Key Takeaways

  • A merchandising agreement allows a licensee to use intellectual property (like logos, characters, or brands) for commercial purposes such as manufacturing or selling products.
  • Merchandising agreements commonly address exclusivity, territory, duration, royalty payments, quality control, and intellectual property ownership.
  • Including terms like sublicensing rights, approval processes, marketing obligations, and termination clauses helps clarify expectations and reduce disputes.
  • Due diligence is crucial for both licensors and licensees, including trademark verification and contract review.
  • Working with an attorney is highly recommended to ensure the agreement protects your rights and complies with relevant laws.

A merchandise license agreement describes the terms through which the owner of intellectual property, notably in the form of a trademark, service mark or copyright, grants a party, called the licensee, the right to use the property for distribution, marketing, and sale. This property is most frequently in the form of a fictional character or mascot, a familiar logo, film, television show, or a video game created by the owner. However it can also be used to transfer rights to a piece of software or a manufacturing process protected by a patent.

These agreements can vary in length and complexity and can be as broad or as limiting as the owner of the property desires. Among the issues addressed in a merchandising license agreement are the type of rights allowed, what products the license covers, the duration of the agreement, and compensation and payment terms. In most cases, the owner of the merchandise, identified in an agreement as the licensor, receives an advance payment at the time the agreement is signed and royalty payments based on a percentage of merchandise sales throughout the period the agreement is in effect.

The agreement also addresses the obligations of the licensee. In addition to payment terms, these can include responsibility for enforcing infringement or piracy violations or a guarantee on the part of the licensee to make a good faith effort to sell the licensed products.

Should the licensee fail to meet their obligations, the licensor has the right to terminate the agreement. This action is typically avoided at all costs, however, since the termination of a merchandising license agreement can result in a loss of income and missed opportunities to capitalize on the property by the licensor, and the waste of an often-substantial investment by the licensee.

When a Merchandise License Agreement Makes Sense

Both the licensor and the licensee can benefit from the establishment of a merchandising licensing agreement.

  • For the licensor, granting the rights to their property to another party can provide a revenue stream from merchandise that the owner does not have the experience, capital, market knowledge or desire to sell on their own.
  • For the licensee, receiving a merchandising license allows them to generate income based on the popularity of the property and use their contacts in manufacturing, distribution and/or retail markets to generate huge sales. According to the Licensing Industry Merchandiser’s Association, global retail sales of licensed merchandise totaled almost $262 billion in 2016.

These agreements can grant exclusive rights to the licensee, or be nonexclusive and have restrictions on geographic markets or the right of licensee to grant sublicenses.

Benefits of a Merchandising Agreement for Both Parties

Merchandising agreements create significant advantages for both licensors and licensees:

For Licensors:

  • Generate passive revenue streams through licensing fees and royalties.
  • Expand brand recognition without managing production or distribution.
  • Reduce operational risks and overhead by outsourcing sales and distribution.
  • Maintain control over intellectual property rights through approval processes and quality standards.

For Licensees:

  • Leverage well-known intellectual property to drive product sales and market demand.
  • Access new markets or expand product lines with lower brand development costs.
  • Utilize their manufacturing and distribution networks to maximize profitability.
  • Benefit from co-branding or association with a recognized brand, which can boost credibility.

What’s Included in a Merchandising Licensing Agreement

Manufacturing license agreements are actually similar to most licensing agreements that transfer intellectual property rights between parties. However, there are some issues that should definitely be addressed in this type of agreement. Among these are:

  • Roles and responsibilities: First of all, it is important to include the obligations of each party, including which party retains the rights to the property throughout the term of the agreement.
  • Geographic areas of interest: It is often the desire of the licensor to restrict the rights of the licensee to sell products based on the licensed property in certain geographic areas based on existing licenses or existing non-compete agreements.
  • Length of term of the license: Most licenses are for a limited time or have renewal clauses that may be triggered by the licensee realizing agreed upon sales goals.
  • Financial details: These could include the amount due the licensor at the time the contract is signed and calculations to determine the amount of royalty payments.
  • Quality control standards: This is particularly important if the licensor has established a brand that is held in high esteem and it is important that any product created by the licensee maintain the standard of excellence.
  • Conflict resolution language: In a perfect world, things always go smoothly. In real life, however, issues of dispute may arise between parties to a merchandising license agreement. As in the case when entering into any legal agreement, it’s always wise for both parties to consult an experienced attorney to protect their rights in the event of a conflict.

If you are the owner of an intellectual property asset that you believe may have value beyond its existing form, or a manufacturer looking to capitalize on the popularity of someone’s intellectual property that you believe could be the next big thing, entering into a merchandising licensing agreement with the right party could create a very lucrative arrangement.

Common Provisions in a Merchandising Agreement

When drafting a merchandising agreement, it’s essential to include the following provisions to ensure clarity and avoid disputes:

  • Grant of License: Specify whether the license is exclusive or non-exclusive and whether sublicensing is allowed.
  • Scope of Rights: Clearly define the intellectual property being licensed (e.g., logos, character images, trademarks).
  • Territory: Identify geographic regions where the licensee is permitted to sell products.
  • Term and Renewal: Outline the length of the agreement and conditions for renewal.
  • Royalties and Payment Terms: Detail royalty rates, payment schedules, advances (if applicable), and audit rights.
  • Quality Control Standards: Include requirements for product samples, approvals, and compliance with brand guidelines.
  • Marketing and Promotion Obligations: Specify whether the licensee must meet minimum sales or promotional efforts.
  • Termination Clause: Define conditions for termination, including breach of contract or failure to meet sales targets.
  • Dispute Resolution: Include mediation, arbitration, or litigation processes for resolving disputes.
  • Intellectual Property Ownership: State that ownership of the intellectual property remains with the licensor.

Important Considerations Before Signing a Merchandising Agreement

Before entering into a merchandising agreement, both parties should consider these critical factors:

  1. Trademark and IP Verification:
    Confirm that the licensor holds valid intellectual property rights and has the legal authority to license them.
  2. Due Diligence on the Licensee:
    Investigate the licensee’s reputation, financial stability, and manufacturing capabilities.
  3. Approval Processes:
    Define clear procedures for product design approvals, including timelines and the licensor's right to reject non-compliant products.
  4. Minimum Sales Requirements:
    Consider including minimum sales thresholds to ensure that the licensee actively promotes the licensed products.
  5. Sublicensing Rules:
    If sublicensing is allowed, detail the conditions under which sublicenses can be granted and how they are monitored.
  6. Termination Impact:
    Understand the implications of termination, including inventory sell-off periods, return of intellectual property materials, and outstanding payments.

Frequently Asked Questions

  1. What is a merchandising agreement?
    A merchandising agreement is a legal contract that allows a licensee to use a licensor’s intellectual property—such as logos, brand names, or characters—to manufacture, market, and sell products.
  2. What should be included in a merchandising agreement?
    Key provisions typically include the scope of the license, exclusivity terms, royalty structure, quality control standards, geographic restrictions, and dispute resolution clauses.
  3. Can a merchandising agreement be exclusive?
    Yes, merchandising agreements can be exclusive, non-exclusive, or limited to specific products or territories, depending on the terms negotiated between the parties.
  4. What happens if either party breaches the merchandising agreement?
    If either party breaches the agreement, the other party may have the right to terminate the contract and seek remedies, which could include damages or injunctive relief.
  5. Why is quality control important in a merchandising agreement?
    Quality control helps protect the licensor’s brand reputation by ensuring that licensed products meet specific standards and comply with brand guidelines.

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