Key Takeaways

  • The licensed merchandise definition refers to products manufactured, marketed, and sold under a legal agreement that permits the use of another party’s intellectual property (IP), such as logos, characters, or brand names.
  • Merchandise licenses outline critical terms such as scope of use, royalty payments, territory, quality control, sublicensing, and audit rights.
  • Both licensors and licensees must negotiate clear provisions on royalty calculation, minimum guarantees, reporting obligations, and approval procedures to protect their commercial and legal interests.
  • Effective agreements include post-term sell-off provisions, clear definitions of distribution channels, and detailed approval processes to maintain brand integrity and prevent disputes.
  • Quality control, sublicensing restrictions, and audit rights are essential to ensuring that merchandise aligns with brand standards and that royalty payments are accurate.

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.

Understanding the Licensed Merchandise Definition

At its core, the licensed merchandise definition refers to any product created and sold under a legal agreement that permits the use of another party’s intellectual property (IP) — such as a brand name, logo, character, slogan, or design — in exchange for compensation. The owner of the IP (the licensor) grants these rights to another entity (the licensee), which then manufactures, distributes, and sells the merchandise using the licensed property.

This arrangement is mutually beneficial:

  • Licensors gain a new revenue stream without investing in product development or sales infrastructure.
  • Licensees benefit from the established brand recognition and consumer trust associated with the IP, often translating into higher sales and market share.

A merchandise license is commonly used in industries such as entertainment (e.g., film, television, gaming), sports (team logos and player likenesses), fashion, and consumer products. These agreements often extend beyond physical goods to include digital products, promotional campaigns, and packaging or marketing materials that feature the licensed property.

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. 

Additional Commercial and Legal Considerations

While standard clauses address the basics of a merchandise license, there are several nuanced provisions that significantly affect how the agreement operates in practice.

1. Scope of License and Post-Term Rights Clearly defining the scope of the license is essential. This includes the types of products covered, the specific IP elements licensed, and the permitted activities (e.g., manufacturing, marketing, promotion, distribution). The agreement should also specify whether the license is exclusive or non-exclusive, as this impacts both parties’ business strategies. Additionally, many agreements include a sell-off period after termination, allowing the licensee to liquidate remaining inventory without breaching the contract.

2. Royalties, Minimum Guarantees, and Payment Structures Royalty rates are typically calculated based on a percentage of net or gross sales, but clarity on allowable deductions (such as returns, promotional allowances, or taxes) is critical. Licensors often require a minimum royalty guarantee — either paid upfront or on a set schedule — to ensure baseline revenue regardless of sales performance. Detailed reporting obligations, including the format, timing, and content of royalty statements, should be included to avoid disputes.

3. Quality Control, Approvals, and Brand Integrity Maintaining brand value is central to merchandise licensing. Licensors typically impose strict approval processes at multiple stages — including design mock-ups, sample products, final production units, and even marketing materials. Licensees must have internal systems to meet these requirements and avoid delays or breaches.

4. Sublicensing and Distribution Channels If sublicensing is permitted, the agreement should outline approval requirements, territory limitations, and quality standards for sublicensees. Additionally, the contract should define sales channels — such as retail, e-commerce, or wholesale — and any restrictions on geographic regions. For instance, licensors might restrict sales to jurisdictions where the licensee maintains an active presence or can provide legal enforcement support.

5. Audit Rights and Enforcement Provisions Because royalties are often the primary source of licensor revenue, audit provisions are vital. Licensors typically reserve the right to audit a licensee’s books to verify royalty payments, but the agreement should limit the frequency, scope, and duration of such audits to protect the licensee from undue burden. It should also specify remedies for underpayment, such as reimbursement of audit costs or contract termination.

6. Termination, Renewal, and Exit Strategy Termination clauses should address breach scenarios, insolvency, or failure to meet minimum sales thresholds. Some agreements include automatic renewal provisions contingent on performance metrics, while others require renegotiation at the end of each term. Clear exit terms help both parties manage inventory, wind down production, and transition the licensed property smoothly.

Frequently Asked Questions

  1. What is the licensed merchandise definition?
    Licensed merchandise refers to products made and sold under a legal agreement allowing the use of another party’s intellectual property — like logos, characters, or trademarks — in exchange for compensation.
  2. What are the key terms of a merchandise license agreement?
    Essential terms include the scope of the license, royalty structure, quality control provisions, distribution channels, sublicensing rights, audit rights, and termination clauses.
  3. How are royalties calculated in merchandise licensing?
    Royalties are usually a percentage of gross or net sales. The agreement should clearly define how deductions (e.g., returns, taxes) are handled and include reporting requirements.
  4. Can a licensee sublicense the rights to another company?
    Yes, but only if the contract allows it. Many licensors require prior written consent and set limits on territory, quality, and sublicensee responsibilities.
  5. What happens after a merchandise license agreement ends?
    Agreements often include a sell-off period that allows licensees to sell remaining inventory. After this, all use of the IP must cease unless a new license is negotiated.

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.