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Intellectual Property Merchandise Program

Common Issues

Licensors choosing to establish a merchandising program must decide whether to administer the program internally or through an agent. They should also verify that the requisite rights for each property to be licensed are under the owner's control by the terms of the underlying employment and independent contractor agreements. The licensors should also establish whether to grant exclusive or nonexclusive rights, and how or if to un-bundle the rights licensed. Finally, the licensors should be careful to select licensees with appropriate experience and a good reputation for manufacturing the types of products to be developed and for operating in the target markets.

Benefits and Risks of Merchandising

Merchandise licensing brings benefits and risks to the parties. For the licensor, a successful merchandising program can generate significant revenue. In addition, it can serve as an effective marketing tool attracting purchasers of the products, observers of the products purchased by others, and passers-by in the stores selling the products, all of which increases the number of advertising impressions. Because most licensing agreements require a minimum guaranteed royalty, licensors generally are not subject to a great financial risk. Instead, the licensor faces the risk that overexposure of the property will glut the market, that the product or its packaging might reflect badly on the property. The licensee also benefits by entering into a merchandising agreement. When the merchandised property is an established property, the licensee gains immediate brand identity and awareness for its products and shares in the goodwill and customer base generated by the licensor's property. These positive attributes would normally be available to the licensee only after investing a significant amount of time and money in the relevant product market. In addition, the licensee receives cross-marketing benefits from the products, based on the same property, that are manufactured by other licensees and, of course, has the potential for high revenues if the property and the product achieve sufficient popularity. All licensees under agreements requiring a minimum guaranteed royalty do, however, risk failing to recoup the minimum guarantee if the product does not sell well.

Utilizing a Merchandising Agent

Once the owner of a merchandisable property decides that the benefits of a merchandising program outweigh its risks, the potential licensor must decide whether to establish an in-house merchandising program or independent licensing agents. For a property owner inexperienced in merchandising, a licensing agent provides experience with the players in the industry, establishing a merchandising strategy, selecting licensees, and policing trademarks. The agreement should clearly define the scope of the agent's authority to commercially license the property and associated trademarks. Agents are typically given only the power to seek licensees and negotiate agreements between the property owner and the licensee, with the proviso that all such licenses are subject to unconditional final approval by the property owner. Agents are, however, sometimes authorized to enter into direct agreements with the third-party licensees. The duties of an agent depend greatly on the circumstances, but the agency agreement should specify what those duties are. The agency agreement also should specify the territory in which the agent is authorized to act and whether the right is exclusive or nonexclusive. The agreement may be broad or narrow in scope; for example, the agent may be authorized to license only certain categories of products or events, or to license products in all categories and media. The duration of the agreement is negotiable, and may provide for a short initial term with the option to extend the agreement.

Assessing the Rights Owned

Even absent a written employment agreement, most properties developed in the course of employment by an employee hired for that purpose are owned exclusively by the employer. This is usually true even when the property is developed outside of the workplace, as long as the employee would normally develop such a product in the workplace. When, however, a property is developed by an employee outside the scope of employment, the rights must be assigned to the employer. Before merchandising a product developed in-house, the property owner should determine which employee(s) created the product, whether such employee(s) signed an employment agreement and, if so, whether any exceptions were made regarding ideas, inventions or designs conceived by the employee prior to employment with the company. Often, an organization will have contracted with independent contractors to design a property, or will have acquired already developed properties, rather than having designed a property in-house. Before the organization licenses the property to a product developer, the organization should carefully review its designer or acquisition agreement, which is usually in the form of an assignment, exclusive license, or nonexclusive license, to be sure that the agreement allows them to merchandise the property.

Issues Specific to Trademark and Branded Properties

Traditionally, trademarks have not been considered merchandising properties. Because the function of a trademark is to identify the source or origin of a product, so as to vouch for its quality, trademarks are assumed to have no inherent value separate from the product to which they refer. When a trademark is used in a purely ornamental sense on a merchandising product, however, the trademark in effect becomes the property that is merchandised. The trademark is no longer serving as a source identifier, but is functioning to increase demand for the product and for related products. Because such a use of a trademark without authorization from the trademark owner does not offend traditional trademark dilution theories, courts disagree on whether the trademark should be protected as a merchantable property against such uses and, if so, under what aspect of established trademark or dilution laws. Courts with an activist bent have found ornamental uses of trademarks protectable under existing trademark laws by finding the relevant test to be consumer confusion as to sponsorship or approval rather than as to source. More traditional courts, however, have refused, for public policy reasons, to censure third party trademark use when an unauthorized use of a trademark on a product is purely functional. These courts note that protection is available only if the trademark is used at least partially as a trademark on the product.

Issues Specific to Sports Properties

Generally, under the right of publicity doctrine, an individual athlete has merchandising rights to both his name and likeness, separate from any team or league affiliation. Absent a contractual agreement between the individual athlete and the team, the athlete may freely appear in a generic uniform of the sport, including one using the colours but not the emblem of the athlete's team, and may keep all associated payments. Because the merchandising rights to the team uniform are owned by the team, an athlete appearing in the team uniform must share the payment received with the team. In this instance, the team is compensated for allowing the player to appear in the team uniform, while the player is compensated for the personal endorsement.