The Conformist

Garment Manufacturing Asia

Have you ever had the experience of going into a fitting room and trying on two of the same item in the same size, perhaps only in different colors, only to find that they fit quite differently—to the point that one might not fit at all although the other did? Production line manufacturing may be efficient, but no one ever claimed it to be an exact science.

No one expects the retailer to guarantee that every item sold under the same SKU will fit exactly like every other item bearing that SKU in the same size. But in fashion licenses, that kind of elasticity in expectations can become the subject of negotiation.

It typically plays out like this: the licensee agrees to provide pre-production samples to the licensor for approval. The licensor either approves or disapproves; if it disapproves, the licensee is often entitled to a second try, adjusting the style to suit the licensor’s expectations. Once the styles are approved, the licensee initiates production. More typically in the fashion business, the licensee contacts someone else, often half a world away, and tells him or her to initiate production.

The licensor may demand, in the representations and warranties section of the license (which has been the subject of this series of posts), that the licensee warrant that production models will not deviate from approved samples. If the licensee is careful, that may be qualified by adding in any material way or by breaking the force of terms like will conform by dropping in the forgiving qualifier substantially. But bolts of cloth from different batches can easily have variations, and sometimes the chosen buttons, snaps and other accessories run out and others need to be substituted; the list of potential deviations goes on. In a seasonal business such as fashion, where a handful of weeks can make or break a SKU, a style, a look, a collection or even an entire business, the date on which finished goods are to be sent to retail doors is hardly the time to get into an argument over whether something already bought and delivered does or does not substantially or materially conform to the appearance or other attribute of an approved prototype.

The first rule of warranties applies here as it does to all others: for the licensee, never make a promise that you cannot keep; for the licensor, never ask anyone else to make a promise that you can be reasonably sure he or she will not be able to honor. To avoid surprises, it is useful for the parties to think through, and to talk through, contingencies due to variations in manufacture and to consider adding to the license, as a defined term, exactly what they mean when they say something must conform to what has been approved. Even if something is completely non-conforming, alternatives such as sale into outlets or other lower end channels, or outside the territory, perhaps with labels removed, can sometimes work.

In the end, however, all licenses, like all contracts, rely more on the element of trust (and forgiveness) than lawyers can hope to draft into them. Simply, a well-written contract can get you a favorable result in court, but working with the right people is a good way to help stay out of court.

Here as with most else in licensing, the name of the game is cooperation. The devil, as they say, will always be in the details.

Credit: Alan Behr

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I Own It — I Mean, Really, I Do!

BlackPolkaDot-RedAccessories

In our exploration of the representations and warranties often seen in fashion agreements, we come to one that is at the core of licensing and distribution agreements, and it typically looks like this:

Fashion Company represents and warrants that it owns and maintains trademark registrations in the Territory [the scope of which should be clearly defined] for the licensed marks set forth in Exhibit A to this agreement.

Similar warranties can be made, as applicable, for rights to trade dress (which is an important trademark derivative for those fields, such as fashion, in which designs can be important assets) and in copyright and design patents. Those will be discussed in subsequent posts.

For trademarks, the important thing is to clarify what is actually being licensed. Scheduling the licensed marks, particularly if any involves specific colors, fonts, devices (logos) or other design elements in how they are presented, is very important because the warranty of ownership will apply only to what is specifically listed, and with trademarks, any change or variation in more than a “de minimis” or token amount may be deemed to have created a different mark—one that is not covered by the warranty.

Pitfall: licensees beware. Licensors may change their branding indicia during the term of licenses. If that happens, and the licensed trademarks are listed in the agreement, the new versions may not be covered by the contractual warranty. As an example, the mark FASHION COMPANY registered in the stylized form FASHION COMPANY will likely not be seen as the same stylized mark as FASHION COMPANY when used in the latter form. The license agreement should therefore be drafted to include any new versions of the listed trademarks within the definition of the “licensed marks”—and to require the licensor to give fair notice when any such changes in branding may be forthcoming. Financial issues concerning the costs of the changeover to the licensee can become the subject of additional negotiations.

Although due to the oddly backwards way in which United States trademark law developed (which is a long story in and of itself), it is not necessary to have a federal trademark registration to claim ownership of a mark in the USA. It is therefore common, and indeed usually prudent, for a licensee to insist on a warranty that the licensed marks have been registered for the specific goods covered by the scope of the license. Where things can get tricky is if such registrations have not yet been granted in the USA or in other jurisdictions in the territory covered by the license. The licensor may, in certain instances, be able to warrant ownership of marks that have not been registered (although it cannot so warrant ownership of the registrations themselves), or it may demand that it limit its warranty to those portions of the territory where it has registrations in place and is confident the use of the mark as licensed would go unchallenged. The business and legal risks, and the operational considerations implicit in partially encompassing warranties, should be carefully considered by both parties.

The key takeaway here is that, in the USA, trademark protection tends to be quite specific, exact and exacting. It is therefore prudent for the licensee to do due diligence to comfort itself that the licensor or other trademark owner’s warranty of ownership (and registration) is valid and accurate—because once you sign the agreement and start acting under it, you will likely be spending your money to make things happen, and no one likes throwing away money due to promises (that is, warranties) that cannot be honored.

Credit:  Alan Behr

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I Hereby Promise That You Are My One and Only-ish

Agreement-Torn

In our explorations of representations and warranties that are typical to contracts in the fashion business, we now come to one of the classics: the warranty that, by signing the contract, the party is not violating any other contracts it has signed. A typical such warranty would look like this:

Fashion Company represents and warrants that, by entering in to this agreement, it shall not violate the terms and conditions of any other agreement, arrangement or understanding to which Fashion Company or any of its affiliates is a party.

What is that about? Remember Mel Brooks’ The Producers (in any of its forms as movie, Broadway musical or movie of the Broadway musical)? The hero (loosely speaking) was Max Bialystock, a down-on-his luck Broadway producer who, with his accountant partner, tried to make a killing by selling far more than one hundred percent equity investment interests in his musical Springtime for Hitler. All he had to do to make the scheme work was to be sure that the show failed—which would not prove as easy as it first appeared.

If someone contractually sells interests in anything to different people so that they collectively have rights to more than all of what could have been sold, the seller has certainly made agreements that violate the terms and conditions of each of the sale agreements, resulting in a breach of this important warranty each time—if the seller was foolish enough to compound his problems by making such a warranty. Another all-to-common example: any Ponzi scheme or similar scam.

Surely, one of the most important places in the fashion business for such a clause is in a license agreement. The licensee needs to be very sure that the grant that it has received is valid and does not conflict with any grant made by the licensor to any other licensee; and the licensor needs to be equally certain that it is not granting conflicting rights to different persons. For example, if you are about to sign as the exclusive licensee for a brand in the “sportswear” category, would you feel that a license to another party for “activewear” violates your exclusivity? The answer, on those possible facts alone, is a resounding “maybe.” If you define sportswear broadly enough, even redundantly enough, to include, “all casual, active and athletic wear,” any license granted by the licensor to a third party for activewear would violate the warranty made to you for sportswear—and you would therefore have the basis of a claim and, if necessary, a lawsuit.

Here again, doing your diligence on your counterparty—and defining your terms—will go a long way toward making your contract into the protective blanket that you and your attorneys intended it to be.

Credit: Alan Behr

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When Just the Licensor is Not Enough

magnifying glass with trademark icon

Companies often place their trademarks in a separate subsidiary or affiliated company. And then, sometimes, rather than being the direct “licensor” of the trademarks, the owner will enter into a master license with another subsidiary or affiliate. Use of a master licensor/licensee structure is appropriate from an operational perspective if the sole business of the trademark owner is to own the trademarks, since it therefore would be unable to provide the services normally required of the “licensor” under any of the various license agreements it hopes will be consummated.

Just as a licensor should require representations from a guarantor of its licensee’s obligations and should seek to bind the guarantor to many of the restrictions imposed on the licensee, sometimes parties receiving licenses (technically, sublicenses) from master licensees will think to ask for various representations from the master licensor/trademark owner, such as those relating to the rights and authority of the master licensee, to the absence of grants of conflicting rights to any third parties, etc., and some of these sublicensees will think to bind the trademark owner to some of the restrictions imposed on the master licensee under the sublicense agreement, particularly in regard to honoring whatever exclusivity rights may have been granted to the sublicensee. But most sublicensees will not think to protect themselves against the potentially adverse effects of changes in the master license agreement itself. For example, if for some reason the master license is terminated during the term of the sublicense agreement, the trademark owner should be bound to substitute itself or a successor master licensee as the (sub)licensor under the (sub)license agreement. And similarly, the customary “binding on successors and assigns” provision of the sublicense agreement should be expanded so that, if ownership of the trademarks is transferred during the term of the sublicense agreement, it is clear that the sublicense agreement is binding on the new trademark owner; and it would not hurt also to bind the trademark owner to be required to cause the new trademark owner to agree that it (or its master licensee) automatically will be substituted as the (sub)licensor under the (sub)license agreement upon the closing of the transfer of the trademarks.

Credit: Jonathan R. Tillem


BOTL III

During the course of negotiating a license agreement, a licensee may propose certain changes that may appear logical and reasonable. However, a licensor should be on the lookout for seemingly innocuous proposals that could impede its ability to operate its business.

Agreement-likeness-blurred

  • “I need a longer sell-off period after termination and the types of customers to which I can sell during the sell-off period [e.g., only closeout accounts] is too limiting.” Agreeing to these requests may not be problematic if no new licensee is in place, but the license agreement must contemplate the possibility that there may be a new licensee; and extended and extensive sell-off rights may make it more difficult to conclude a new license and may increase the pressure to give financial and other concessions to the new licensee. (In a later post, we will discuss the substance of sell-off provisions, including circumstances of termination that could result in a bar to a sell-off beyond the date of a termination of the license agreement.)
  • How much time does a licensee actually need, particularly considering that, for a seasonal business with a typical December 31 contract year/term end, sell-off actually could be starting as early as September?
  • While selling off prior seasons’ inventory should not seriously compete with a new licensee’s business and while closeout accounts may be the only meaningful customers for closeouts, it cannot be good for the licensor’s brand or the new licensee’s business if the former licensee’s products, whether or not they include “basics,” are being offered to the new licensee’s regular customers at the same time that the new licensee’s business is being launched.
  • “I would like an option to renew the license agreement.” While renewal options are quite common, and sometimes may even be offered by a licensor, accepting some common licensee complaints can have unintended consequences.
  • “The date by which I have to exercise the option is too early.” Depending on the length of the term, this could be a fair point, but a licensor must keep in mind that, if the option is not exercised, it will need time to locate, negotiate with and conclude an agreement with a new licensee and the new licensee will need time to develop its initial collection, which, for a seasonal business, will have to go to market well before the end of the current licensee’s agreement. (In a later post, we will discuss the need for provisions in an exclusive license allowing the licensor to engage a new licensee during the term and the new licensee to start business before the end of the term.)
  • “The conditions for renewal are not objective.” As noted in an earlier post, a licensee will want only objective standards when it comes to the conditions it will have to satisfy in order to exercise its option. However, is it unreasonable for a licensor to be able stop doing business with a licensee that, while not technically having defaulted in its obligations, has been a terrible partner and exceedingly difficult to deal with?
  • “I would like a right of first refusal for additional products or countries or trademarks.” A right of first refusal, in effect, requires the licensor to make a deal with a prospective third party licensee and then offer the current licensee the right to match it. There is not much chance that a prospective licensee will be willing to devote the time and expense of negotiating a license agreement in these circumstances. If pressed, giving the existing licensee a first right to try to make a deal with the licensor – a right of first negotiation – is a better, and reasonable, alternative.
  • “I want more countries in my licensed territory.” If a prospective licensee can demonstrate the wherewithal to properly exploit the proposed additional countries, the inclusion of the additional countries is often just a question of business judgment. (There may, however, be legal considerations to be addressed in the license agreement depending on the status of the licensor’s trademark rights in the additional countries.) If additional countries are included, though, a licensor should retain the right to take back countries that the licensee does not exploit adequately; and any such reversion right must be carefully drafted, particularly to take into account that getting back a few countries in a region may not be of any real value to the licensor. (What potential new licensee is going to be interested in a license for a few scattered Asian or European countries if the existing licensee retains the major markets in the region?) A possible compromise here might allow the licensee to keep the entire region if it is appropriately exploiting the major markets in the region, but to lose the entire region if it is not.

Credit: Jonathan R. Tillem

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License Negotiations – A “WORD” to the Wise

Ask Why

Lately, I have been seeing some licensor counsel sending out first drafts of license agreements as PDFs rather than in Microsoft Word. Putting aside that it is getting easier and easier to covert PDFs accurately into Word, I must ask why. Are they seeking to avoid getting back a markup of their draft? Again, I must ask why. Do they really prefer the good old days when the licensee’s lawyer would send back a 50+ paragraph memo of comments to be followed by hours upon hours of give and take negotiations just to get to round 2?

To me, it is unquestionable that sending or receiving a track change or compare copy saves a tremendous amount of time (and psychic energy) in and within the process of documenting a license, particularly with experienced parties and counsel. (Note to sender – if you do a compare copy, send along a clean copy of the revised draft!) It takes me far less time to do even an overly comprehensive markup than it would to describe all of my proposed changes, with the associated reasoning, in a memo of comments (and this does not even factor in the time saved by effectively eliminating the first round of “live” negotiations). Similarly, as licensor counsel, much less time is involved in reviewing a markup and incorporating the acceptable changes into the draft than in talking through the comments with opposing counsel and then redrafting. Much gamesmanship is eliminated and the truly open issues are set; and, frankly, I have found that, at this point in the process, both lawyers tend not to revisit most items that, in a practical sense, are inconsequential and to focus on resolving larger issues and moving toward consummation. Sort of like seeing the forest!

Credit: Jonathan R. Tillem