Licensing Agreement In Fashion Industry

Fashion is one of the trending aspects of our life these days. The fashion industry has many intellectual property rights linked to clothing, shoes, fragrances, accessories, jewellery, etc. The fashion industry, in terms of its specialization, is expanding and involves intellectual property rights such as copyright, trademarks, patent, design, and so on.

What is Licensing in the fashion industry?

Licensing in fashion makes sense since establishing and maintaining retail operations and your brands often require a significant investment. Under a fashion licensing agreement, the licensor can generate new revenue streams by requiring licensees to invest their capital in developing and maintaining licensed products. In addition to gaining additional and potentially more profitable outlets, licensing agreement helps the licensor increase brand visibility and revenue.

The licensor will receive payments for the licensee’s use of the trademark (typically in the form of upfront fees and periodic royalties on net sales). Royalties are mostly paid quarterly, with payment usually due 30 days after the end of each quarter as per the parties’ agreement. It will need just a small capital investment (to ensure quality control or for joint marketing efforts or administrative or other support).

Of course, the capacity of the licensor to locate suitable licensees to operate the branded retail company is critical to the success of any fashion licensing program.

Licensing in fashion is not a new idea. There are already many excellent examples available. For example, if you’re familiar with the “Funko” toy brand, you’ll know that the firm creates copies of characters from current movies and similar is the case of fashion franchising.

What is a fashion licensing agreement?

This is a legal contract between two parties, a licensor (brand owner) and a licensee (third party) where the licensor grants the licensee the right to use the brand or relevant intellectual property involved to manufacture and sell products or offer services.

What are the 3 types of licensing agreement in fashion industry?

Exclusive licensing agreement: This type of agreement grants exclusive rights to the licensee to use the licensed products or services within a specific geographic region. The licensor is prohibited from licensing the same products or services to other licensees within the same region.

Non-exclusive licensing agreement: This agreement allows the licensor to license the same products or service to multiple licensees without any restrictions. The licensee has the right to use the licensed products or services but does not have exclusive rights.

Sole licensing agreement: In a sole licensing agreement, the licensor grants the Licensee exclusive rights to use the licensed products or service within a specific geographic region. However, the licensor retains the right to use the products or service and may license it to others outside that region.

Restricted licensing agreement: This agreement allows the licensor to retain significant control over the IP and bring in the required revenue through the agreement. Some common ways of doing so are:

• Using the trademark in a specific geographical location only.
• Using the trademark for a specific product only. 
• To ensure quality standards of the product.
• To avoid using the trademark in connection with any other marks not previously agreed.
• To engage in advertising and marketing only through the approved ways. 

Unrestricted licensing agreement: This agreement allows the licensee to use the trademark however they deem fit. While the licensor can impose certain restrictions, they are constrained and do not affect the agreement to a great extent.

Types of IP to license 

There are mainly 4 types of Intellectual Property that you can consider licensing as part of your fashion licensing agreement:

• Patents – This allows the licensee to make, use, and sell the patented invention in accordance with the terms of the agreement. 
• Trademarks – This allows the licensee to use the brand name, slogans, etc., related to the brand, which are the signifiers of the commercial origin of the brand. 
• Copyright – This allows the licensee to use the paintings, visual arts, songs, and movies as required. They may also exist in characters created by the brand—example – Mickey Mouse. 
• Trade Secret – This allows the licensee to make use of the business systems, software, customer information, and other vital data of the licensor. This is where it becomes essential for the licensee to sign Non-Disclosure Agreements. 

What is an example of a successful licensing agreement in the fashion industry?

Licensing in fashion can be a mutually beneficial arrangement for both parties, which allows designers to expand their brand presence and revenue streams without the capital investments required for manufacturing and distribution, while manufacturers and retailers benefit from the reputation and creativity of the designer’s brand and designs. A good example of licensing in the fashion industry was the agreement between Michael Kors (licensor) and Fossil Group, Inc (Licensee)

Michael Kors, the licensor herein, entered a licensing agreement with Fossil Group, Inc., the licensor, in 2004. The license agreement aimed to produce and distribute Michael Kors-branded watches, jewellery, and accessories. In the licensing agreement, Fossil was granted an exclusive right to design, develop, produce, and distribute the Michael Kors branded watches and jewellery. However, Michael Kors maintained creative control over the products and branding.

On the issue of consideration, Fossil was to pay Michael Kors a licensing fee in terms of royalties on the net sales of the licensed products.

This licensing agreement was one of the highly successful agreements in the fashion industry.

What factors should be considered before entering into a license agreement?

Due Diligence

Both parties to the agreement need to carry out due diligence to the IP right and the other party’s business. Due diligence cuts across every area that will affect the transaction. Some of these areas include: 

a) Knowledge of the Licensee by the licensor: If a licensee is an organization, then what is its legal structure, and what does the licensee want from the license to determine its need will work within the licensing program of the licensor?

Equally, having some basic information about the financial background of the licensee will act as a guarantee on the ability of the licensee to comply with any financial terms within the agreement.

b) Knowledge of the licensor by the licensee: the licensee will need to know the ownership of the relevant IP right to be licensed and whether the licensor has the right to license the same. The licensee should also know the existence of other licenses regarding the IP rights in question.

c) Issues of interest to both parties: Some issues will need to be delved into, particularly if they affect both parties, such as the business plan of the license, as both parties will need a business plan regarding the prospective license and its financial needs or requirements. 

IP valuation

Before entering into a trademark licensing agreement for licensing in fashion, both parties, the licensor and licensee, need to understand the value of the IP to be licensed. Valuation helps parties to the licensing agreement to reach the royalty rate. There are several methods that can be used to value the IP right to be licensed, including; – the cost method, the income method and the marketing method.

Financial Considerations

Both parties should analyze the financial implications and the associated costs of entering into a licensing agreement in the fashion industry. For example, payment and royalties, i.e. lump sum payments where the lump sum is agreed to and paid when the license right is being granted, or royalties, which include an upfront fee accompanied by ongoing minimum royalty payment based on sales.

Why is Licensing Important in the Fashion Industry?

Brand licensing and entering into licensing agreements has grown in popularity in the fashion industry, with everyone from fast-fashion stores to luxury design companies working to deliver customers exciting new product categories.

Designer companies have recently collaborated with mass market stores, such as Gucci x the North Face, Adidas x Prada, Manolo Blahnik x Birkenstock, and Burberry x Supreme. These agreements also produce favourable PR and customer interactions by exposing both parties to new customers, prompting shops to get more involved in brand licensing for more product categories.

Brand licensing enables merchants to distinguish themselves from the competition while expanding into new market categories with a distinct product line deemed exclusive owing to the licensing agreement. At the same time, brand licensing allows shops to acquire new customers by offering various product categories.

While brand licensing isn’t suitable for every firm, it may be incredibly profitable to both parties. In addition, as a licensee within brand licensing, you have the potential to offer your clients something more tempting by collaborating with a brand or important firm that you know they appreciate.

Brand Licensing implies establishing a relationship with another company and opening up a new sales channel. When you collaborate with another firm, you gain access to their clients and audience, and licensees benefit from the same arrangement.

Working with existing firms to create awareness makes market penetration much simpler. Further, a trademark licensing agreement is ideal for expanding income opportunities in Fashion Industry. For example, royalties are paid to licensors for each product category sold.

Simultaneously, the firm selling the licensed items may boost sales by making things more appealing to their target demographic and fresh marketing campaigns. All this helps the brand reach a larger audience, build closer relationships with consumers, diversify and enhance revenues, and defend the brand from counterfeiting by broadening the territory in which the firm is present.

What do the licensor’s prior written consent and licensor’s prior written approval mean in a fashion license agreement?

In a fashion license agreement, these terms refer to the licensor’s approval that must be obtained in writing before the licensee can take certain actions relating to the licensed products. Some of these actions may include modification of licensed products, sublicensing the right to manufacture and using the licensed trademark in a manner not explicitly outlined in the agreement. Generally, this clause ensures that the licensee does not take any action that could potentially harm the licensor’s brand or dilute the value of the licensed products.

What are the significant clauses of a typical brand licensing agreement?

A typical brand licensing agreement is a legal contract that outlines the terms and conditions under which a licensee is granted the right to use a licensor’s trademark rights in connection with the licensee’s products or services. Below are some of the key clauses that are typically included in a fashion licensing agreement:

Definitions

As used herein, the term:

• ‘affiliate’ company directly or indirectly controlling, controlled by or under common control with another entity.
• ‘consideration’ shall mean either a lump sum or royalties.
• ‘license’ shall mean the non-exclusive right to use trademark and trade name in connection to manufacturing, distributing and sale of the licensed products;
• ‘licensed products’ shall mean product categories such as Jeanswear, accessories and other high-quality apparel set in this agreement;
• “product Lines” shall mean the specific lines of any licensed product identified in this licensing agreement, which may include clothing, accessories, and other related products.
• ‘territory’ shall mean worldwide;

Grant of license

Subject to the terms and provisions hereof, the licensor grants the licensee a non-exclusive, non-transferable license to use the trademark, trade names and design solely in connection with manufacturing, marketing and sale of licensed products specified herein in the territory specified herein.

Licensee acknowledges that all IP rights related to the fashion designs and licensed products are owned by the licensor pursuant to applicable laws and regulations. Further, licensee acknowledges that it has reviewed the trademark rights, design and other licensed products and understands their connection therewith to the licensor’s brand.

Licensee shall neither sublicense the rights herein granted nor authorize any third-party manufacturer to use such licensed products during the term of this licensing agreement without the licensor’s prior written consent.

Scope of use

Licensee shall use the licensed products solely in connection with the retail sale of fashion apparel and accessories in the licensed retail outlets.

Financial consideration

In consideration for the license granted hereunder, the licensee shall pay the licensor a minimum royalty fee of 4% of the net sales of the licensed products sold through the licensed retail outlets quarterly during the term of this licensing agreement. Licensee shall provide the licensor with a written report setting forth the actual net sales of the licensed products sold and the royalties due to the licensor from such sales on a specified period basis.

The licensor shall have the right to audit the licensee’s books and records relating to the calculation of royalties under this licensing agreement. Where the licensee’s books or audits disclose any underpayment of royalties, the licensee shall reimburse the licensor for any associated audit costs. 

In the event that the licensee fails to make any payment when due, then interest shall accrue on the such unpaid amount from the due date until paid in full at a rate equal to the then-current prime rate plus two per cent (2%) per annum. 

Description of licensed products

Licensor grants licensee herein the right to manufacture, distribute, and sell the following products under the licensor’s trademark and other intellectual property rights; women’s and men’s Jeanswear (jackets, pants and outerwear) and accessories (belt, wallets and bags). 

Licensee agrees to manufacture and distribute the licensed products in accordance with the quality standards set by the licensor. Licensee shall not manufacture, distribute or sell any licensed products that are not explicitly listed in this agreement as a licensed products without the licensor’s prior written approval. 

Quality control

Licensee shall maintain and enforce a quality control program for the manufacture, production, and distribution of the Licensed Products. The quality standards established by the licensor should be adhered to.

Licensee shall be obligated to submit samples of the Licensed Products to the licensor for inspection and approval before manufacture, distribution and sale, and the licensor shall have the right to inspect and test any Licensed Products at any time during the term of this agreement to ensure that they conform to the quality standards established by the licensor.

Where the licensor determines that any Licensed Products do not meet the established quality standards, the licensee shall immediately take all necessary corrective action to remedy such products and shall not distribute any non-conforming products without the licensor’s written approval.

Branding and marketing clause

The licensee herein shall use the Licensed Trademarks solely in connection with the licensed products and only as permitted by this agreement. Licensee acknowledges and agrees that the Licensed Trademarks and all associated products belong exclusively to the licensor and that nothing in this agreement shall confer any right or title in or to the Licensed Trademarks upon Licensee.

Licensee shall conduct all advertising, promotion, and marketing of the Products in a manner consistent with the high-quality image and reputation of the Licensed Trademarks and in accordance with the licensor’s guidelines as may be communicated to the licensee from time to time. Licensor shall have the right to review and approve all advertising, promotion, and marketing materials that include the Licensed Trademarks in advance of their use.

Manufacturing facilities, quality control and third-party manufacturer:

Licensee shall manufacture the Licensed Products in a manufacturing facility that meets all applicable laws and industry standards for safety and quality. The licensed products manufactured should adhere to the licensor’s standards per the agreement.

Licensee may engage a third-party manufacturer to manufacture the Licensed Products. Such products shall be subject to the quality control requirements provided the licensor’s written consent is sought beforehand.

The licensor should also inspect the third-party manufacturer to determine whether they comply to the licensor’s satisfaction in its sole discretion with the Terms of Engagement. Licensee shall also ensure that any third-party manufacturer complies with the terms and conditions of this agreement and that the licensed products manufactured adhere to the licensor’s approved quality and standards. 

All manufacturing and production costs associated with the licensed products shall form part of the licensee’s sole discretion expense, including materials and labor as well as any other licensee’s expense incurred in connection with the performance of its obligations under this fashion license agreement.

Infringement:

Licensee shall not use or authorize any third party to use the licensor’s trademark or trade dress except as expressly provided in this licensing agreement. Licensee shall notify the licensor of any known or suspected infringement of the licensor’s intellectual property and undertake to assist the licensor in any legal action or legal services taken to protect such rights.

Licensee shall not infringe on any trademark licensing rights of any third party in connection with the manufacture, distribution, or sale of the Licensed Products.

In the event that the licensee fails to comply with these provisions, the licensor may terminate this license Agreement upon issuing 30 days written notice to the licensee or a one-month period notice.

Termination:

If the licensor deems it necessary, it may exercise its right to terminate this fashion agreement upon written notice to the licensee in accordance with the legal services envisaged in this agreement. Such termination may occur subject to the issuance of 30 days written notice to the licensee and if the licensee fails to comply with any of the terms and conditions outlined in this agreement or if it defaults on any payment obligations or such default that may be deemed necessary.

In the event of such termination, the licensee shall immediately cease all use of the licensed intellectual property and return every licensed product to the licensor.

Advantages of Fashion Licensing

Brand Extension

Fashion licensing agreements are often used to expand the products offered by the brands, venture into new markets, and earn the credibility of different customer groups. The successful collaboration between McDonald and Moschino in 2014 is one example, wherein they sold iPhone cases, handbags, backpacks, and sweaters. Another example is the licensing agreement between Hong Kong-based Esprit and retailer group Zannier for developing, producing, and distributing Esprit Kids in the Middle East and Europe. 

Diversifying the Product

Fashion Licensing provides the opportunity to diversify the business, not just geographically, but diversifying the product as well. This is done by applying the trademark and branding to a new set of products and catching the attention of the Gen Z population as well. A significant example is the collaboration between Minecraft and Burberry, a unique collaboration with a fashion company and videogames. The collaboration won the 2023 Licensing International Award for Best CAA Brand Management and was a significant example of the fact that there are no boundaries to physical and digital creations. 

Earning revenue without risks

Entering a new market has its own set of challenges in terms of revenue. However, a licensing agreement limits most of them by allowing individuals to earn revenue without experiencing the manufacturing and marketing risks involved. A significant example of this is H&M’s collaboration with fashion designers at the local level, which helps them gain an advantage in their existing market and expand the brand. 

Fashion licensing agreement sample

Fashion licensing agreement

This LICENSING AGREEMENT (“The Agreement”) is effective as of the 23rd day of January 2023 (“the effective date”) between:

(Company A), a corporation organized under the laws of (jurisdiction) (hereinafter referred to as “Licensor” and (Company B), a corporation formed under the laws of (jurisdiction) (hereinafter referred to as “Licensee”). The Licensor and Licensee hereunder are collectively referred to as (“the Parties”) and each individually referred to as (“a Party”).

WHEREAS, the licensor is engaged in the business of manufacturing, selling and distributing and licensing others the right to manufacture, promote and sell Jeanswear, accessories and other high-quality apparel and related merchandise as well as use in commerce the Trademarks and trade names, as hereinafter defined, in the sale of such licensed products, throughout the world; and

WHEREAS, the licensee desires to acquire, and the licensor is willing to grant a license to use the Licensed Trademarks and trade name (as hereinafter defined)

NOW, THEREFORE, in consideration of the mutual terms, agreements and conditions herein, the Parties agree as follows:

What are the potential risks of fashion licensing?

a) It can lead to dilution of the brand or excessive brand extension. 

A good example of this scenario was Calvin Klein, Inc. (CKI) vs. Warnaco Group, Inc. In this case, Calvin Klein, Inc. sued Warnaco Group, Inc. sometime in May 2000, for breach of its Jeanswear licensing and distribution contract that caused dilution of its brand equity. Warnaco was also accused of selling full-price merchandise rather than discontinued items to off-price warehouse clubs.

Warnaco denied the allegation of trademark dilution and justified its distribution via warehouse clubs as an adequate business practice. In addition, it claimed that Calvin Klein breached the license through its strategic practices and eroded the brand thereto.

This case set a precedent since it was the first time that charges of brand equity dilution as legal services were made against a licensed manufacturer or ineffective brand advertising by a designer.

b) Either of the parties to the license agreement can collaborate with an ill-matched brand which can send a mixed signal to consumers. While parties enter into licensing agreements with positive goals and aims, there are chances of things not working out, especially in cases where the collaboration is far-fetched or not up to the standards of the consumers. Therefore, it is important to consider the consumer perspective and enter into a collaboration which is unique and beneficial for them. 

c) Extensive contracts and negotiations. Considering the scale at which licensing agreements are involved in the fashion industry, it is no surprise that entering into such arrangements requires significant time, patience, and costs to be incurred by both sides. It is always possible that the parties enter into a protracted negotiation process that yields no results. Therefore, parties are recommended to take a more long-term objective and enter into negotiations to close the deal for ease of negotiations between them. 

Conclusion

Just like an artist spends a lot of effort and time making a one-of-a-kind painting, a fashion designer invests a lot of effort and ingenuity into designing one-of-a-kind clothing. It is only reasonable to safeguard the fruits of one’s labour and innovation. If copyright protection is extended to the fashion industry, competition will be encouraged rather than suppressed.

Because fashion designs have a short product life-cycle, they often hesitate to secure their IP rights due to the time and financial expense needed. Registration of a design stops others from copying it and keeps you from fighting unethical rivals.

Frequently Asked Questions

What is apparel licensing?

Clothing items made particularly and principally for usage are licensed apparel. A license grants access to the asset without changing ownership to the licensee. Fashion brands may develop, expand into new markets, strengthen their brands, and enhance their reputation through licensing.

What is licensed merchandise?

Product and item licensing have a long history in the fashion industry. Famous designer companies like Ralph Lauren, Michael Kors, and Vera Wang rely on licensees to expand their product lines and give their clients a broad range of lifestyle options. While Mr. Kors or Ms. Wang may design their clothing lines, they frequently outsource the manufacturing of other product categories in the portfolio of a contemporary lifestyle brand. Hats, ties, and a variety of additional accessories.

A merchandise license, often granted for a specific time, enables licensees to use well-known IP to produce branded goods. Once the rights are obtained, the licensee uses the licensed intellectual property to create merchandise and pays the licensor a fee.

LegaMart, a legal ecosystem with the mission of easing access and building trust in the legal sector, is here to offer online and direct interactions between lawyers and clients from multiple jurisdictions. We have all the solutions you need by providing a wide range of necessary legal services, from translation and case reviews to advisories and advocacies. As you have us, you have new resources.

Secure your fashion products from copyright infringement through social media. Read our article on 5 tips for copyright infringement: cocial media channels to know more. 

Here’s an interesting article on design-build contract for your next read.

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