While economists may argue about whether globalization has turned the world flat, there is no doubt that American fashion companies and designers have increasingly looked abroad to grow their businesses.  I know from where I speak.  I’ve represented a leading urban brand in its license and distribution agreements in every continent, famous Seventh Avenue designers in Japanese license and distribution agreements, and one of America’s leading retailers in connection with contracts to open stores under its trademark in China.

THE BASICS

A trademark license agreement involves the grant of the right to use one or more trademarks in a specific territory, for a specified time period, in connection with the manufacture, sale, promotion and advertising of specified products, in exchange for the payment of monies called royalties.  A distribution agreement involves the grant to a distributor of the right to sell specified products it buys from the brand owner under a trademark, in a specified territory, for a specified term, at specified pricing terms.

PROTECT YOUR TRADEMARK

In order to do business abroad and protect its trademark, the brand owner must register its trademark where it wishes to do business in the product category.  Any brand with plans to establish an international business should embark promptly after its launch on a program to register its trademark in countries where business success is likely.  Although the business prospects for different brands in different countries may well vary depending on the brand’s image, distribution level, design concept and the country’s taste, it is fair to say that key countries/regions outside the U.S. for fashion trademark registrations are Canada, Mexico, the European Union, Japan, China, Korea, Saudi Arabia, the UAE, Australia, Panama and Brazil.

CHOOSING THE LICENSE/DISTRIBUTOR

A brand-owner should investigate carefully the experience, reputation and integrity of the licensee/distributor and its ability to operate and grow the business under the brand and to pay the monies due the brand owner.

TERM

The typical term for a license agreement is three years (sometimes with a six month start up) plus a three year renewal term.  Japanese trading companies often prefer a five year initial term with no renewal.  If a license to open one or more major retail stores is granted, the licensee may want to receive multiple renewal terms in order to recoup its substantial investment. Distribution Agreements may run from one to three years, often with a renewal right.

DISTRIBUTION AGREEMENT VS. LICENSE AGREEMENT

Heretofore, I’ve been referring to licensee/distributors.  However, there is a significant difference between license agreements and distribution agreements, and thus to licensee and distributors.  In a license agreement, the licensee, the recipient of the license, can do its own manufacturing and, subject to the brand-owner’s approval, do its own designing.  In a distribution agreement, the distributor must buy all its products from the brand-owner (or the brand-owner’s U.S. product licensees).  The monetary terms also differ.  In a distribution deal, the brand-owner makes its money on the distributor’s purchases of the products; in a license deal, the brand owner makes its money on the royalties paid on the sale of products, or through minimum royalties.

In a distribution deal, the brand-owner has more control over the design and quality of products.  All the products being sold in the foreign territory have been designed by the brand-owner and manufactured by factories used by the brand-owner, pursuant to the brand-owner’s specifications. In a license arrangement, there needs to be substantial brand-owner control as well. The licensee is responsible for the manufacture of the goods, but subject to brand owner approval as to design, and product quality.

A foreign company may resist being a distributor for several reasons.  First, the clothing product made for the U.S. market may not be sized to fit the foreign customer; this is especially true in Asia.  Also, the foreign company may be able to obtain a better deal from its own manufacturers and thus make more money manufacturing the product itself even after payment of license royalties to the brand-owner.

Sometimes a hybrid solution works best.  The brand-owner may permit the licensee to make certain products itself (subject to the brand-owner’s approval of design and quality) but require the foreign company to buy other products from the brand-owner.  A further refinement could require that for products made directly by the licensee, that a minimum percentage, e.g., 75%, be based on the same designs used by the brand-owner for its products.

CONTROLLING DISTRIBUTION

Controlling the brick and mortar outlets for products abroad is generally more complicated than in the U.S. where the American brand-owner knows the retailers that are appropriate.  The brand-owner should do its homework for the foreign territory and also ask the licensee/distributor to provide information about proposed retail outlets.

MONEY!!!

In a license agreement, the licensor will typically require the licensee to pay a percentage royalty on net sales as against a minimum royalty payable regardless of sales.  The U.S. brand-owner must also ensure that these monies will actually get paid.  If the foreign licensee wants to set up a new company to be the licensee, the main foreign company must guaranty the royalty payments.  The U.S. licensor may also want to insist on the foreign licensee’s posting of a letter of credit with a U.S. bank to secure the royalty payments.

In a distribution arrangement, the parties must provide for a price standard, for example a percentage above the f.o.b. cost, for products to be purchased by the foreign distributor. The brand owner should make sure that a substantial percentage of the purchase price is paid up front. The U.S. brand-owner should also impose minimum purchases on the distributor, which, if not met, will result in the brand-owner receiving lost profits on the purchase shortfall, and/or the termination of the agreement. Again, the brand-owner may also insist on a guaranty and/or letter of credit to secure payments.

ADVERTISING

The brand-owner may also wish to require that the foreign licensee/distributor spend a percentage of sales to promote and/or advertise the brand, with all social media and advertising approved by the brand-owner.

CONTROL SUB-DISTRIBUTORS/SUBLICENSEES

If the foreign licensee/distributor is given the right to retain sublicensees or sub-distributors, the brand-owner must control both their selection and operation.  A separate agreement must be signed by the sublicensee and sub-distributor, as the case may be, obligating it to comply with certain provisions in the main agreement and giving the brand-owner the right to terminate the sublicense or sub-distribution agreement if there are contractual defaults.