Chapter 14

Trademarks and Licensing: Follow the Money Trail

Reputation Counts

Trademark licensing is often spelled with dollar signs. That is because licensing is big business. Whether it is transferring logos to merchandise or granting franchise rights to third parties who make their business by using a popular mark, well-managed trademarks can generate substantial revenue. While the film trilogy Star Wars netted almost $3 billion in box office and home video sales, licensing and merchandising Star Wars characters and products grossed over $4.5 billion. For colleges and universities, licensing can be a vital source of supplemental revenue. With large student bodies and loyal alumni, state universities garner millions of dollars by simply putting school colors and mascots on T-shirts and coffee mugs and almost anything else that is not nailed down.

Collegiate licensing was not always that way. Until about 1980, state schools had no organized licensing programs because it was believed that state school logos were public property. Not until the University of Pittsburgh challenged and defeated Champion (famous for making college T-shirts) did collegiate licensing get under way in an organized manner.

For many schools, preexisting deals left them little opportunity to develop a licensing program. In 1981, one large Midwestern state university had an unusual contract with a major clothing manufacturer written before the Pitt case was concluded. The license agreement did not provide for rights in a straightforward way; rather, the agreement was styled “a covenant not to sue in perpetuity.” That is a legal promise that the school could never sue to overturn the deal. What is more, the license provided for a flat fee of $1,000 a year, while the T-shirt company grossed hundreds of thousands of dollars annually. Knowing that state judges would not look kindly on such an onerous deal and betting that the one assigned the case could be a grad of the university's law school, the institution unilaterally canceled the deal and threatened to sue. The gambit paid off and translated into a fair license settlement. Today, that Midwestern university garners millions of dollars for scholarships and other programs through proceeds from its extensive licensing program.

Trademark licensing also offers savvy owners ways to expand a brand's reputation. Take, for example, the extension of cable channels such as Discovery and ESPN. Not only have these networks created clearly defined programming niches for loyal audiences, they have also been able to sell videocassettes and other merchandise branded with their logos. Whether they created the product, acquired someone else's works, or gave another manufacturer a license to use their logo, placing their trademarks on the tapes increases market presence and permits a higher price to be charged for the goods.

Similarly, when Discovery bought The Nature Stores in 1996, it did so with the realization that selling nature-oriented products was a “natural” fit and that the most practical way to achieve brand extension was to move into the retail market. For the Public Broadcasting System (PBS), licensing is viewed as a potential supplement that can cushion drastic cuts in federal funding.

Characters are important elements in media trademarks. Mickey Mouse is a Disney franchise, and ET is a symbol for its creator, Steven Spielberg, and Universal Studios. Today, nary a major movie is made without consideration of the vast potential for character licensing and extension of the mark into unrelated goods or services (but related revenue streams). As a result, virtually every children's film coming out of Hollywood has planned associations with fast-food chains as well as products such as dolls, action figures, lunch boxes, notepads, and, sometimes, amusement park thrill rides. In winter 2001, every conceivable form of merchandise bearing the name or image of Harry Potter simply flew off the shelves. The same phenomenon occurred with characters from The Lord of the Rings. The extension of the copyrighted work into products developed by a theme or character is essential to justifying the unimaginable costs of creating and marketing major motion pictures and other big-time media programs. Even as film editing of Jurassic Park, The Lion King, Harry Potter, and The Lord of the Rings was being completed, plans for exploiting catalogues of merchandise were well under way. An interesting footnote relates to The Lord of the Rings: There are actually two distinct lines of products in an unusual “divided licensing” plan. One company owns the rights to merchandise related to the film (and its future sequels), while another company owns the rights to products related to the underlying books.

Another intriguing development is the interest in items appearing in fictionalized stories. In the 2001 Harry Potter film, the young wizard coveted a Nimbus 2000 broom, a perfectly designed spin-off product. Sometimes, the market values of the product lines are appreciated by outsiders even before the program's creator. An example of the need for creative programmers to be watchful of their own inspirations involves the television series, The Simpsons, where characters drink Duff Beer. An enterprising Australian took the animated series' product and began selling Duff Beer locally. Fox Television, the program's producer, was forced to bring a trademark infringement action in Australia, seeking an injunction to prevent the misuse of the trademark. Fox won, but the expense of litigating to preserve rights for Homer Simpson's crowd might have been avoided altogether had the producers taken several appropriate steps when the show became a worldwide sensation.

Tips for Planning a Licensing Campaign

When planning trademark licensing, whether as a licensee or licensor, there are a number of key things to keep in mind (Figure 14-1).

Attend to Trademark Research and Federal Registration

If an item is going to be a part of a licensing campaign, it should be treated with respect. This means that, at the earliest possible time in the creating process, before the licensing program is formalized, the creators should conduct a search regarding the availability of the words, phrases, and symbols that they intend to exploit. If a word or phrase is identified for an object likely to have commercial value—such as Nimbus for the Harry Potter broom or Duff for beer—it should be cleared from a trademark perspective as part of the creative process for the film. Particularly, if one is creating a work of fiction, failure to attend to the trademark clearance process can result in embarrassing conflicts down the road if it develops that someone else has preexisting trademark rights. It is no excuse that one did not know about a product already in commerce. Once cleared, an application for federal registration should be prepared and filed. If the mark is not going to be used for some time, as will often be the case, an ITU application should be filed. If the mark is in use, then a regular trademark submission is appropriate.

These filings should be broad in sweep and function. Even if one is not sure whether a particular product line will have value, it pays to protect it at an early date. A creative professional can always decide not to proceed with licensing or merchandising a product and phrase, but if protection has been secured, it will be much easier to stop others who would attempt to steal the franchise.

As already explained, registered marks are entitled to the strongest legal protection. Registered owners and authorized licensees can use the official registration notice, ®, which not only provides public notice but very often adds value to the marketing campaign and the worth of the item. It translates into “original” or “official” merchandise.

Figure 14-1 Keys to Licensing Strategy

Develop a Reasonable Plan to Cover Likely Uses

When considering the initial structure of a licensing campaign, develop a thoughtful plan before the product lines are established. It is best to take a broad view of the content being created and identify as many elements as one can that would be suitable for protection. Once you have identified the important images and phrases, it will be possible to narrow those deserving of a higher degree of protection based on a reasonable budget. One advantage of an effective licensing campaign is that many of the obligations of a strong program can be passed onto the licensee as part of its requirements in the contracting process. Nevertheless, at the early, creative stages, it is better to identify more trademark elements and potential uses, rather than fewer, to achieve maximum valuation of the creative works. So when thinking of clothing items to be manufactured or licensed, do not stop at the obvious ones, like hats and T-shirts. Thinking more broadly may identify ties, socks, shorts, sweatshirts, shoes, gloves, and so forth. The registration process allows an applicant to identify a limitless number of goods in a single class all for the same filing fee. Particularly at the ITU stage, one is not obligated to actually create all the objects identified to assert a valid claim.

Part of the plan includes selection of the licensees, the firms entrusted with actually making the products. Here, it is essential to do marketplace research, talk to others who serve as references for companies and accept competitive bids. If several companies emerge as possible candidates, consider whether nonexclusive deals work better for you or territorial divisions make sense. Assessing the strengths and weaknesses of licensees is vital business. They carry your reputation into the market.

Provide for Quality Control

The most essential element of a properly devised trademark licensing program is quality assurance. It is the duty of the licensor to be satisfied that the way the mark is used is compatible with its own standards. Every agreement should spell out precisely what constitutes acceptable standards, both with respect to the products being licensed and the way the mark appears on the goods and services. It may be desirable to preapprove certain samples or indicate in the agreement that use in a recognized fashion meets the standards of the licensor. The easiest way to lose a valuable trademark is to license without quality inspection. Quality control is the sine qua non of trademark licensing principles.

Rely on Written License Contracts

Confusion reigns when licensing agreements are not in writing. The agreement need not be a legal treatise, but there should be a written understanding covering the vital elements of the licensing, including

• A definition of the mark or marks covered by the agreement. Samples of the marks should be attached to the agreement, particularly if typeface, size, or stylization is relevant to the proper exploitation of the mark.
• The term of the license. A reasonable period of years typically identifies the term of the license. Setting beginning and end points also permits both the licensor and licensee to assess whether the transaction meets mutual expectations. If the term is too short (a year or two), the licensee may not have adequate opportunity to create the products, introduce them into the market, and develop a substantial consuming public. If the term is too long, an underperforming licensee could rob the licensor of valuable marketing potential in a mark. The nature of the goods and the mark itself also bear on the term. Some products, like merchandise associated with an event or a program, must be ready for sale at or prior to the day of the event or commencement of the program. Failing to adhere to a strict schedule can doom the success of the licensing program and hurt the long-term viability of a trademark. Therefore, licensor and licensee must have a clear schedule for production and launch of a product line. If the merchandise is not acutely time sensitive, it is still necessary to have a common understanding of the way in which the products will be planned, produced, and marketed.
• Quality control. As already discussed, quality control is an absolutely essential element of any licensing campaign. Failure to define what is acceptable quality and establish a mechanism to assure compliance with its specifications may not only result in poorly designed and marketed products but render a trademark legally useless. The quickest way to lose a trademark infringement dispute with a competitor who has taken your mark and exploits it without your control is to permit a licensee to operate without any standards. This means that the mark exists without proper source identification, which renders the mark meaningless.
• Fundamentally, quality is what the licensor defines it to be. There is no legal requirement that products emblazoned with a trademark meet a specific standard; however, it is incumbent on the licensor to describe what is acceptable from its perspective in sufficiently clear terms that a licensee can understand and enforce the specifications and standards.
• The quality control term has at least four principal elements:

  1. The look and feel of the trademark itself; in other words, the physical appearance of the mark on the products and promotions, including typeface, placement, color, size, and shape.

  2. The quality of the products themselves; ingredients, cost, manufacturing process, durability, and shelf life are but a few essential elements.

  3. The manufacturing and inspection process; the more sophisticated the quality control, the more detailed the licensor will be about how the goods are to be produced and the greater the insistence on an adequate process of inspection to assure continuing quality control.

  4. The packaging and marketing of the product; even though the licensor may have a lot to say about this element or it may leave it in the hands of the licensee, chosen for its expertise in this area, as long as each of these elements is addressed in a quality control process, the licensor has satisfied its legal obligations at a level sufficient to maintain its rights to its trademarks.

• Licensee fees. Every licensing transaction has a monetary motive. The fees are the essence of the deal for the licensor, and they set the standard by which the licensee knows whether it is entering into a wise business venture. Typically, license fees for the privilege of placing a logo on a product produced by another range from 5 to 15%, with most fees falling in the 5–10% range. If more than one logo is to appear on a product (like a New Years Bowl collegiate T-shirt with the name of the game and the two competing teams), the royalty rate rises to the high end (15%), even though each team and the tournament directors fall in the lower end of the spectrum (5% each).
• Termination procedures. It is essential for the licensor to establish a way to get out of a bad deal. While a licensee can simply stop performing—an act that may be a violation of a contract requirement to continue to produce even if the results are not as anticipated and thus create some exposure to liability—the licensor may not have an equivalent option to intervene in the middle of a contract term, unless a specific process permits termination for failure to perform. Termination for good cause, such as failure to produce according to agreed-on specifications (part of the quality control process), is very appropriate. Other bases may include failure to provide adequate reports and financial accounting. But, under any circumstance, some termination provision should be required by the licensor.
• Exclusive vs. nonexclusive. A key decision that a licensor must make is whether the grant is to only one company. Exclusive deals tie the trademark owner to a particular producer of goods without recourse to other competitors. From the perspective of the licensee, an exclusive deal allows it to invest in the brand without fear that a competitor will reap rewards it does not deserve. Since marketing expenses—advertising, buying shelf space, creating themes, hiring famous spokespersons—mean financial risks, a licensee does not want a competing producer to siphon off sales meant for the one who created the market to begin with. For licensors, limiting a product line to one licensee usually means it can charge a higher license fee, but if the firm does not deliver results, it may have a smaller profit. Nonexclusive deals hedge the licensor's commitment to one producer but usually come with lower license fees. If multiple licensees each produce their fair share, the net result can boost licensor revenue. In the end, knowing the typical market deals and the parties you are contracting with are the keys.
• Monitoring the marketplace. Both parties to a license agreement should have a means of determining whether the product is reaching the right market and whether the market is satisfied with the trademarked merchandise. This feedback is another essential ingredient for a licensor properly assuring quality control over its product and a licensee properly determining the success of its program.
• After the end of the license. At the end of the license term, one of two things can happen. The license can be renewed or extended on the same or new terms or all rights can revert to the licensor. In that case, there should be some understanding about goods already produced. A licensee may need a shoulder period to get rid of unsold merchandise, or it may need a way of transferring that merchandise to its successor. It behooves the parties to think through the arrangement for the end of the term, just as they have to plan for the initiation of the program.

Licensing can take on a life of its own. It is a complex process that requires careful planning and forethought. Effective exploitation of trademark rights can be a lucrative supplement to any business and in some cases it can be the whole business. Whether a business is successful depends on some unpredictable factors and hard work, but do not lose the licensing opportunity.