While there are many benefits in favour of brand licensing activities, there are also many risks involved that should be taken into consideration by licensors when weighing up their expansion options. Some of these risks include:
Loss of control
The most obvious risk of brand licensing is the loss of control the brand owner then has over the products in question or the manufacturing process of the brand licensee. Any poor products placed in the market by a licensee can place brand integrity and related goodwill at risk.
This risk can be mitigated by carefully worded quality control provisions within the licence agreement and licensors should demand, and audit, high quality standards for the maintenance of the integrity of the product being licensed.
Damaging loss of reputation
The actions taken by a licensee may significantly affect the licensor’s image and brand integrity. Many readers will be aware of the incident whereby an audit conducted by Apple Inc uncovered 106 underage children working within its supply chain. While actions were immediately taken by the corporation to remedy this issue, the incident still received negative media exposure and reactions from consumers.
While licensing arrangements can contain provisions to limit, control and compensate for such matters, once reputation has been lost in practice, it can be very difficult to regain.
Are the royalty payments better all round that a direct investment?
Successful licensing agreements can certainly generate income from guaranteed royalty payments but sometimes a direct investment from a brand owner may be more profitable in the long term than a licence agreement.
Licensees may also cannibalise the sales of the licensor, therefore resulting in a lower yield of royalty revenue to the licensor than direct sales.
Prior to proceeding with a licensing model, a brand owner should conduct a feasibility study which takes into account all the financial and non-financial matters related to the proposed brand exploitation and then proceed with the optimal outcome.
When licensing agreements don’t always shield the licensor
Not all licensing agreements are successful. Some licence agreements turn into financial burdens for the IP owner causing them to want to cut their losses and end the relationship despite the royalty stream.
Termination clauses should therefore be properly defined in the licence agreement and should take into account local laws in the applicable licence jurisdictions. Some territories – for instance Arabic countries - have mandatory laws which prohibit the termination of an agreement without the consent of all the parties involved.
There is also a large administrative process behind managing licensees that needs to be considered and provided for in advance. The proper management of a licensing arrangement is instrumental in ensuring its success and continuity yet many licensors underestimate the significant cost that will be required for this.
Are the royalty provisions worth the paper they are written on?
Another potential risk associated with licensing can be the difficulty in collecting recognised royalty income from licensees. This may prove to be burdensome, time consuming, and strictly regulated by local laws.
Uncollected revenue may subject a corporation to tax liabilities far greater than the gains recognised from the royalty income. Therefore, the exact mechanism for earning and collecting royalty income should be tackled during preliminary licence negotiations and drafted in sufficient detail within the final agreement.
Over-extension of a product line
Diversity can be a good thing but it can also be negative if a product is stretched too far. Dilution of the brand is another key risk that should be factored in when cross licensing the brand to different product categories.
Over -extension of a product line may especially harm luxury brands by decreasing the value of the standalone IP. Over-extension may increase revenues from licensees on secondary product lines but may affect the margin on core brands through indirectly affecting the perceived premium of that brand to the consumer.
The fashion designer Pierre Cardin licensed his luxury brand to different industries such as bikes, strollers, restaurants and toilets which some may argue has now diluted and damaged Pierre Cardin’s core brand image.
Licensors not doing their homework
Often a Western corporation will overestimate how well-known its brands are in other markets. When negotiating with the licensee, brand owners need to articulate their value proposition, not simply assume that it speaks for itself.
Actions for cancellation or revocation of a prior registration of the same or a similar trade mark, often filed in bad faith, regularly fail simply because an insufficiently convincing case was made that the mark was well-known enough in the particular territory.
Building up a brand takes time and licensors often don’t appreciate this and then their international expansion of the brand can be to the detriment of the protection of that brand in certain territories.
Even Coca-Cola had to learn this lesson when it re-entered Myanmar after 60 years and it discovered that although people recognised the drink and some of its other brands, most people had never tasted them so Myanmar consumers had to be re-familiarised with the brand with a very different approach to advertising and brand exposure.
Beware the dreaded counterfeit!
The outsourcing of manufacturing processes to different jurisdictions, such as China, can increase the quantity of sophisticated counterfeit branded goods that can seep into a market. Therefore, extensive due diligence should be conducted by the licensor on the ethical and moral standards of the licensee and its associated parties and regular surprise audits should be undertaken in order to ensure that manufacturing quantities and qualities are in line with agreed figures.
Article by:
Ben Goodger (ASLAN Pharmaceuticals)
Ralph Thomas (DSM)
Mena Lo (Wilkinson & Grist)
Bahia Yafi (Alyafi IP)
All members of the MARQUES IAM Team
Issue 071
