9 May 2018Trademarks

Starbucks-Nestlé licensing deal: the IP impact

A $7.15 billion licensing deal between Starbucks and Nestlé raises some interesting IP questions but should be carefully managed in case relations turn sour, lawyers have told WIPR.

Starbucks announced the worldwide licensing deal with Swiss food and drink brand Nestlé on Sunday, May 6.

Under what the companies called a “global coffee alliance,” Nestlé will pay $7.15 billion to obtain the exclusive rights to market, sell, and distribute Starbucks’ packaged coffee, tea, and juice worldwide.

The US coffee chain will lead in global brand management for the alliance, but it said the two companies will “work closely together on innovation and go-to-market strategies”.

Benjamin Koch, a lawyer at German firm Lubberger Lehment, noted that the reported value of the deal is “extraordinarily high” for a licensing agreement and may be one of the highest-ever agreed for an exclusive trademark licence.

He added that, as the licence is limited and only granted for certain Starbucks products, the value of the deal is even more unusual in this context.

Paul Tjiam, managing associate at Simmons & Simmons’ Amsterdam office, said the fact that this is a global deal makes it “really interesting IP-wise”, but added the caveat that “there is a plethora of challenges in these worldwide licensing agreements”.

For Nestlé, a huge brand is added to the sales portfolio, said Tjiam. “Automatically this means that Nestlé will have to deal with all imaginable IP-related issues that come alongside the exploitation of a renowned brand,” he explained.

Tjiam added that “the IP impact for Starbucks is different”.

As a company licensing its own brand to a third party, there is always the risk that the licensee fails to take proper care of the trademark, “so for Starbucks, as licensor, its main task will be to make sure that Nestlé delivers what it promises to deliver,” he said.

Koch concurred, and said “Starbucks certainly will keep an eye on the quality of the products sold under its brand”. He explained that licence agreements such as this one tend to include “comprehensive quality clauses which allow the trademark owner to control the quality of goods sold under its trademark”.

“This licence agreement will likely keep lawyers and brand/marketing managers of both companies busy,” Koch predicted, noting that there will be follow-up work and ongoing collaborations that such an agreement necessitates.

Tjiam identified three primary challenges Starbucks and Nestlé will face in relation to branding and IP in the licensing agreement, though he said there are “many more”.

First, US company Starbucks and Switzerland-based Nestlé have very different backgrounds and businesses. Inevitably “they will both have different views on how the Starbucks brand should be marketed,” Tjiam said.

Second, Starbucks should ensure it can intervene if Nestlé fails to take proper care of the brand. Tjiam said agreements such as this often start off very positive, but “when drafting an IP licence agreement it is important to make arrangements if things get sour, in order to protect the Starbucks brand”.

Third, arranging IP enforcement in such an agreement is “notoriously difficult”, Tjiam noted, and “which party is allowed to do what in the case of infringement” must be determined. This will also differ between the country where the companies are operating, adding a further layer of complexity.

Koch added that parties to an exclusive licence agreement usually negotiate which company addresses and pays for the issue of counterfeiting. However this can be “rather tough” given the licensor’s interests to control brand enforcement and the degree to which it trusts the licensee to tackle IP infringements.

Starbucks said the deal is expected to close during the summer or autumn. Under the agreement the coffee chain will retain a significant stake as licensor and said it will use the up-front payment to primarily accelerate share buybacks.

A Nestlé spokesperson confirmed that the deal is a licensing agreement with royalty payments, but said the company has no further comments to make on the precise shape of the deal.

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