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Defining the World of Licensing
1.1 Definitions and Terminology
Over the years, the licensing industry has developed a set of terms that need to become understood if one is to function effectively in the industry.
1.1.1 Forms of Licensing
The term "licensing" typically means any transaction in which the owner of intellectual property grants another party the right to use such intellectual property, typically in exchange for some form of consideration or payment. Absent the grant of such a right or license, the other party's use of the intellectual property would be considered an infringing use. Thus, the license constitutes a defense to infringement. Licensing is, therefore, the monetization of an existing asset.
The grant of the right to use another party's intellectual property on their products or services in exchange for financial consideration, typically a royalty.
"Intellectual property" can take many forms including, for example, musical works, literary works, artwork, drawings, inventions, discoveries, designs, patents, trademarks, names, logos, legends, industrial designs, trade dress, celebrity rights, etc. Regardless of the type, the one constant is that it must be protectable under some form of intellectual property protection, e.g., as a patent, trademark, copyright, right of publicity or trade secret. Intellectual property is frequently referred to simply as "IP."
There are many types of licensing, virtually all of which will depend, in large measure, on the type of intellectual property involved. For example, when the intellectual property being licensed is technology or is covered by a patent, the licensing of such technology or patent is typically called "technology licensing" or "patent licensing." Similarly, when the property being licensed is computer software, the licensing of the software is normally called "software licensing." When a trademark is being licensed, it is typically referred to as "trademark licensing."
When a character from a book or motion picture is the property being licensed, such licensing is commonly called "character licensing." Similarly, when a corporate brand is the subject matter, it is typically called "brand licensing."
When one licenses a highly recognizable brand or character for goods or services in categories different from the one where the brand or character had originally been popularized, such licensing is frequently called "brand extension licensing" or simply "merchandising."
This book will focus primarily on merchandising, although at times the terms "merchandising" and "licensing" may be used interchangeably throughout the work. It should be appreciated that the term merchandising may have other meanings, particularly in the retail or marketing fields. In the retailing field, merchandising means something other than licensing, e.g. some form of "a sales promotion as a comprehensive function, including market research, development of new products, coordination of manufacture and marketing, and effective advertising and selling."
1.1.2 Contractual Terms
The grant of a license to a manufacturer is typically done pursuant to a written "license agreement" or "license agreement." While oral licenses may occur, the clear majority are granted under formal, written license agreements.
In the context of licensing, the owner of the IP that is granting the license is commonly called a "property owner" or "licensor" while the party receiving the license to use the intellectual property on their product is typically called a "licensee."
The intellectual property being licensed is normally called The "property" or, more accurately, the "licensed property," while the products for which the license is being granted are typically called the "licensed products or licensed articles." If the intellectual property is being licensed for use in conjunction with a service, e.g., restaurant services, those services would be called the "licensed services."
It is quite common to include "schedules" in a license agreement to more accurately and completely define both the licensed property and the licensed products or licensed services.
There are different types of license grants. An "exclusive license" is one in which the licensee is the only party receiving the right to use the licensed property for the licensed products to the exclusion of everyone, including the licensor. There may be some instances, however, in an exclusive license where the licensor reserves the right to use the licensed property itself for such products, but that would have to be specifically stated.
A "non-exclusive license" is one in which the licensee is granted the right to use the licensed property for the licensed products on a non-exclusive basis so that the licensor may make similar grants to other parties. In merchandising, most licenses are non-exclusive, even where the licensor may have no intention of granting a similar right to anyone else. This is done primarily to protect the licensor should the licensee underperform or even declare bankruptcy. In such event, the licensor might be able to find others to step into the shoes of the bankrupt licensee during the pendency of the bankruptcy proceeding.
Virtually all licenses are granted for fixed periods of time, e.g., three (3) years. Products that require a long development period or a large capital investment are often longer, or, alternatively, for so long as the licensee continues to sell licensed products (called "Life of Product" license). The length of a license grant is typically called its "term." In many cases, a licensee is given an "option" to renew the license for additional terms upon meeting certain conditions. In such cases, the initial period may be called the "initial term" and the renewal period may be called the "renewal term."
Most licenses will restrict the licensee's use of the property to a geographical area, e.g., North America or the European Union, and this is typically called the "licensed territory."
Similarly, a licensor may want to restrict the licensee's sales of the licensed products to a specific market or channel of trade, e.g., "mass market" or "Internet" and possibly even specific retail outlets within that market or channel. Such distribution limitations are commonly referred to as the "channels of distribution."
Licensors may want to exclude certain rights from the license grant, either to give it the freedom to exploit those rights itself or to be able to grant such rights to others. Many licensors will exclude the right to use the property as a "premium" or in conjunction with a "promotion." The exclusion of premium is very common in licensing agreements for movie and television properties. The reason is that premiums and promotional products are not typically sold as merchandise through the normal channels of distribution but, instead, are given away to the public to promote the licensed property and/or the company offering the premium, e.g., McDonald's BAKUGAN Happy Meal Program, in which BAKU-GAN toys were given away by McDonald's to help promote BAKUGAN property and drive sales of McDonald's products.
The most common form of compensation for the right to use a licensed property on a licensed product is the payment of a "royalty" to the licensor, which is a percentage of the licensee's "net sales" of the licensed products. "Net sales" is always a defined term in any license agreement and will vary from license agreement to license agreement. It is often defined as the licensee's gross sales of licensed products, less certain agreed-upon deductions, usually "discounts and allowances" and any "returns" by the retailer or consumer.
At the time a licensee enters into a license agreement, the licensee is typically required to pay the licensor an "advance" against its future earned royalty obligations — think of it as a prepayment of royalties. In most instances, the advance is creditable against the licensee's future earned royalty obligations. Thus, if the licensee paid a $100,000 advance, it would not need to pay any additional earned royalties until such earned royalty obligation exceeded the amount of the advance, i.e., $100,000.
Most licensors require that the licensee pay a "guaranteed minimum royalty," often referred to as simply the "minimum" or "guarantee." Guarant ees are intended to protect the licensor if the licensee's net sales prove to be lower than anticipated. As the name implies, the licensee is guaranteeing that it will pay the licensor a certain minimum amount of royalties over a given period during the term of the license regardless of what the earned royalties may be.
Although there are several ways to apply this guaranteed minimum royalty obligation, in most instances it only applies when the licensee's earned royalties fall below the minimum for that period. In such case, the licensee is obligated to supplement its earned royalty payments to meet the guarantee for that period.
In addition to the payment of a royalty, many licensors require their licensees to also contribute to a "common marketing fund" or "CMF" which the licensor collects from all its licensees and uses to support and promote the property and the licensing program. These payments are occasionally called a "marketing royalty" because they are frequently calculated as a percentage of the licensee's net sales of licensed products in much the same manner that the royalty is calculated.
Many licensees use third parties to manufacture the licensed products for them and/or sell or distribute them. These third parties are called "manufacturers" or "distributors." This practice is not "sub-licensing," which is almost always prohibited. In sub-licensing, the licensee grants a third party the same rights that it had received from the original property owner or licensor, not simply the right to manufacture or distribute products for it.
1.2 Types of Properties
There are a variety of different types of properties that can be merchandised or licensed, although most constitute words, names, titles, symbols, designs, character or personality images or likenesses that have acquired a wide degree of public recognition through mass media exposure. Licensing properties typically fall into different categories, including:
Art properties can be virtually any image or work of art. In the case of prominent artists such as THOMAS KINKADE, WARREN KIMBLE or DENA FISHBEIN, the artist's name can also be included as part of the licensed property.
It's been said that in art licensing, "it's all about the image." Consumers are purchasing the licensee's products primarily because of the artwork or image that appears on the products and licensees are licensing the artwork for the same reason. There are two principle reasons for licensing the artwork of an outside artist: it provides the licensee with unique artwork, and/or lowers the licensee's development costs which makes the licensing of artwork very attractive. While artwork is licensed for a host of different types of licensed products, including apparel and printed matter, it is also extensively licensed for use in advertising and on packaging.
While publishers and manufacturers have been using other people's artwork and images for decades, the practice of licensing such artwork has been a more recent trend. In the "early days," artwork was typically purchased by a manufacturer for a nominal sum of money, rather than licensed on a royalty-bearing basis.
As the licensing business grew, however, artists (and their agents) recognized that they could potentially earn far more money by licensing such works to the licensee rather than selling it outright as they would then be sharing in the revenues earned by the licensee using the artwork. Consequently, many artists stopped trying to sell their artwork outright and, instead, turned to licensing to potentially share in the sales that the artwork generated.
As art licensing grew in popularity, so too did the sizes of the advances and guarantees that a publisher or manufacturer was willing to pay for the right to use the artwork. In many instances, these advances and guarantees were significant and, frequently, were never earned off by the licensee.
As a result, the business model changed ... again. While most artwork is still licensed rather than simply sold or assigned, the current trend is towards smaller advances and guarantees. Though the artist may still be able to ride the crest of a very successful licensed product, these smaller advances and guarantees protect the licensee if the licensed products do not sell up to the expectations of the parties when the agreement was negotiated. In short, business sanity has set in.
According to the 2018 LIMA Survey of the Licensing Industry, the three largest categories of licensed products for art properties were gifts & novelties, housewares and paper products.
Undeniably, we live in a world in which people are fascinated by celebrities. Magazines such as People and In Touch have generated subscriber bases in the millions and huge web followings simply because people want to closely follow the lives of their favorite celebrities. The United States has even elected celebrities as its president. It should not, therefore, come as any surprise that when a celebrity elects to put his or her name on a product or otherwise associate themselves with that product, more people will want to buy that product. The celebrity licensing category functions because of this basic premise.
In a nutshell, celebrity licensing is the licensing of a celebrity's name, image or likeness for use on a licensed product or in association with the advertising or promotional material for that product, to enhance the sales of such product. The value of the license is tied directly to the popularity and "fame" of the celebrity which, unfortunately, can change over time, in some cases, very abruptly.
In the early days, the celebrity might be required to act as a spokesperson for the licensed product, e.g., appearing in an infomercial on television or in print ads extolling the virtues or benefits of the licensed product and telling consumers why they should buy it. It has, however, evolved into one where the celebrity often simply licenses the right to use their name or image on the licensed product in a more classic licensing style.
In some instances, the celebrity might be required to make a promotional appearance or two with selected retailers, appear on the Home Shopping Network or to wear the licensed product on the "Red Carpet" before a Hollywood event, but the promotional support required is usually minimal, and has been replaced in many agreements by requiring the celebrity to support the product through the use of some form of social media, e.g., Facebook or Twitter.
Ironically, the celebrity doesn't even have to be alive to be licensable. The licensing of deceased celebrities has become big business and, as a result, there are licensing agencies that specialize in this niche area. For example, it has been reported that the estates of such deceased celebrities as ELVIS PRESLEY and MICHAEL JACKSON continue to derive significant revenue from licensing the names and likeness of these individuals despite their passing.
A manufacturer needs, however, to be careful when taking a celebrity license for a living celebrity since their fame and public image can be fleeting. If the celebrity's personal life doesn't go the way everyone expected, not only will the celebrity's career suffer, but so will the sales of their licensed products. For example, after evidence of Tiger Woods' marital infidelity hit the media, not only did his golf game suffer but so did the sales of TIGER WOODS licensed products. The insertion of a "Morals" clause affords the licensee some protection in such cases where the behavior of the celebrity generates negative publicity.
According to the 2018 LIMA Survey of the Licensing Industry, the three largest categories of licensed products for celebrity properties were apparel, gifts & novelties, and health & beauty.
Over the past few decades, collegiate licensing has become a very important part of the licensing industry, as colleges and universities now regularly grant licenses to third parties to use their names, logos or mascots for a host of different types of licensed products. The royalty income generated by such licensing programs is used by these schools to support a wide variety of their athletic, academic and other quality of life programs.(Continues…)
Excerpted from "The New and Complete Business of Licensing"
Copyright © 2018 Kent Press.
Excerpted by permission of Kent Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
ABOUT THE AUTHORS,
ABOUT THE CONTRIBUTORS,
CHAPTER 1 DEFINING THE WORLD OF LICENSING,
CHAPTER 2 HISTORY OF LICENSING,
CHAPTER 3 THE LICENSING INDUSTRY TODAY,
CHAPTER 4 THE LICENSE AGREEMENT,
CHAPTER 5 COMPENSATION AND ROYALTY RATES,
CHAPTER 6 IDENTIFYING AND CLEARING LICENSING PROPERTIES,
CHAPTER 7 SELECTING THE RIGHT LICENSE FOR YOUR PRODUCTS,
CHAPTER 8 THE LICENSOR – LICENSEE RELATIONSHIP,
CHAPTER 9 LICENSING AGENTS AND CONSULTANTS,
CHAPTER 10 THE RETAILER'S ROLE IN LICENSING,
CHAPTER 11 BEST PRACTICES FOR LICENSORS,
CHAPTER 12 BEST PRACTICES FOR LICENSEES,
CHAPTER 13 MARKETING AND PROMOTING LICENSING PROPERTIES AND LICENSED PRODUCTS,
CHAPTER 14 PROTECTING LICENSING PROPERTIES,
CHAPTER 15 INTERNATIONAL LICENSING,
CHAPTER 16 INTERNATIONAL INTELLECTUAL PROPERTY PROTECTION,
CHAPTER 17 BATTERSBY'S RULES ON LICENSING,
CHAPTER 18 SIMON SAYS ABOUT LICENSING,
CHAPTER 19 ETHICS AND SOCIAL COMPLIANCE,
CHAPTER 20 MOST COMMON MISTAKES IN LICENSING,
CHAPTER 21 SPECIAL CONSIDERATIONS FOR DIFFERENT TYPES OF PROPERTIES/PRODUCTS,
CHAPTER 22 ACCOUNTING, AUDITING AND TAX CONSIDERATIONS,
CHAPTER 23 DEALING WITH INFRINGERS AND COUNTERFEITERS,