Successfully licensing your trademarks requires the right partners.

What would you give to be able to live your dream, and be paid for it? Imagine that your ambition was to become a fashion designer, and then someone offered to handle all of the production, warehousing, and distribution headaches for you? And did I mention they would pay for all of that, and then give you a handsome royalty, too? If that sounds unbelievable, then you’ve probably been in the clothing business a while. Or maybe you’re just smart, or cautious, or realize that nothing’s ever absolutely free.

Many clothing designers, including skateboard companies, have licensed their trademarks to companies that specialize in the complex and nerve-racking business of manufacturing and distributing clothing. But not all licensing deals are equal, and few are problem-free.

In truth, no trademark license involves “free money,” and the real question is whether or not you can live with the cost of the license. For instance, some skateboard companies might not view licensing their trademark graphics for Tech-Deck fingerboards that are sold in Wal-Mart as a problem, while others may see this as a serious compromise of their companies’ credibility. And if the idea of miniature skateboards bearing your trademark being sold in Wal-Mart doesn’t concern you, how about low-quality shirts, shorts and backpacks with your logo on them showing up at discount stores, swap meets, and everywhere else you never intended to go?

Image might not be everything, but no one wants their customers associating their company with the low-quality world of discount outlets.

Control over one’s trademark and its authorized usage is what hopefully prevents the above scenario from taking place. And control is at the center of any licensing agreement¿an agreement whereby an owner of a trademark, a licensor, consents to a third party, a licensee, use of the licensor’s trademark on goods, usually in exchange for a royalty.

The law presumes that the licensor has a right and a duty to control the quality of the goods produced by the licensee. The law presumes a duty because a trademark is an indicator to consumers as to the source of the goods. Consumers rely on the assumption that goods bearing a particular trademark are of a predictable level of quality. So if the licensor does not make sure that the quality of the licensee’s goods are equal to or greater than the quality the licensor’s goods, then the danger exists that consumers may be deceived. Owners of trademarks might not worry too much about that, but there is a legal penalty for defrauding the public.

An uncontrolled license is called a “naked license,” and trademarks that are subjected to naked licenses may be viewed as abandoned. This means that the owner of an abandoned trademark effectively forfeits any right to it, and no longer has the right to exclusively use the trademark on goods.

That being said, a license can work very well for both the licensor and licensee, particularly with apparel. In fact, a licensing arrangement can be ideal in some circumstances. Consider it a division of labor: the licensor creates the designs and marketing materials; and the licensee, presumably someone who knows the garment industry, is responsible for financing, production, and distribution. One great benefit of a licensing arrangement is that an under-financed brand can suddenly afford to produce an extensive cut-and-sew softgoods line.

A few years ago the owners of Zoo York found themselves in such a capital crunch. The company could afford to fulfill less than half of the orders for its popular apparel line. In order to facilitate growth of their company and satisfy some of the demand for their goods, Zoo York cautiously entered into a licensing agreement.

Zoo York Partner Adam Schatz realized that theirs was a young company, and they needed to carefully manage its growth to evolve it while maintaining its credility. This meant that if they were going to license their mark, they would have to maintain control over the creative direction of the company and the distribution. Schatz and company found a licensee that understood Zoo’s goals, and was happy to grow the line at the pace dictated by the licensor. After spending long hours with their attorneys to make sure the agreement properly addressed their concerns, Zoo York entered into the licensing agreement. It was only after the first season that Schatz realized a licensing deal isn’t exactly free money.

The license did help Zoo bridge the gap between supply and demand, but Schatz found that he spent a lot of time policing their licensee. While Zoo York was happy to see its apparel program blossom, Schatz and company are careful about who is allowed to carry their line. The licensee, on the other hand, depends on volume for profits, and is therefore naturally interested in as broad a distribution network as possible. Because of this, and no matter what the licensee says going into the agreement, sooner or later conditions like the strict control over distribution that the owners of Zoo York exercised were sure to conflict with the licensee’s instinct to maximize profits. This is why it’s imperative that a licensor draft the agreement so that they have ultimate control over the customer base and distribution; no handshake deal is going to prevent this kind of confrontation. “It a license can work great, but it’s not easy,” says Schatz. “Complacency can kill you.”

Zoo worked very closely with their licensee, communicating with them on a daily basis, and the company shared its customer information and growth strategies with the licensee. In their particular arrangement, Zoo York forwarded customers to the licensee, who wrote all of the orders for the company’s apparel (the license didn’t include other Zoo York products). Even at trade shows, a representative of the licensee was present in the Zoo York booth to write apparel orders. But all new accounts had to first be approved by Zoo York.

One provision unique to Zoo’s agreement is that the company even had the licensee handle T-shirts, which a licensor traditionally manages. But because of the structure of the relationship, the parties agreed the licensee should also share in the proceeds of T-shirt sales.

Schatz likens Zoo’s relationship with its licensee to a marriage, where trust is imperative. Trust is so important because a licensor is paid based on a percentage of the gross sales made by the licensee. If a licensee is falsifying sales data, the licensor may be under-compensated and receive a false picture of the brand’s strength. If the licensee handles all orders and fulfillment, verification of sales data is key.

A review of the licensee’s books is one way to verify the correct sales numbers, but a more hands-on approach is also highly recommended. Physical inspection of the licensee’s operation and some key retailers may give a licensor a good idea what to expect in the data. But no matter how diligent a licensor is in collecting sales information, there is always going to be some ambiguity. An obvious solution is to have the licensor handle sales in addition to design and marketing, but the additional staff, facilities, and expense of operating a sales department may not be justified.

No matter what the nature of the relationship, licensing apparel or any category of your company’s products to a third party essentially makes that third party a partner.

The owners of Rookie Skateboards realized just how close the relationship with a licensee can be when they considered licensing their apparel a few years ago. After eight months of negotiations they called the deal off when the licensee refused to have the license agreement be non-assignable. Rookie Partner Catherine Lyons explains that the nature of a license, the close relationship between the licensor and licensee, makes it unacceptable for the licensee to potentially sell its licensed rights in the Rookie trademark to a third party. Under an assignable licensing agreement, the licensee can transfer the license to a third party without the consent of the licensor.

Bob Hurley, the former licensee of the Billabong trademark, has a different point of view on the licensing world. He saw the licensor/licensee relationship as upside down, his point being that the party investing all of the money usually has control, but in many licensing arrangements the licensor has most of the control. Hurley lived, worked, and breathed Billabong, but eventually it dawned on him that he was just renting a trademark. He had created all the goodwill associated with the Billabong trademark in the United States, but didn’t own any part of it. After that, the idea of continuing the license became less attractive. As Hurley’s experience illustrates, the lack of control over a licensed trademark can become very frustrating to a licensee. Hurley went on to establish his own successful apparel brand, and now suggests that licensing deals like the one he was in “are dinosaurs.”

Dinosaurs or not, Sole Technology Marketing Director Don Brown has had no shortage of offers from third parties interested in licensing Sole Technology’s Etnies, Emerica, éS, and Thirty-two trademarks for clothing. Brown has not dismissed the idea altogether, but has so far declined all offers, citing that none have measured up to his requirements. As is typical of companies whose trademarked products enjoy international distribution, a large number of apparel-licensing inquiries have come from Sole Technology’s foreign distributors.

Many international distributors feel importing T-shirts and other goods that are easily-produced domestically makes little sense. For example, it would be much more profitable to have a silk screener in Australia print Emerica T-shirts for the Aussie market than it is to ship the finished product from California, thereby avoiding all shipping costs and import duties. But like domestic licenses, international licenses require a tremendous amount of trust between the parties. And even then, safeguards drafted into the agreement can be a licensor’s best protection.

A licensing agreement, for instance, can require minimum royalty amounts, nonrefundable recoupable advances, monthly statements that keep the licensor appraised of the current level of sales, physical inspections, and provisions for constant monitoring of the product line and the quality of the goods. Such provisions can allow the licensor to maintain control.

Whether the license is domestic or international, one critical prerequisite to any successful licensing agreement is that the licensor have ownership of the trademark in the relevant territory. Registration of one’s trademarks is always a good idea, but for the purposes of a license, it is almost a requirement.

In civil-law countries (i.e., Japan, Germany, Sweden) ownership means applying for and receiving the registration for the trademark(s) in each separate country.In the United States, while registration is not required for ownership, an experienced licensee is going to want to see a company’s proof of ownership of the trademark. The easiest way to demonstrate ownership is to have federal registration of the trademark, or at least a pending application with the United States Patent and Trademark Office. Most licensees will be reluctant to make any investment in a trademark whose use may be contested by a third party.

For more information on registering trademarks, see “International Trademarks” in the January 1999 (Volume 10 Number 4) issue of SKATE Biz. It can also be viewed online at: www.skatebiz.com.

Zoo York recently ended their domestic licensing arrangement and are pleased with the results of the deal; they were able to establish and grow their company and apparel line. But the partners feel the time has come to receive the full benefit of their brand, inhntially sell its licensed rights in the Rookie trademark to a third party. Under an assignable licensing agreement, the licensee can transfer the license to a third party without the consent of the licensor.

Bob Hurley, the former licensee of the Billabong trademark, has a different point of view on the licensing world. He saw the licensor/licensee relationship as upside down, his point being that the party investing all of the money usually has control, but in many licensing arrangements the licensor has most of the control. Hurley lived, worked, and breathed Billabong, but eventually it dawned on him that he was just renting a trademark. He had created all the goodwill associated with the Billabong trademark in the United States, but didn’t own any part of it. After that, the idea of continuing the license became less attractive. As Hurley’s experience illustrates, the lack of control over a licensed trademark can become very frustrating to a licensee. Hurley went on to establish his own successful apparel brand, and now suggests that licensing deals like the one he was in “are dinosaurs.”

Dinosaurs or not, Sole Technology Marketing Director Don Brown has had no shortage of offers from third parties interested in licensing Sole Technology’s Etnies, Emerica, éS, and Thirty-two trademarks for clothing. Brown has not dismissed the idea altogether, but has so far declined all offers, citing that none have measured up to his requirements. As is typical of companies whose trademarked products enjoy international distribution, a large number of apparel-licensing inquiries have come from Sole Technology’s foreign distributors.

Many international distributors feel importing T-shirts and other goods that are easily-produced domestically makes little sense. For example, it would be much more profitable to have a silk screener in Australia print Emerica T-shirts for the Aussie market than it is to ship the finished product from California, thereby avoiding all shipping costs and import duties. But like domestic licenses, international licenses require a tremendous amount of trust between the parties. And even then, safeguards drafted into the agreement can be a licensor’s best protection.

A licensing agreement, for instance, can require minimum royalty amounts, nonrefundable recoupable advances, monthly statements that keep the licensor appraised of the current level of sales, physical inspections, and provisions for constant monitoring of the product line and the quality of the goods. Such provisions can allow the licensor to maintain control.

Whether the license is domestic or international, one critical prerequisite to any successful licensing agreement is that the licensor have ownership of the trademark in the relevant territory. Registration of one’s trademarks is always a good idea, but for the purposes of a license, it is almost a requirement.

In civil-law countries (i.e., Japan, Germany, Sweden) ownership means applying for and receiving the registration for the trademark(s) in each separate country.In the United States, while registration is not required for ownership, an experienced licensee is going to want to see a company’s proof of ownership of the trademark. The easiest way to demonstrate ownership is to have federal registration of the trademark, or at least a pending application with the United States Patent and Trademark Office. Most licensees will be reluctant to make any investment in a trademark whose use may be contested by a third party.

For more information on registering trademarks, see “International Trademarks” in the January 1999 (Volume 10 Number 4) issue of SKATE Biz. It can also be viewed online at: www.skatebiz.com.

Zoo York recently ended their domestic licensing arrangement and are pleased with the results of the deal; they were able to establish and grow their company and apparel line. But the partners feel the time has come to receive the full benefit of their brand, inherit the headaches of clothing production, distribution, and sales, and earn the full margins on their apparel sales.

Licenses can be great for both parties. A licensee doesn’t have to build brand identity from scratch, and a licensor can determine the parameters within which the licensee operates. The net result is that demand is supplied, and the company is able to manage its growth. The key with licenses, as with all other endeavors, is to identify what your goal is, and what it will take to achieve that goal.

Is It Worth It?

Why bother with the headaches of clothing production when you can license your trademark to someone, and let them deal with the SNAFUs? Here are some things to consider before you hand your baby to a complete stranger.

Pros

*Relatively passive income.

*Someone else is responsible for the production of the goods¿no more dealing directly with the garment industry.

*A way to grow a line without having to finance the growth yourself.

 

Cons

*Loss of some control over the brand.

*Lower margin compared to self-management of production.

*Licensee becomes a de facto “partner” in your business.

*Requires a tremendous amount of trust.

*You become a police officer.

Matthew Miller is an attorney-at-law in Solana Beach, California. He can be reached at: (858) 259-6969. inherit the headaches of clothing production, distribution, and sales, and earn the full margins on their apparel sales.

Licenses can be great for both parties. A licensee doesn’t have to build brand identity from scratch, and a licensor can determine the parameters within which the licensee operates. The net result is that demand is supplied, and the company is able to manage its growth. The key with licenses, as with all other endeavors, is to identify what your goal is, and what it will take to achieve that goal.

Is It Worth It?

Why bother with the headaches of clothing production when you can license your trademark to someone, and let them deal with the SNAFUs? Here are some things to consider before you hand your baby to a complete stranger.

Pros

*Relatively passive income.

*Someone else is responsible for the production of the goods¿no more dealing directly with the garment industry.

*A way to grow a line without having to finance the growth yourself.

 

Cons

*Loss of some control over the brand.

*Lower margin compared to self-management of production.

*Licensee becomes a de facto “partner” in your business.

*Requires a tremendous amount of trust.

*You become a police officer.

Matthew Miller is an attorney-at-law in Solana Beach, California. He can be reached at: (858) 259-6969.