Rules Of The International Road: Worldwide Licensing And Branding

p>In this ever-shrinking world it has become increasingly desirable and opportune for companies with recognizable brands in the active lifestyle market to develop markets in foreign countries. This can be done in numerous ways, including direct sales, creation of subsidiary or associated entities, and through foreign distributors or licensees. In this article we will focus only on licensing as a method.

Along with opportunities usually come risks. There is “no free lunch,” and royalties from foreign licenses require effort and an investment of time and energy by both licensor and licensee if the relationship is to be successful. A licensing arrangement that has not been properly thought through and structured with an inappropriate licensee can be a business disaster, creating endless negative energy. It’s better to delay a license program until the licensor is prepared and able to make the commitment of time and energy.

A license relationship is just that, “a relationship.” Before entering into a long-term relationship, care should be taken to consider the relationship and prepare an appropriate “prenuptial” agreement to deal with issues before they arise.

Why License

For small and intermediate-sized companies, licensing makes more sense than the other options available. Licensing allows penetration of foreign markets utilizing the talents and expertise of foreign entities in a controlled and focused manner. Licenses have the following advantages:

1.They supplement income to the licensor without absorbing capital (which is better used for more profitable purposes). By having the licensee produce the products, the working capital needs to service the market is predominantly assumed by the licensee. If the licensor tries to service the market directly or through distributors, the licensor’s capital is tied up in production.

2. Licensing assists penetration of new markets not readily available to a new brand or a U.S. entity that does not have a sophisticated infrastructure to manage those markets. To effectively penetrate a international market, the entity servicing the market needs to have a presence and representation at some level. You cannot realistically service a foreign market from the U.S. — other than superficially.

3. Licensing harnesses the skills and expertise of a foreign entity more knowledgeable of the marketing and manufacturing issues applicable to the territory so as to maximize the skills of all of the parties involved. A local licensee (or distributor) will have more intimate knowledge of local conditions insofar as they relate to products, market conditions, and tastes. Although the licensor controls the core integrity of the brand, there may need to be some adapting for local conditions.

4. By expanding distribution, the marketing and advertising brand recognition of a brand are expanded — especially when the licensee either contributes to licensor’s advertising budget or is required to market and advertise within the territory.

5. The investment risks (and some of the rewards) are shared equitably.

6. Licensing allows for an expansion of product categories. With proper planning, the licensor could harness the talents of the licensees for the benefit of the program by sharing designs, sourcing, and other opportunities.

7. Licensing and direct manufacturing allow the foreign licensee to be cost competitive by permitting direct manufacturing and avoiding or reducing import duties.

What To License

A license always includes the use of a trademark, and steps must be taken as soon as possible to obtain registration of trademarks for all appropriate product classes in key territories. As difficult as it may be to justify legal fees in a growing business, the failure to do so can be expensive in the long term. Stories of foreign appropriation of trademarks, particularly in Brazil, Japan, and Spai abound. It is extremely expensive to mount an attack on foreign registration of a mark after registration has been obtained. It is far preferable to intervene at an early stage. If you have shown your product at a trade show, you have exposed it to foreign pirates. The better you look at the show, the more incentive they have to attempt to register. Allocate a budget and work with attorneys knowledgeable in this area to maximize the dollars allocated for registrations and protection.

In addition to the trademarks, a typical license agreement either directly or indirectly allows the licensee the use of image, advertising materials, designing and styling of the brand. The specific properties to be included need to be considered and specified. The amount a licensor can expect to receive from foreign licensees is, of course, linked to the extent of the licensor’s contribution to the licensee.

When To License

Don’t make a decision to license as a whim, or merely because a flattering contact was made. Prepare a thought-thorough business plan incorporating your expectations about the relationship. Licensing without planning often results in a laborious and time-consuming struggle and sometimes long-term disputes and litigation, which destroy future opportunities. Do not license without a plan. Select territories that make the most sense financially and culturally.

How To Select A Licensee

The selection of an appropriate licensee is probably the most critical factor in a successful relationship. Only after a marketing and business plan has been thought through and structured — including needs and expectations — can an appropriate partner be selected to implement the plan.

Many inexperienced licensors have made the mistake of selecting a licensee merely on the basis of some common interests. Understanding the surfing or skate lifestyle is critical in a licensing program for activities. However, equally important is a common philosophical business connection.

It is imperative that the licensee have similar goals and objectives. If you as the licensor are laid-back and casual, a relationship with a hard driving and regimented bottom-line-driven licensee (or visa versa) is destined for failure and at least major compromise.

Obviously, even those relationships can be successful, but more likely than not they’ll cause friction. Using marriage as a metaphor, the fact that you have some things in common with your potential spouse may not necessarily mean that you will have a peaceful, satisfying long-term relationship. You need to look deeper and be realistic about what you see. There is no magic form or checklist to do this right. Follow your instincts and think about what you’re doing.

Where To License

Don’t select territories to license merely on the basis of a solicitation from a flattering suitor. Analyze the market potential and opportunities and then implement a plan that is cost effective and gives the most return for the investment of time and energy. Presently U.S. companies are often successful in marketing their brands in Japan, Europe (particularly France, Germany and the United Kingdom), Australia, and New Zealand. There are also viable markets in South America and parts of Asia. In all cases, although you need to rely on your local licensee, you should make yourself aware of local customs and business operations, and be prepared to compromise on some issues.

How To Implement A Plan

Formulate a business plan which reflects your expectations and objectives. Prepare an appropriate term sheet and license agreement. The term sheet will include the basic business terms to be agreed upon, such as the territory, royalty rates, advertising contributions or obligations, minimum sales, or royalties.

Prepare an appropriate standard-form license. While there are license agreements available as standard forms on the Internet or at the library, using such “standard” forms may be dangerous. They are typically general and nonspecific and do not usually address issues you as licensee may feel are important.

The license agreement serves three separate purposes:

1. It forces the parties to think through issues beyond the superficial level.

2. It becomes the “rule book” for the relationship, hopefully ruling on issues before they become divisive and create friction.

3. It becomes the basis for litigation or arbitration in the event of a dispute which cannot be resolved. (Hopefully this is the least-important purpose, but it may be necessary if points one and two are poorly done.)

A license agreement should not be perceived or prepared as some legal document the licensee doesn’t really understand but the lawyer wants! It should be carefully drafted and modified to satisfy the licensor’s specific requirements and expectations. In addition to standard provisions with regard to royalties, advertising contributions, and the like, consideration should be given to other issues such as advertising commitments, minimums, obligations to market and promote the brand, attend trade shows, and share resources and designs. Get input from somebody experienced as to which issues to consider and the options available.

Plan to meet and communicate with the licensee often. Try to visit the licensee at the licensee’s premises at least once or twice a year. Have the licensee attend sales meetings and discussions in the United States so that they have a clear understanding of the marketing plan and philosophy.

Be receptive to the input from the foreign licensee, and be prepared to accommodate local requirements and compromise on issues that do not jeopardize the reputation of the brand and its image.

Exercise appropriate quality control of the products, the marketing and advertising, as well as the tiers of distribution through which products are sold. Be prepared to protect against counterfeiting and diversion, both into the territory and emanating from the territory into other areas of the marketplace.

Common Mistakes And Misconceptions

You will not save money by allowing the licensee to prepare the first draft of a license document. At best the draft will be tilted in favor of the licensee and once the opening terms are presented it is more difficult to force change. Invariably when starting with a pro-licensee document you finish up with a more expensive, less satisfactory document, or you may even lose a potential opportunity altogether because of the now protracted negotiating process. Invest the time and money to prepare your own agreement to present to the licensee. In the long term the same agreement can be adapted for additional licenses. Additionally you will become familiar with the terms and run your business and the licensing program more effectively.

Register the trademarks as early and as often as possible. Never allow the licensee to do so on your behalf. Invariably, when a licensee does offer to register the trademarks on behalf of the licensor it is screwed up in some way either deliberately or accidentally. Either it’s not registered, registered incorrectly, or often not registered in the name of the correct owner. In my experience, the number of times the licensee has appropriately and properly registered a mark on behalf of the licensor is far exceeded by the number of times it has gone the other way. The trademarks are valuable assets. Take responsibility for protecting them

Be careful in allocating territories. Do not allocate territories that are geographically too large to a single licensee without carefully considering whether the licensee can reasonably service that territory. Having a licensee doing good business in Germany but hardly touching France can be frustrating if you have granted exclusive rights to both countries. Make sure that the licensee has some presence or sales force in all of th” forms may be dangerous. They are typically general and nonspecific and do not usually address issues you as licensee may feel are important.

The license agreement serves three separate purposes:

1. It forces the parties to think through issues beyond the superficial level.

2. It becomes the “rule book” for the relationship, hopefully ruling on issues before they become divisive and create friction.

3. It becomes the basis for litigation or arbitration in the event of a dispute which cannot be resolved. (Hopefully this is the least-important purpose, but it may be necessary if points one and two are poorly done.)

A license agreement should not be perceived or prepared as some legal document the licensee doesn’t really understand but the lawyer wants! It should be carefully drafted and modified to satisfy the licensor’s specific requirements and expectations. In addition to standard provisions with regard to royalties, advertising contributions, and the like, consideration should be given to other issues such as advertising commitments, minimums, obligations to market and promote the brand, attend trade shows, and share resources and designs. Get input from somebody experienced as to which issues to consider and the options available.

Plan to meet and communicate with the licensee often. Try to visit the licensee at the licensee’s premises at least once or twice a year. Have the licensee attend sales meetings and discussions in the United States so that they have a clear understanding of the marketing plan and philosophy.

Be receptive to the input from the foreign licensee, and be prepared to accommodate local requirements and compromise on issues that do not jeopardize the reputation of the brand and its image.

Exercise appropriate quality control of the products, the marketing and advertising, as well as the tiers of distribution through which products are sold. Be prepared to protect against counterfeiting and diversion, both into the territory and emanating from the territory into other areas of the marketplace.

Common Mistakes And Misconceptions

You will not save money by allowing the licensee to prepare the first draft of a license document. At best the draft will be tilted in favor of the licensee and once the opening terms are presented it is more difficult to force change. Invariably when starting with a pro-licensee document you finish up with a more expensive, less satisfactory document, or you may even lose a potential opportunity altogether because of the now protracted negotiating process. Invest the time and money to prepare your own agreement to present to the licensee. In the long term the same agreement can be adapted for additional licenses. Additionally you will become familiar with the terms and run your business and the licensing program more effectively.

Register the trademarks as early and as often as possible. Never allow the licensee to do so on your behalf. Invariably, when a licensee does offer to register the trademarks on behalf of the licensor it is screwed up in some way either deliberately or accidentally. Either it’s not registered, registered incorrectly, or often not registered in the name of the correct owner. In my experience, the number of times the licensee has appropriately and properly registered a mark on behalf of the licensor is far exceeded by the number of times it has gone the other way. The trademarks are valuable assets. Take responsibility for protecting them

Be careful in allocating territories. Do not allocate territories that are geographically too large to a single licensee without carefully considering whether the licensee can reasonably service that territory. Having a licensee doing good business in Germany but hardly touching France can be frustrating if you have granted exclusive rights to both countries. Make sure that the licensee has some presence or sales force in all of the countries included.

In choosing a licensee, chose carefully. As is the case when you start dating, don’t ignore, overlook, or underestimate early warning signs such as personality quirks, lack of credibility, lack of finance, or lack of integrity. If things bug you when you start the process, be prepared to back off. Licensing is a relationship, not an agreement. It’s not possible to have a good deal with a bad person. It’s not possible to cement a bad relationship with a good agreement.

Analyze the ability of a licensee to perform. Use common sense. Does the licensee have an infrastructure, capital, and experience needed to take the vision and make it work? Ask the difficult questions and listen to the answers. If you’re not satisfied with the answers, keep probing. Don’t be afraid to pass on the deal that doesn’t feel right! The amount of revenue that could be earned on a misconceived plan is by far outweighed by the number of problems it will create.

Like sex, a licensing relationship can be mutually profitable, satisfying and enjoyable. Like sex, it would be wise to take precautions, plan ahead, and think before doing something impulsively, stupid, or on a whim! In both cases the potential consequences outweigh the benefits or rewards! This article is obviously an abbreviated outline of some of the things to consider, and will hopefully prompt some thoughts to consider as you enter into a relationship with exciting possibilities and immense rewards if done right. Others have done it successfully. Follow their lead.

_____________________________________

During the past twenty years Bryan Friedmann has been involved in, orchestrated, negotiated, and handled numerous transactions in the surf and skate industry. Presently he is counsel for Billabong, Lost, Ezekiel, Element, Black Label, Veezee, Counter Culture, 411 Video Magazine, Destructo, Surf Diva, and Dawls as well as a number of other apparel companies not specifically in the “lifestyle” industry. He can be contacted at bfriedman@fpsglawyers.com.

f the countries included.

In choosing a licensee, chose carefully. As is the case when you start dating, don’t ignore, overlook, or underestimate early warning signs such as personality quirks, lack of credibility, lack of finance, or lack of integrity. If things bug you when you start the process, be prepared to back off. Licensing is a relationship, not an agreement. It’s not possible to have a good deal with a bad person. It’s not possible to cement a bad relationship with a good agreement.

Analyze the ability of a licensee to perform. Use common sense. Does the licensee have an infrastructure, capital, and experience needed to take the vision and make it work? Ask the difficult questions and listen to the answers. If you’re not satisfied with the answers, keep probing. Don’t be afraid to pass on the deal that doesn’t feel right! The amount of revenue that could be earned on a misconceived plan is by far outweighed by the number of problems it will create.

Like sex, a licensing relationship can be mutually profitable, satisfying and enjoyable. Like sex, it would be wise to take precautions, plan ahead, and think before doing something impulsively, stupid, or on a whim! In both cases the potential consequences outweigh the benefits or rewards! This article is obviously an abbreviated outline of some of the things to consider, and will hopefully prompt some thoughts to consider as you enter into a relationship with exciting possibilities and immense rewards if done right. Others have done it successfully. Follow their lead.

_____________________________________

During the past twenty years Bryan Friedmann has been involved in, orchestrated, negotiated, and handled numerous transactions in the surf and skate industry. Presently he is counsel for Billabong, Lost, Ezekiel, Element, Black Label, Veezee, Counter Culture, 411 Video Magazine, Destructo, Surf Diva, and Dawls as weell as a number of other apparel companies not specifically in the “lifestyle” industry. He can be contacted at bfriedman@fpsglawyers.com.