Earlier this year, the United States Postal Service (USPS) announced that it was coming out with a line of clothing and accessories called "Rain, Heat & Snow." The USPS licensed its motto to Wahconah Group Inc., a Cleveland-based apparel company that will design, manufacture, market and distribute the products bearing the USPS motto. This promotional product license deal may be the most brilliant money-making move that the financially floundering USPS could make.
Promotional product merchandise that includes popular company trademarks (such as names and logos) is big business. Trademark licensing deals can be very lucrative, not only from the income they generate, but in building brand recognition. However, licensing deals, like the USPS' arrangement, can involve many legal land mines. Before jumping into a licensing deal or simply popping a logo onto a product to sell, here are some important points to remember.
1. Don't Use Others' Trademarks Without Express Permission
A trademark is a word, phrase, symbol or design, or a combination thereof, that identifies and distinguishes the source of one party's goods from someone else's goods. Examples of trademarks include names and logos of famous fashion designers, soft drink products and automobiles, to name a few. Other trademarks include universities' names, seals, crests, sports teams and mascots, as well as marketing slogans.
Trademark owners have exclusive rights to use their trademarks—others can use them only with permission of the intellectual property owner. Intellectual property that is used by others without permission (i.e., infringers) can expose the infringer to lawsuits involving significant sums of potential damages. This is where just popping a logo onto a product without explicit permission from the intellectual property owner could land your company in hot water. Therefore, permission to use others' intellectual property should be obtained through a license arrangement.
2. Negotiate a License Agreement With the Intellectual Property Owner That Includes Clear Terms
In a license arrangement, the intellectual property owner, called the licensor, gives rights to a licensee to use and sell products bearing the licensor's intellectual property for a fee—typically a percentage of sales called a royalty. While the agreed-to royalty is a critical term, other terms can be equally as important.
Here is a cautionary tale to demonstrate this point. I represented a school that had licensed its name and crest to a T-shirt manufacturer. The parties had a "back of the napkin" type license agreement that, in the interest of saving money, was prepared without the assistance of a lawyer. Their license agreement provided for a royalty to be paid to the licensor (the school) based simply on net sales of the T-shirts, and an initial term of three years. The parties terminated the contract after the third year. However, the manufacturer continued to use my client's name and crest after this time. That's when my client called me, exasperated that the manufacturer would do such a thing.
My client sued the manufacturer for breaching the license agreement and for trademark infringement, for continuing to use my client's trademark without permission. To make matters worse, we learned in discovery (the part of the case where we obtain the other side's documents and take deposition testimony) that the manufacturer had come up with a crafty way to reduce my client's royalty. The manufacturer had decided unilaterally to deduct from "net sales" all of its costs, including marketing expenses and shipping expenses. This, of course, resulted in a smaller royalty paid to my client.
After an extensive and costly litigation battle, my client prevailed. However, the lesson here is that if you are going to embark on a licensing deal, retain a lawyer with licensing experience, and have a solid license agreement in place. A license agreement should, at minimum, have provisions relating to the following:
• A royalty rate that is based on a percentage of net sales. Royalty rates paid to licensors typically range from 2 percent to 20 percent of the licensee's net sales. Thus, the most important provision in the license agreement is how the term "net sales" is defined.
Royalties are calculated by multiplying a royalty rate by net sales. "Net sales" is typically defined as gross sales less deductions, which can include customer discounts, returns, shipping costs and allowances. A licensor will want the "net sales" definition to contain as few deductions as possible, to maximize royalty payments; a licensee will want to include as many deductions as possible, to reduce royalty payments.
If you are a licensee, try to include additional deductions in the "net sales" definition, such as commissions and/or marketing expenses. Licensors should include a cap on deductible expenses to 5 percent of gross sales.
• Audit rights for the licensor. The licensor should have the ability to audit licensee's books and records to verify royalty payments and any deductions from "net sales."
• Quality control rights for the licensor. The licensor should have the ability to review and monitor the quality of products manufactured bearing the licensor's intellectual property.
• A clear definition of the scope of the license. The license agreement should contain a full and complete description of the intellectual property being licensed and the products for which the intellectual property may be used by the licensee.
• A clear definition of the term of the license and whether it is exclusive or non-exclusive. The license agreement should contain an initial period of time for which the intellectual property may be used and any other limitations (e.g., geographical limitations, whether the license will be exclusive or non-exclusive, etc.).
• Indemnification and insurance. The licensee should ask for a provision indemnifying them against copyright, trademark and other infringement claims that may arise out of use of the licensor's intellectual property. If the licensor gives permission to use a trademark the licensor contends it owns, and it turns out that someone else believes they own the trademark, you can be sued for trademark infringement. If that happens, the licensee should be indemnified by the licensor so that the licensor is responsible for attorney fees and any potential judgment.
Similarly, both licensor and licensee should have adequate insurance coverage in place to cover claims for product liability or other issues.
A licensing deal can be highly profitable for licensees and licensors, but there are many potential pitfalls that can affect profitability and liability. Before you embark on a licensing deal, be sure to have a thorough license agreement in place.
About the Author:
Lisa A. Lori, Esq., is a partner in the litigation department at Klehr, Harrison, Harvey, Branzburg, LLP in Philadelphia. Lori is a trial lawyer and business advisor, who represents clients in corporate disputes, intellectual property, employment and fraud-related litigation and investigations. She represents clients throughout all aspects of the litigation process—from pre-litigation counseling and settlement negotiations, to trials and appeals. Lori also counsels clients on FTC and FDA regulatory compliance. To contact Lori, call (215) 620-4370 or email firstname.lastname@example.org.