As the U.S. economy sputters, companies are turning to international trademark licensing as a way to increase profits.
International trademark licensing involves granting the right to manufacture, market and sell products bearing a registered trademark by a trademark owner (the licensor) to a foreign company (the license). The licensor supervises the activities of the licensee and provides approvals and support, such as design and advertising support.
The licensee assumes the financial risks of manufacturing, marketing and selling the goods under license in a specified territory and pays a royalty to the licensor based on a percentage of wholesale sales. The licensor generates revenue, increases its market presence and the good-will value of its trademark by the licensee’ efforts.
The licensee benefits by increasing sales and profits due to the trademark’s recognition.
The first step to a successful international licensing program is to prepare a thorough business plan. The business plan will include a report from your legal counsel regarding the status of your trademark registrations in the countries in which you wish to license your trademarks.
Every company that plans to expand internationally should register their trademarks abroad in key markets as soon as possible to avoid “pirate” registrations by third parties.
If your trademarks are not registered, your legal counsel, through foreign affiliates, can register your trademarks in one or more countries.
If the trademarks are already registered by a third party, you will need to determine whether you will attempt to negotiate the purchase of such registered trademarks from the registered owner, seek an action to rescind the foreign registrations under applicable laws, or decide not to do business in such country due to the prior registrations.
– Define Items To Be Licensed
Your business plan needs to define the product categories to be licensed. For example, if you are an apparel company, you may have different lines, such as jeanswear, shoes and accessories. You will need to determine if you will grant a master license for all of product categories or if you will license each product category separately.
You will also need to determine the royalty rate and minimum wholesale sales that the licensee must guarantee during the length of the license agreement and the estimated costs to be incurred by your company to service the licensee. The minimum revenue your company generates will be determined by multiplying the royalty rate by the minimum annual sales, less costs, to service the licensee.
If the royalty rate is 6 percent and the minimum sales in the first year is $1 million, then the minimum your company will earn will be $60,000 less the cost to service the licensee.
It is important you carefully consider the cost incurred by your company to service each licensee, since a miscalculation can result in losses rather than profits. You may wish to include a “fee for services” provision in your license agreement to protect against a demanding licensee.
Your business plan should include a market study that covers the size of the market, major population centers, per capita income, retail pricing of competing products, advertising trends and similar market analysis. The market study will help you determine appropriate minimum sales, royalty rates and other economic factors.
Many company rely on prospective licensees to prepare this information. While this is a quick way to gather information, it may be self-serving, intended to reduce the minimum sales requirements or obtain other contract advantages.
By understanding the foreign market, you can provide valid counter-arguments during negotiations. You may wish to have a foreign market research firm review your findings and validate your conclusions or rely on your local service providers with appropriate market knowledge.
– License Agreement
Your business plan also needs to address the essential covenants to be included in the license agreement. These include how the licensee will distribute licensed products such as through a showroom, sales staff, Internet.
o Exactly what support the licensor will provide the licensee?
o Isall the support to be provided included in the royalty rate, or is some support provided on a “fee for service” basis?
o Will the licensor or the licensee be required to spend money on local advertising for the trademark?
o How will the licensee be required to dispose of irregular or excess goods?
o What is the review and approval process?
o What are the restrictions and pre-approvals on manufacturing facilities, trademark infringement and anti-counterfeiting actions, the sell-off period after termination? Have these and other issues properly included in a license agreement?
Your business plan should touch upon each of these matters so that you understand the parameters of the license your company will grant. You may need legal assistance to spot some of these issues.
Your business plan will allow you to prepare a two-to-three-page “terms sheet” that specifies the parameters of the license to be granted to a prospective licensee.
You can find prospective licensees by attending trade shows, using the gold key service of the U.S. Foreign Commercial Service (U.S. Department of Commerce), through private entities such as local World Trade Centers, and through local professionals who have affiliated offices or contacts abroad. It is not difficult to find foreign licensees for U.S. products, particularly in Latin America, where U.S. products are preferred.
It is far more difficult to obtain reliable third-party information on the reputation and financial strength of a prospective licensee, particularly in Third World countries. You should always undertake as much due diligence as possible on your prospective licensee before you enter into a long-term agreement.
Once you find a prospective licensee, you will be ready to have your legal counsel prepare a license agreement. It is important that the license agreement reflects the practicalities of doing business in a foreign country and is reviewed by foreign counsel. For example, requiring high insurance coverage in Third World countries is not customary or necessary.
The agreement should include effective policing provisions that take into account how books and records are maintained in foreign countries. You need to deal with diversion of products bearing the trademark outside of the territory granted.
You need to decide whether you will allow the licensee to register the license agreement in the foreign country and what effect such registration can have on your termination rights. You should not assume you can terminate a foreign licensee by giving written notice of termination, particularly if you allow the licensee to register the license agreement. Your legal counsel, working with foreign counsel, can work through these issues for you and advise you on how to structure the license agreement.
Your company may have a great deal of unrealized value in its trademarks. If you have existing licensees in the U.S., then you should seriously consider licensing abroad, particularly in Latin America.
If you do not have a licensing program in place, you should look into developing one so that you can “unlock the value in your trademarks.”
Mizrachi is special counsel for international/intellectual property/technology law practice groups of Luce, Forward, Hamilton and Scripps, LLC.
