Issues in trade mark licensing (sponsored article)
Lily Lei and Yuan Yuan of Liu Shen & Associates explain the complexities of trade mark licensing in China
What are the most popular types of trade mark licensing in China?
Well, actually it depends.
Unlike the traditional ways of franchising and merchandising, co-branding can [involve] crossover[s] combining two distantly-related products, like Nike+Ipod bringing sports and music together.
Co-branding has been catching more eyeballs of both media and consumers in China as well as in other countries. After all, who could argue with playing Lego toys with Batman minifigures therein, meeting Marvel heroes in Shanghai Disneyland, getting extra bonus[es] or even plane ticket[s] with a credit card jointly launched by China Guangfa Bank and China Southern Airlines, or licking a KFC Cremia ice cream out of a Shiroi Koirito cone? As for the two brands, co-branding is usually a win-win strategy with half [the] marketing expense but doubled exposure.
However, as appealing as it is, most co-brandings do not last as long as the other traditional licensing types. Intel processor's co-branding with Dell and HP computers is an exception, but this is mainly because [a] processor alone does not serve any function and is hard to be advertised on its own.
As compared with co-branding and merchandising, franchising conveys a business model more than [the] mere licensing of IP rights. Along with the attendant trade marks, design patents, know-how and other IP rights, a franchisee is always required to take the business pattern set up by the franchisor so that goods or services of consistent quality and style are secured. For example, a consumer entering 7-11 would expect the food to be not only clean and healthy, but also 7-11-styled, not a burger or fries like McDonalds, although the latter is of equally good quality. Accordingly, franchising is adopted in business[es] like restaurants, beauty salons and supermarkets more often than other types of licensing, where consumers would expect goods and services to be alike or similar.
Merchandising is an old and long-established form of licensing, which is still very active in China today. We can see little girls wearing T-shirts or dresses with different images of Elsa from Frozen every day, and it is reported that Disney has profited much more from merchandising Frozen characters than selling movie tickets and DVDs. When items like mugs, plates, clothes, caps, towels are added with sports teams, universities, well-liked characters, popular stars or trade marks, sales will be instantly boosted despite…the premium price as compared with the same goods without licensed IP rights. The key [to] merchandising is the IP rights per se are so popular that consumers are willing to pay extra.
To sum up, it is hard to say one type of licensing precedes the other in popularity in China. It really depends on which sector the business is in and what [cooperative] relationship the parties can build.
What are the pros and cons of the main types of licensing?
On one hand, when two renowned companies are together in co-branding, they share resources, marketing expenses and even risks while enjoying individual profit margin increased by sales volume. On the other hand, if anything negative from either side happens, both brands will be affected. And two separate brands tend to have different missions and visions, which makes co-branding more likely to fail or be short-lived than other types of licensing. For example, one brand may prefer to advertise the co-branding more to increase sales, while the other brand may think too much advertising of the co-branding would dilute its own brand, and such difference may lead the co-branding to end.
For a franchisor, franchising is a cost-effective and risk-less way to expand business, as the franchisees typically assume costs and risks. And to avoid loss of investment, local franchisees would do diligent [research] to open up new markets for the franchisor. In…decades [past], many foreign companies have built up their presence quickly in China by franchising. Successful examples in China include KFC, McDonalds, 7-11, Hilton, Sheraton, and Super 8 Motel…However, much cattle, much care. With the rapid growth, which is a trait of franchising, a franchisor needs extra efforts to keep the train from [running away]. Otherwise, adverse experience from one hotel in China may stop a customer from booking another hotel sharing the same brand in US.
Although profit margin[s] can be enormously increased by merchandising, IP right owners [should] pay more attention to the quality of merchandised items, as products of poor quality may not only decrease the popularity of the merchandised IP rights, but also do harm to reputations built up [over] years. When merchandised products are in large volume[s] and differ in type…quality control can be a real challenge. And target markets may vary a lot with different merchandised IP rights. For example, it is never a good idea to sell Red Sox souvenirs in New York.
Each coin has two sides. [The] [p]ros and cons of each type of licensing [should] be considered before a decision is made.
What are the most important issues for licensors to consider?
First, licensors need to decide if the license [will] be exclusive, non-exclusive or sole, and whether sub-licensing is allowed or not. This is ordinarily based on the relationship [and the] business strategy.
Second, although there is no so-called "naked licensing" in China. China['s] Trade Mark Law does require licensors to supervise the quality of licensed goods and services. And licensors would be held jointly liable for [any] problem caused by [poor] quality of licensed goods and services.
Besides quality control, the licensors may also want to have control over the…use [of] the trade mark, the design of packaging and decoration, the prices and the distribution channels, so as to protect the trade mark from dilution, degrading (especially when the licensed trade mark is associated with "[higher] end" [goods]) or other possible harm.
Last but not least, licensors [should] consider requesting the licensees to cooperate in actions defending the licensed trade marks. For example, licensees' help in collecting evidence is essential [in defending] the mark in non-use cancellation[s].
What are the most important issues for licensees to consider?
First and foremost, licensees [should] always review and evaluate the trade mark to be licensed before licensing. Is the ownership of the licensed trade mark clear and stable? Is there any risk of being accused of infringement? Will the profit and other business benefits be good enough for royalties?
Second, although record[ing] of trade mark license[s] [are] not mandatory [under] China['s] Trade Mark Law, it is prudent to have the license recorded with [the] Trade Mark Office (CTMO) anyway, which will not only defend the licensees from third parties…but also save time for licensees in future possible inspections.
If the licensees decide to [record their license], it shall be noted that the term of license shall not exceed the valid period of the trade mark registration, and the licensed goods/services shall not go beyond the registered ones. And [this should] be re-filed whenever there is any change in the term of license, contents of licensed goods/services or ownership of the licensed trade mark.
[Third], licensees shall consider whether the license [will] be kept valid after [the] ownership of [the] licensed trade mark is changed. [The] Supreme Court has provided that [this should happen automatically], unless it is explicitly agreed upon otherwise in the license contract. However, if the licensees choose to keep the license after change of ownership, a clear clause in the contract may save time and money with the new owner of the licensed trade mark. And [if] the licensees choose not to keep the license after [a] change of ownership, the licensees shall consider what compensation [will] be made by the licensors who assign the licensed trade marks during [the] licensing period.
Last, if the licensors record the licensed trade marks with…customs, the licensees shall request [that] the licensors list licensees and their import and export agencies as authorized users with…customs, which may [save] licensees from trivial [problems] in future.
What are the key points for both parties to include in a licensing agreement?
First, both parties shall include the type of license in the agreement, that is, whether it is exclusive, non-exclusive or sole.
Second, quality control is a key point for both parties.
Then basic and general issues like extent and scope of licensed rights, right to sub-license (or not), field of use, territory, manufacturing of products, design of packaging and decoration, payable fees, renewals, termination, consequences of termination, infringement and counterfeiting, miscellaneous provisions regarding governing law and jurisdiction are key points too. Each of the above points has to be considered thoroughly and addressed adequately. Take payable fees as an example. The agreement [should] address the following questions: How is the licensor to be paid? Lump sum or instalment? If the latter, guaranteed minimum royalty, or percentage royalty, or combination of both? If the latter two, should the licensee be required to explain how the royalties are calculated, and does the licensor have [the] right to audit? What is the payment term, annually or quarterly?
Furthermore, obligations and responsibilities of both parties in special situations like change of ownership, bankruptcy are also key points to be included in the agreement too.
Lily Changxin Lei is a partner at Liu, Shen & Associates, heading the firm’s trade mark practice. She obtained her BA from the Institute of International Relations, majoring in International Relations and English Literature.
Part of her legal training was on a Young Chinese Lawyer’s training scheme at the University of London, Clifford Chance and the Chambers of Christopher Morcom QC. Lily has presented on trade mark issues in China at INTA and at seminars sponsored by corporate clients.
Yuan Yuan is a partner at Liu, Shen & Associates where she covers trade marks. She holds a Bachelor’s degree in English Literature from Wuhan University and a Master’s in Intellectual Property Law from the Franklin Pierce Law Center (now part of the University of New Hampshire). She trained in US trade mark practice at Birch, Stewart, Kolasch & Birch in 2008.