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What to Consider When Negotiating License Agreements

August 15, 2023

License agreements serve as powerful tools for leveraging intellectual property assets for consumer goods and fashion companies. Various types of license agreements enable businesses to expand market reach, enhance brand value, and drive revenue. But to get the most value out of these agreements, it is crucial to understand and negotiate the terms in detail. This includes identifying the parties’ needs, assessing the value of the property being licensed, deciding proper financial terms, defining the scope of the agreement, addressing quality control, and determining what will happen at the end of the term of such agreement.

Before initiating negotiations, it is essential to clearly define the objectives and obligations of the parties. This involves identifying the specific intellectual property assets to be licensed, deciding the scope of the license (e.g., territories, duration), and determining the desired level of control and exclusivity the licensee and/or licensor need to have over the term of the agreement. Identifying these needs provides a solid foundation for negotiation and helps both the licensee and licensor align their expectations.

For licensors, it is imperative that they also first assess the strength of their brand, the market demand, and the potential financial benefits the licensee stands to gain. In contrast, for licensees, they need to evaluate the strategic advantages they would gain from using the licensed intellectual property. This evaluation serves as a basis for setting royalty rates, upfront fees, and other financial terms. For example, some licensors may deem it wise to pass up higher initial upfront fees, in lieu of higher royalties, or other forms of consideration.

Once those considerations are evaluated, careful negotiation must take place concerning royalty rates, upfront payments, and other financial considerations. Factors such as the exclusivity of the license, anticipated sales volume, and market competition can influence such financial terms. Both parties should seek a mutually beneficial arrangement that adequately compensates the licensor for the use of the intellectual property while providing the licensee with a reasonable return on investment. Famously, Michael Jordan and Nike entered one of the most mutually beneficial license/endorsement deals in 1984, whereby Michael Jordan, through creative negotiation, received not only an annual fee but also royalties for each “Air Jordan” sneaker sold as well as stock options.

The scope of the license defines the boundaries within which the licensee can use the intellectual property. This includes geographical territories where the license applies, the specific product categories covered, and any potential restrictions or limitations. Licensees must seek the necessary flexibility to maximize their market opportunities.

Maintaining brand integrity and ensuring product quality are also paramount considerations in licensing agreements for the consumer goods and fashion industry. The licensor must establish clear guidelines and quality control measures to protect their brand reputation and licensees must adhere to these standards to maintain consistency and avoid diluting the brand. Establishing mechanisms for monitoring compliance is vital to avoid brand degradation and dilution. Such quality control mechanisms are also important because licensors can potentially lose their ownership rights if licensing is not done correctly. For example, a court could view a license without such quality control mechanisms as a naked license if the licensee releases products without certain quality standards.

Termination and renewal provisions are also material terms for license agreement negotiations as they provide clarity and mitigate risks for both licensees and licensors. The parties need to understand the circumstances under which either party can terminate the agreement when specific notice of intent to terminate or renew is required and address any potential penalties or consequences for failure to abide by such terms. Renewal options and procedures for renegotiating terms at the end of the license term ensure a smooth transition and ongoing collaboration, if both parties desire to extend the agreement.

Identifying licensing needs, assessing the value of intellectual property, negotiating financial terms, defining the scope of the license, addressing quality control, and establishing termination and renewal provisions are crucial steps in the negotiation process for licensing agreements. Effective negotiation ensures a mutually beneficial agreement that protects both licensors and licensees while fostering long-term success and innovation in the ever-evolving consumer goods, fashion, and apparel landscape.

This publication is intended for general informational purposes only and does not constitute legal advice or a solicitation to provide legal services. The information in this publication is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking professional legal counsel. The views and opinions expressed herein represent those of the individual author only and are not necessarily the views of Clark Hill PLC. Although we attempt to ensure that postings on our website are complete, accurate, and up to date, we assume no responsibility for their completeness, accuracy, or timeliness.

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