee file the applications for you (after all, who wants that headache?), you or your attorney should handle the application(s) to keep the process under your control. If possible, you will want your licensee(s) to pay some or all of the cost of applying for the trademark application(s).

You have a Great Product But Want a Recognized Brand Name to Go with It

Paying for the right to use a well-known brand name will make your product more attractive and allow you to charge more for it –– so why not take advantage of the hard work, time, and money the brand’s owner has already devoted to building name recognition? To a great extent, considerations for the licensee are simply the reverse of the considerations for the licensor.

Do you know the brand’s strengths and weaknesses?
Does it fit with your own capabilities and marketing strategies?
What royalty will you have to pay to get the license? Will there be other fees?
Will your additional sales be worth the cost of licensing the brand?

It’s More Than Just a Name: In addition to providing a brand name, you may want the licensor to provide additional support, such as design assistance. If your licensor’s brand is known not just for its name, but for particular styles and designs, be sure that your license permits use of those fabulous styles and designs. How much assistance to ask for depends upon your own capabilities and your willingness to accept your licensor’s input. Of course the licensor may charge for its assistance, including a royalty for the use of its artwork.

Limit Their Control Over Your Products: Your licensor will demand certain approval (or veto) authority over your products associated with its brand. Before signing, ask yourself:

Are you comfortable with the scope of that approval?
What hoops will you have to jump through in order to satisfy your licensor?
Will there be upper or lower limits on the number of lines, styles and units you will be permitted or required to produce?

Advertising Support:

If you are required to contribute money to advertising the brand name, can you make sure that the advertisements will be seen by your consumers?
Will your advertising dollars positively impact your sales? If not, then your money will be essentially a gift to your licensor.

Building the Brand: Try to get a sense of how your partner plans to further build its brand. You don’t want to lock yourself into a multiyear license agreement with high guaranteed minimum royalties for a brand that’s on its way down.

Will the licensor, or other licensees, market new products that will complement (or compete with) your products?
Will the original company remain involved in selling products or will it step back and license all uses of its brand?

Sublicensing and Assignability: If you decide before the end of the agreement that the brand no longer works for you, you will want to be able to sublicense the brand or assign the agreement. The licensor will naturally resist this and, even if it agrees, it will want veto power over your proposed sub-licensee. Try to include that your licensor’s approval cannot be unreasonably withheld. As an alternative, have a shorter term with multiple renewal options for additional (but short) terms.

Both Sides Should Have an Exit Strategy

A license agreement is a partnership. Ordinarily, both sides go in bursting with excitement at all the possibilities for growth and making more money than either side could without the other. If all goes well, both sides benefit, but sometimes all does not go well. Once you’ve signed the agreement, it’s too late to build in protections for the other side’s ruinous actions or omissions. The time to plan is before the agreement is finalized.

Try to think of situations that would justify your terminating the agreement (it is impossible to predict what will go wrong, but you should envision what could go wrong). Obviously, if the licensee does not pay the royalties it owes, or if it sells products that have not been approved, or if it sells licensed products outside its authorized territory or distribution channels, the licensor will be permitted to terminate, but should the licensee first be given an opportunity to cure the breach?

On the other side, should the licensee be permitted to terminate if a licensor with a high-end brand name decides to sell the brand into the mass market? What if the reputation and value of the trademark is damaged significantly, perhaps because the licensor or another licensee sells an atrociously dangerous product causing a worldwide recall causing consumers to avoid the brand entirely?

Should You Use a Licensing Agent?

License agreements are reached in many steps, and each step requires specific skills and knowledge that may be outside the scope of your day-to-day business dealings and experience. You have to find the right partner, confirm his/her qualifications, negotiate the business terms of the agreement, and perform your obligations under the contract.

As the owner of a brand, you may have to immerse yourself in someone else’s industry to find out whether a potential licensing partner has the reputation and ability to succeed with your brand. As a manufacturer seeking the right to use a recognized brand name, you may need guidance to find the best licensor.

Those skills and knowledge are what a good licensing agent can provide. For the licensor, your licensing agent should know about you, your industry, and where you fit in. S/he should also know the industries where your brand could be successful, and who in those industries has the manufacturing and retail connections and the financial ability to expand your brand while preserving your brand identity. For the licensee, your licensing agent should know the owners of brands that have synergy with your products, and hopefully will find a strategic partnership rather than just a label.

Skilled licensing agents with extensive knowledge of the industry can guide you through the pitch process, assist in negotiating the deal, and may even collect royalties and support you through product approvals.

There is, of course, a cost to hire a licensing agent. Many licensing agents charge you only when they are successful; i.e., they get a percentage of royalties or sales. In some cases the fee will be a combination of time or fixed-fee charges for some items (creating a business plan in support of seeking licensees) and a percentage of royalties or sales.

The all-important analysis in deciding whether to hire a licensing agent is whether you will do better with or without the agent. If your brand has attained tremendous recognition, then you probably have companies knocking down your doors seeking a license for one thing or another. You may be tempted to forego the licensing agent when so many want a share of your success. But even then, investigating licensing offers can be a full-time job, and one that will distract you from what you do best. If licensing becomes a significant part of your business, you may consider adding to your staff an experienced person to evaluate new license opportunities and oversee existing licenses.

Obtaining the benefit of an expert’s experience can more than offset the cost by getting you more and better deals than you could get on your own, protect you in ways that you would not have known to consider, and allow you to focus on running the business that you have probably devoted all of your attention and countless hours to over the years.

The Checklist

Important points to consider when granting or getting a license:

What have you licensed? This could be a trademark, a family of trademarks, artwork, a product, or a combination of these. If the license is for a trademark, is it registered? Look for the ^® symbol which, if used properly, indicates that the mark is registered, but could be misleading. You still need to know if the mark is registered for all categories of licensed products (trademark registrations are specific to product and service categories) and in all applicable territories. You can search the U.S. Patent and Trademark Office (http://www.uspto.gov), the World Intellectual Property Organization (http://www.wipo.int/romarin) and other websites to find out.
Is the artwork registered? The © symbol does not mean that the owner has a copyright registration. U.S. copyright registrations are not readily searchable and the U.S. Copyright Act does not require copyright registrations. However, there are presumptions and benefits to having a copyright registration.
Is the product patented? Searching the U.S. Patent and Trademark Office website may be helpful, but it’s much easier if you have the patent registration number. You may want to read the patent registration (or have your attorney read it) to discern what portions of the product are protected.
Does the license give exclusive or nonexclusive rights?
What is the territory? Does the license grant rights throughout the world, or are there specifically identified countries?
What are the channels of distribution? Do these channels fit with your goals? Are any stores or channels carved out? Are end-of-season or after-season closeout sales to discounters permitted (assuming that discounters are excluded from the in-season distribution channels)?
When will the license agreement expire? Is that long enough or too long?
Can the license agreement be renewed? Who can renew it and under what circumstances? If it can be renewed, how long is the renewal period? Often, the unilateral right of the licensee to renew the license agreement is based upon meeting certain minimum sales and not being in breach of the license agreement.
Can the license agreement be terminated before expiration? Who has the right to terminate the agreement and under what circumstances?
What is the royalty rate? When are the royalties paid? Are royalties based on gross sales, net sales, or some other benchmark? What, if any, deductions from the licensee’s sales are permitted (such as returns and discounts) in determining what royalties are owed?
What reports should the licensee provide in showing royalty calculations? Are there minimum guaranteed royalties? Will there be any advance payment? Can licensor audit licensee’s books to confirm that the royalty payments are correct?
Is the licensee required to pay an advertising fee to the licensor? Are there any minimum advertising requirements?
What is the approval process for licensed products (and for packaging, advertising and marketing materials)? Typically the licensed products must meet some minimum standards and the licensee is responsible to ensure that the licensed products comply with all applicable laws.
Have you gotten appropriate representations, warranties and indemnifications from the other side?
What happens when the license agreement expires? Will the licensee have a sell-off period to permit sales of remaining inventory? Will the licensee be prohibited from dumping its remaining inventory? Will the licensor have a sufficient opportunity to replace the licensee and avoid a gap in the sales of licensed products?
Do you have an exit strategy if the relationship falls apart?
If you end up in a dispute with your license partner, what law applies? Do you want to arbitrate disputes or litigate in court? Where will the arbitration or court proceedings be held?

This checklist is not exhaustive, but it should be more than enough to get you thinking about many of the issues to consider before signing a license agreement.

Jeremy Richardson

About Jeremy D. Richardson
Jeremy D. Richardson is an attorney on the fashion industry team at Phillips Nizer. His practice involves representing clients in the children’s apparel, accessories and furniture industries. In April 2005, Jeremy was appointed to the Executive Committee of the American Apparel & Footwear Associations’ (AAFA) Product Safety Council, which most recently has focused its energies on educating its members about the Consumer Product Safety Improvement Act (CPSIA) of 2008.

Jeremy guides start-ups and entrepreneurs through protection of their intellectual property, negotiation of partnerships, and when necessary, the litigation of matters that cannot otherwise be resolved. He has argued before the Second Circuit Court of Appeals and has been admitted pro hac vice to practice in the California Superior Court.

About Phillips Nizer
Phillips Nizer LLP has been engaged in a wide-ranging practice of domestic and international law for over 80 years. Established in 1926 by Louis Phillips, former Assistant General Counsel to Paramount Motion Pictures, and Louis Nizer, considered one of the most outstanding trial lawyers of the twentieth century, the firm consists of lawyers who are well-respected leaders in their fields. Our bond with the fashion and apparel industries began in the 1940s, a relationship that continues to this day almost 60 years later. Our principal office is in New York City, with additional offices in Garden City, Long Island and Hackensack, New Jersey. For more information about Phillips Nizer LLP, please visit: http://www.phillipsnizer.com/