Merchandise License Overview

A merchandise license is a contractual agreement that allows one party to use the copyrighted material of another party for commercial purposes. As per terms of the agreement, the copyrighted material can be used on merchandise, such as clothing, posters, or any other product that can be sold, and in exchange the copyright holder will receive some form of compensation, often as a percentage of the total sales. The timeframe in which the agreement will remain valid and what may or may not be merchandised will also be stipulated in the agreement.

Merchandise License Clauses

A merchandise license contract may contain any number of clauses depending on the specific nature of the contract. However, some of the more common ones include:

  • The Licensed Products Clause. This will describe in detail what merchandise is to be licensed, including its materials, colors, and dimensions. The licensor will generally want to limit the licensee’s merchandising rights as much as possible, while the licensee will want the right of first refusal if the licensor should desire the property to be licensed to other product lines.
  • The Grant of Rights Clause. This will give the licensee the ability to make, advertise, distribute, and sell the merchandised products, exclusively or non-exclusively. An exclusive grant means only the licensee can merchandise the intellectual property (IP), while a non-exclusive grant means the IP can be licensed to others, as well.
  • The Sublicense Clause. This allows a licensee to license the rights to another company; perhaps to merchandise products in foreign markets, for example. For licensors, it is advised to place specific limits on these rights, if given, and that final consent be reserved for any sublicensing deal. Otherwise, the IP may be licensed in ways not desired or in markets where legal actions are difficult.
  • The Reservation of Rights Clause. This states that if a specific right is not granted, then that right has been retained by the licensor.
  • The Territory and Channels of Distribution Clause. This will specify the geographic regions in which the merchandise may be sold and how it may be sold in those regions. It is advised that the licensor have the territory limited to the countries the licensee maintains a presence in and that the channels by which the merchandise is sold should be limited generally (specific stores or types of stores).
  • The Term Clause. This limits the duration of the merchandising license. Generally, the licensee will want this license to last for as long as possible, while the licensor will want a shorter term. If no merchandising term is defined, U.S. copyright laws may let you terminate a licensing agreement after 35 years, even if the terms “in perpetuity” or “forever” are used.
  • The Quality Control Clause. This allows the licensor to have final approval of all merchandise and advertising or packaging related thereto. This approval may also be retained for various stages of the design and production process.
  • The Sales Efforts Clause. This clause works to ensure that the licensee has made a good faith effort at selling the merchandised products to the best of their ability, especially if an exclusive license is involved. Royalty guarantees, minimum sales requirements, and advertising commitments are provisions that can be used in this clause to help ensure a good faith effort.
  • The Royalties Clause. This determines the percentage of royalties to be received for the licensing of the IP, as well as the base to which the percentage will be applied. Royalty rates may range from 2% to 20%, while the base is usually determined by multiplying the rate with the net sales.
  • The Statements and Payments Clause. This defines when royalty payments are to be made, which is usually quarterly, within 30 days of the end of each quarter. Usually, the royalty payment schedule will be the same for all licensees of the licensor.
  • The Audit Rights Clause. This gives the licensor the right to audit the books of the licensee to verify the royalty and sales reports. A time limit may be imposed by the licensee for an audit of previous books, and limitations on the number of audits may also be stipulated. 

These are far from the only clauses that may be encountered within a merchandising license contract. If you need further explanation of details regarding the merchandise license, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.