Updated November 5, 2020:

An apparel licensing agreement is a deal between the licensor and licensee to manufacture and sell merchandise.

Basics of a Merchandise Licensing Agreement

A license agreement is the basis for every merchandise licensing transaction. Typically the licensor and licensee put together the best written agreement so they can both profit. The licensor usually garners extra income and publicity, while the licensee obtains a chance to benefit from an association with the licensor's properties.

When it comes to the merchandise licensing agreement, there are several aspects to consider.

  • Licensed property: The agreement should state what the licensed property is. If there are trademarks or copyrights necessary to the property, the licensee should state the registration numbers.
  • Licensed products: The agreement should include a description of the merchandise, including colors, materials, and dimensions.
  • Grant of Rights: This states that the licensee has the right to manufacture, import, distribute, and market licensed products. Exclusive rights mean that nobody else has the same rights in the territory, while nonexclusive rights mean that others have the same rights. 

Licensing Sales Effort

The licensor wants to make sure that the licensee makes an effort to manufacture and sell all of the licensed products, especially if the license is exclusive. The licensor might also want the licensee to guarantee that royalties will reach a specific amount. If that doesn't occur, the licensee might end up paying the difference. 

There might also be minimum sales requirements to make sure the licensee actively sells the products. In addition, the licensor might want the licensee to commit a specific amount of money to advertise the products. 

Royalty Percentages

To receive compensation for the licensing agreement, you need to look at the royalty percentage and the base against that percentage is applied. Other aspects of royalties include the following:

  • Rate: The royalty rate can range from 2 to 20 percent of the net receipts. These rates vary depending on the type of licensed property manufactured, the demand, and the licensor's track record.
  • Base: Most instances have the royalty amount determined by multiplying the rate by the net sales of the licensed products. To determine net sales, you must take into account the wholesale price.
  • F.O.B. sales: In this instance, the retailer buys licensed products from the licensee but takes delivery at the factory. This saves the licensee the cost of freight, so the licensee will charge a lower wholesale price.

Oftentimes, royalties are paid on a quarterly basis, with payment due usually 30 days after the end of each quarter. Licensors have the right to audit the licensee's books to verify sales and royalty records.

Termination Rights

If the licensee fails to perform under the written licensing agreement, the licensor wants the rights to terminate the agreement prior to the end of the term. Most agreements have three categories for termination:

  • Events that are grounds for immediate termination without a cure period
  • Events that will become grounds for termination if not cured in a specific timeframe
  • Events that are confined to only a part of the license and must be cured within a reasonable time after notice

The licensor might terminate the agreement following 10 days written notice to the licensee. During that time, the licensee has a chance to fix the situation as determined by the licensor.

After termination, the licensee might want the right to distribute any remaining products. If that's the case, the licensor should provide a statement showing the quantity of licensed inventoried merchandise and include extra safeguards to prevent the licensee from producing more merchandise in anticipation of termination.

Issues to Consider in Apparel Licensing

When it comes to apparel licensing, you want to be prepared for issues you might encounter. You must have enforceable rights to the design and protection. It's a smart idea to apply for a trademark registration before you begin the process. If you need a patent, contact the U.S. Patent and Trademark Office.

However, if you want to license your design in other countries, U.S.-based trademark registration has little if any protection from infringement in foreign countries. You must file for registration in the applicable countries; otherwise you have few rights if someone competes with your product.

The agreement should also specify how and when you get paid. The licensee should pay you every time a licensed product is sold. The payment could come in a flat-rate or royalty-based form, but the licensing agreement should use clear examples to explain the process. There should also be a stated minimum sales target and guaranteed royalties to meet or exceed.

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