By Nicholas Scott and David Hansel
(Memery Crystal LLP)
Introduction
Merchandising
agreements can be a very effective route to profits both for designers with a strong
brand and commercial organisations skilled in
bringing high-end designs to a broader market. However, these
agreements can be fraught with a clash of cultures between the 'talent'
and the 'money.' Sometimes this tension is productive, but other times it is
not. Therefore, both parties need a workable means of regulating their
relationship that can also weather any storms along the way.
This article sets
out some of the practical, commercial insights we have learned from
resolving many fashion related disputes and how these influence the agreements we
draft. We focus on why it is important for the parties to share a
clear understanding of how the licensed brand will be exploited, how this may
impact on the brand protection strategy and what concepts should be
embodied in the agreement so that the parties retain a workable
agreement in the event that the original commercial relationship breaks down.
A Shared Vision of Success
In our
experience, the single greatest factor in a successful relationship is a shared
vision of the future of the licensed brand. This is not always present and may
result in the agreement not fulfilling the aspirations of both the parties. To
a great extent, agreeing upon that vision is a commercial, not a legal matter,
but those commercial aims can be protected and possibly furthered through a
well-drafted agreement. The key objective of the drafting of these agreements
is to set out how this will work and align the parties’ commercial interests so
far as possible. We set out below,
some of the key legal mechanisms to achieve this commercial goal.
Approvals Mechanism
A common
contractual brand protection device is a clause giving the designer a right to
approve both designs for a collection and the final product, usually in the
form of a sample collection. The approvals process can add considerable value
to the agreement by giving the licensee the opportunity to receive the
designer’s often valuable feedback and input on its designs, but it can become
a sticking point in the relationship where commercial and artistic differences
arise.
We sometimes see
approvals mechanisms providing for an ‘expert’ to determine these disputes. In
our experience, these provisions are unwieldy and do not result in a resolution
of any disagreement on these points on an acceptable timescale because, for
instance, an expert may not be available sufficiently soon to determine if the
disputed item should be included in a particular season’s collection. Although the approvals process can
involve highly subjective judgements, one party must still have the final right
of approval, or the agreement may become unworkable. The better approach to approvals is for both parties to
recognize that a diffusion product is different to a mainline product but that,
whilst it needs to be sufficiently distinct from the mainline so as not to
damage that brand, it must also be sufficiently closely connected to the style
and aura of that mainline in order that a broader body of shoppers will buy
into it. In any event, what is always sensible, given manufacturing lead times
and costs, is for the approvals criteria and process to be documented in
writing and signed off by a senior representative of both the designer and the
licensee.
Ethical Manufacturing
A less obvious,
but increasingly important brand management concern, is that garments made by
the licensing partner should be manufactured in facilities which observe
certain basic standards of employee welfare. Considerable brand damage can
result from the mere allegation that the working conditions of the garment
manufacturers do not conform to accepted contemporary norms. This is especially
so in relation to luxury goods, where the disparity between the retail price
and the wages of the sub-contracted labour can be exploited (often unfairly)
for the protestor’s particular ends. Concerns of this nature can be addressed in a manufacturers’
agreement annexed to any licence agreement. The manufacturers’ agreement may
also specify minimum standards of acceptable quality of manufacture.
Financial Commitment
The designer
will usually look for financial commitment from the licensee whether by way of
advances or minimum guarantees. A
further way to align the parties’ interests is to require the licensee to
invest in promoting the licensed products and possibly the designer’s mainline
collection. Also, an obligation on
a licensee to incur the cost of a regular marketing spend acts as a major
incentive to make the agreement work.
Brand Protection: Anti-Dumping
There can be a
tension between the licensee’s desire to exploit a designer’s fame and
reputation by producing and selling the greatest volume of merchandise possible
and the designer’s need to control the image of any brand associated with him.
However, it is possible to draft an agreement so that it aligns the parties’
potentially disparate interests more closely. One of the most obvious and, legally and commercially
effective mechanisms in this area is an ‘anti-dumping’ clause. These clauses
take many forms, but, in principle, they prevent a licensee from manufacturing
too much of the licensed product because it will be unable to dispose of it by
jobbing or dumping that stock. Conversely, it is sensible to give the licensee
a right of sell off for a short period and possibly at a discount to the
prevailing market rate, so that it can clear unsold stock in an orderly fashion
and thereby remove the temptation of dumping stock into the market. A balanced allocation of rights offers,
in our experience, greater brand protection.
Breaking Up Is Always Hard To Do
But what if,
with the greatest will in the world, the parties cannot make the agreement
work? Termination is the obvious answer. It is always best for the parties to
agree in advance in what circumstances the agreement may be terminated and for
what reasons. Typically, the parties will agree that an agreement may be
terminated for a so-called ‘material breach’. This can either be defined in
advance or ascertained at the time of breach. Either way, it is also sensible
for any agreement to provide a mechanism for the parties to require breaches to
be cured within a given period rather than simply going straight to the more
drastic decision to terminate.
Conclusion
Signing a merchandising
agreement should be viewed as the start of a long-term relationship between the
parties, even if that relationship is terminable. In common with any such
relationship there will probably be some friction en route. However, in our experience, that friction can be smoothed
over by both parties stepping back from the minutiae of the dispute and looking
to the bigger picture of working together to make money by using one party’s knowledge
and ability to market and sell to the mass market and the other’s ability to
deliver the inspiration and guidance behind the relevant brand. If one or other
of the parties is unable to see the bigger picture, a well drafted agreement
can often allow the relationship to continue beyond that period of difficulty.
Nicholas
Scott is a Senior Associate in the Dispute Resolution Group at Memery Crystal
LLP in London. David Hansel is a
Partner at the firm with a practice focused on Retail and Fashion.
Memery
Crystal has extensive experience of negotiating fashion licence agreements on
behalf of both licensor and licensee. Its clients include Marchpole Holdings
Plc, Debbie Moore Enterprises Limited (Pineapple), Saltrock Surfwear, Hay &
Robertson Plc, and MAS Holdings together with a large number of retailers.
The firm also represents clients in disputes arising out of
fashion licence agreements -- most recently, successfully settling Marchpole
Holdings Plc's claim against Ozwald Boateng's Bespoke Couture Ltd.
