As with any sector, there are a wide variety of business models in the food and drink sector each with its own pros and cons, and some are more popular than others. A growing number of food and drink businesses are based around, either partially or wholly, licensing brands.
When it comes to brand licensing, whether as the licensor or licensee, there are certain key points that the parties must consider and a decision reached on how the relationship is going to operate in practice. Failing to deal with these points can lead to the dreaded ‘grey area’ in which the parties lack clarity on each of their responsibilities/obligations, where liability rests or whether there is a breach of the agreement.
What type of licence is it?
You are most likely to encounter either exclusive or non-exclusive licences, and any agreement should specify the territory covered by the licence. The most likely scenario when licensing a brand is an exclusive licence covering a specific territory (or potentially setting the territory as worldwide).
Deciding this point early is key, as what other terms are/are not acceptable will likely relate back to the nature of the relationship between the parties and its prospective value to each of them.
How is the brand being commercialised?
The most common return for a licensor in a brand licence is a royalty. Whilst not an exhaustive list by any means, other options are a flat rate (albeit that is fairly uncommon), fixed sum per unit, or a blended consideration of a flat rate and lower rate royalty.
Assuming there is at least some royalty element, what the royalty rate is, what it is being applied to, and how any relevant metrics are to be calculated need to be carefully considered and documented in the licence. For example, a percentage royalty on the net profit per unit sold is a common basis for royalties. Even this relatively simple concept needs a clear definition of how net profit is arrived at, and even unit quantity can be complex if there are non-arm’s length transactions within the business model. There are also factors like any minimum or maximum levels of royalty payments, either in total or for any given period.
Several further points flow from the commercialisation model, such as record keeping, retentions against refunds/claims, audit and inspection rights, and payment terms.
Intellectual property and brand protection
The licensor is likely to want to retain some control over the brand and the products being sold under the brand, at the very least to the extent necessary to make sure its asset, being the brand, is not harmed in anyway. Equally, the licensee will want sufficient freedom to sensibly operate without the constant need for consent from the licensor.
The balance is usually struck depending on the brand, the goods to be sold under it and the relative positions of the parties.
Quality control and product recall
The licensor will almost certainly want to retain a degree of control, or have contractual assurances, on the quality of the products sold under the licensed brand. After all, if those products are defective or lacking in quality it may irreparably harm that brand’s reputation and make a marked difference to its value or commercial viability in the future.
Product recall obligations principally fall on the producer of a product, but it is important that the parties consider the contractual position, obligations of notification and potential financial or reputational ramifications of a recall. It’s also important that the parties are aware that if an end consumer is hurt or put at risk because the final products are defective (for example they’re found to contain unidentified allergens or are given the incorrect use-by date) then the consumer is entitled to assume that the owner of the brand on the products is the producer of them. They can then make a claim against the licensor instead of the actual manufacturer. It is, therefore, very important that the licence deals with this, which usually means at least having the right to pass those risks back to the licensee under the contract.
Term and termination
Careful consideration should be given to how the licence will end, or in what circumstances the parties can end it, and what the consequences of that should be. Subject to paying any appropriate royalty, will there be a sell-off period for the licensee after termination? Will that apply irrespective of how the licence is terminated? For example, if it is terminated due to breach by the licensee should the sell-off right still apply?
The recipe
As you can see, whilst brand licensing is a potentially exciting and profitable venture for both licensor and licensee, it is important that the relationship and how it is recorded is well thought through. After all, missing an ingredient can turn any gourmet dish into a dog’s dinner! The specialist Intellectual Property team at Howes Percival are experienced in advising clients in the food and drink sector on all aspects of brand licencing and intellectual property protection.
If you would like to get in touch in relation to any of the issues raised in this article or any other Intellectual Property matters email jenna.bruce@howespercival.com or stephen.ruse@howespercival.com or call 01604 230400 or visit www.howespercival.com
