The Yin and Yang of Licensing
When a licensing agreement works well, both parties reap the rewards, but negotiating and executing an effective agreement is a matter of “give and take,” according to Judy McCool, Senior Vice President, Legal Affairs at HBO (USA).
She was speaking in Session CM01 The Yin and Yang of Licensing: Deep Thoughts from a Licensee and Licensor yesterday, along with Viviana Mura, Assistant General Counsel at Luxottica Group (USA).
At HBO, Ms. McCool works on licensing deals for multiple properties, such as TV show Game of Thrones, across many different markets and product areas. From a licensor perspective, she said that good licensing brings in revenue to the company, but also serves other useful purposes.
“When there’s a lag between seasons of a show, it’s about figuring out ways to keep fans engaged with the show,” she said. In the case of Game of Thrones, that means everything from a live concert experience drawing on the music featured in the series to a set of postage stamps featuring characters from the show, produced by Royal Mail (UK).
At eyewear company Luxottica Group (Italy), Ms. Mura is usually in the position of licensee rather than licensor. The company sells eyewear for brands such as Chanel S.A. (France) and DKNY (USA) under license.
Licensing is a “powerful way to generate revenue” for both licensee and licensor, she said, but money should not be the only consideration.
While adding brands to companies through licensing deals can be a useful way of diversifying your portfolio, “you need to consider whether a certain brand mixes well with your other brands, and you have to be mindful of having a portfolio that really blends and makes sense when seen in its entirety,” Ms. Mura added.
Ms. McCool extended the point, noting that from a licensor’s perspective, it’s important to choose your licensing partners carefully. “Brand alignment is really important,” she said. A deal may look like a great opportunity in terms of revenue, but if the brand doesn’t align well with your values, you run the risk of damaging your brand if you license it.
Ms. Mura said that as well as revenue, licenses are a way of “building the reputation of your trademark,” and therefore it’s vital to be confident in the companies you partner with.
A Question of Balance
While both parties to a license should be seeking the same fundamental outcome of a successful, revenue-generating deal, there are always likely to be competing concerns in a negotiation.
For example, Ms. Mura explained, the way royalties are structured is often a source of tension between licensee and licensor. As a licensee, she said, “we don’t like lump sum payments up front, since you have to give over money before you have an idea of how the deal is going to work out.”
For Ms. McCool, the perspective is different, and she prefers to have a “minimum guarantee” in licensing deals to provide a degree of security for the company.
Similarly, on the question of how the licensed assets are used, licensors generally want to keep as much control as possible, but this can be difficult in situations where you’re licensing into industries that you don’t know well, Ms. McCool said, especially in regulated markets.
HBO licenses assets related to Game of Thrones for use on slot machines and on alcoholic beverages, for instance, and there are regulations in those industries that limit the control it can exercise over certain elements of the use.
A Question of Quality
Most licensing agreements will include provisions relating to quality control, and as Ms. Mura noted, some jurisdictions require trademark owners to exercise quality control over products made under license, or risk having the trademark deemed abandoned.
However, the degree of control can vary, and “as a licensee we want the least control possible.” And if there is a quality control issue, “you want the ability [in the licensing agreement] to cure or mitigate” if possible, rather than losing the license for any breach of quality control.
Though, as Ms. McCool noted, some quality control breaches, such as the use of child labor in factories, cannot be cured or mitigated, and for licensors the ability to cancel an agreement promptly in this scenario is vital, not least because there may be public relations challenges to manage.
Ms. Mura cautioned licensors to be wary of trying to exercise too much control over quality, because “the more you control, the higher the likelihood that consumers affected [by a quality breach] would come after the licensors as well as the licensee for any damages.”
She added that taking too much control also raises the risk that “you will be deemed a franchisor rather than a licensor” in litigation.
A Question of Morality
The session closed with a discussion of morality clauses in licensing agreements. These may be used in all types of agreements, but are particularly common when agreements involve individual celebrities working with brands, and provide for cancellation in situations where one party’s moral conduct does not reach the standards spelled out in the agreement.
“Mutuality is increasingly important in these morality clauses,” Ms. McCool said, because “you never know on which side of the transaction it’s going to be an issue.”
Ms. Mura added that morality clauses shouldn’t “be limited only to criminal acts or a public statement,” because that may mean you are unable to terminate your agreement when you need to.
“All scenarios that lead to termination should be spelled out properly in the agreement,” she said.
Ms. McCool added: “Peace of mind is the name of the game for both sides.”
