Licensing: A Growing Phenomenon in the Business and IP World
In order to foster creativity and give people the exclusive right over their creations, we take the protection of our intellectual property (“IP”) seriously. But what happens if we want to let someone use one of our creations? One way to do so is through licensing. Licensing is “the grant of the right to use another party’s intellectual property on their products or services in exchange for financial consideration, typically a royalty.”[1] The licensor is the party who owns the IP and receives payment when the other party, the licensee, uses it.[2]
We’ve seen forms of licensing in many contexts before and may not have even realized it, such as our favorite characters on merchandise items, celebrity endorsements, and collaborations between our favorite brands. A variety of different types of properties can be merchandised or licensed, including but not limited to art, celebrity, collegiate, fashion, music, and publishing properties.[3]
Licensing has a very rich history. The practice of paying royalties to use another’s likeness or name is believed to have begun in the eighteenth century, when two British women of nobility reportedly allowed a cosmetics manufacturer to use their name on its products in exchange for a percentage of revenues generated from the product sales.[4] However, we can track licensing as we know it today to the 1870s, when it is believed that brewery founder and philanthropist Adolphus Busch permitted manufacturers to use the name “BUSCH” on a wine key that included a foil cutter, corkscrew, and small blade to boost sales of the key. [5] Some of the iconic licensing characters we still remember now also trace their origins generations back, such as Peter Rabbit, Teddy Bear, the Girl Scouts, etc.[6]
One popular form of licensing today is fashion licensing. Some forms of fashion licensing include licensing a brand name, product design, fabric design, or logo into an associated product category; licensing a brand name to perfume makers and accessory manufacturers; and collaborating with a well-known brand in another industry to create a new product line. [7] Licensing can be extremely beneficial for the fashion industry as it allows retailers to differentiate themselves from competitors, expanding into new product categories, and attract new, more diverse customers through different product offerings.[8] Furthermore, the licensor can gain status and credibility with the new customer groups, test out a new market, increase overall brand awareness, and produce attractive and innovative fashion items.[9] In fact, the “Fast Track Your Fashion Brand” podcast states that “90 percent of the $160 million a year in sales at Calvin Klein Inc. comes from licensing … The only merchandise they make themselves is their line of women’s.”[10]
However, the world of fashion licensing is not always smooth sailing. There are a few risks and drawbacks that come with a brand or company trying to increase their consumer base through licensing. There is always the risk that the brand becomes damaged or diluted.[11] For example, “Calvin Klein sued Warnaco in 2000 for diluting the Calvin Klein brand by producing sub-standard products and trading with discounted retailers.”[12] Some other drawbacks include protracted negotiations and extensive contracts, restricting the grant of future licenses or breaching earlier licenses, and sending mixed or harmful messages by collaborating with a brand that ends up being ill-matched.[13]
We can look to one recent example of a licensing deal gone awry by briefly discussing Ye’s collaboration with Adidas. Celebrities enter into brand deals and collaborations all the time, and Ye’s deal with Adidas is widely known:
“Entered into in 2016 and slated to run until 2026, the Yeezy arrangement saw West license the Yeezy brand name to adidas in exchange for royalties of approximately 15 percent of the sales of Yeezy products. (West’s Mascotte Holdings is the sole holder of the trademark rights in – and registrations for – ‘Yeezy’ and ‘YZY’ for use on footwear and apparel, which West’s corporate entity licensed to adidas for use in connection with the footwear collection. This enabled West to monetize this intellectual property (and bring in royalties), while still maintaining complete ownership over the Yeezy brand.)”[14]
Ye’s Adidas deal ended much earlier than planned. In early October 2022, Ye went on a rampage in public appearances and interviews––his actions included making antisemitic comments and conspiracy theories and criticizing Black Lives Matter, leading to the end of many business relationships, getting banned by social media platforms, and overall criticism by industry peers.[15] In response to widespread backlash against Ye, and in an effort not to be associated with his hate speech, Adidas promptly issued a press release severing all ties with Ye.[16] Adidas announced that it would also end production of Yeezy-branded products and stop all payments to Ye and his companies––essentially, stop all forms of business related to Ye in any way.[17]
Adidas was able to terminate the deal four years early due to a moral clause embedded in the agreement.[18] A morals clause is “a provision that typically prevents endorsers or other collaborating parties from engaging in conduct – and sometimes speech – that will bring either the party ‘into public disrepute, scandal, embarrassment,’ or generally cast an unfavorable light on the company’s reputation.”[19] Fox Rothschild LLP has clarified that some morals clauses don’t just prohibit criminal conduct, but also cover conduct that is offensive or insults or shocks public morals or decency. [20]
While Mascotte Holdings Inc. (Ye’s company) has a portfolio of over 160 trademark applications and registrations for the Yeezy brand, Adidas owns the rights to the designs of most Yeezy shoes, which include the popular Yeezy Boost 350 sneakers.[21] Since the contract itself is private, it is unclear exactly how the termination proceeded on the inside and how the remainder of Ye’s royalties will be paid to him––but what is clear is that the Adidas brand has suffered due to Ye’s actions.[22] While Adidas could probably keep selling shoes that look like Yeezy shoes as long as they don’t use Ye’s trademarks, the Ye controversy has already decreased the value of Adidas’s designs.[23] Kazuyo Morita, a partner at Holland & Hart LLP, stated how “[c]elebrity co-branding can often provide increased sales, consumer hype, and can distribute economic risk … [T]he more controversial the figure, the bigger the splash––and maybe the bigger the payoff––but there’s also this exact type of risk.”[24]
What does this mean for future licensing deals as licensing becomes more popular in all forms of business? Well, who you go into business with matters! Licensing can provide many benefits to a brand, but it is not without risk. One way to mitigate risk is for companies to include morals clauses in their contracts, just like Adidas had with Ye. Including sweeping morals clauses means that companies will be able to get out of deals with relative ease if they take issue with a contracted creative’s behavior.[25] These morals clauses can help protect the company’s brand and reputation.[26]
Lastly, it’s important to stay current. The fashion industry is changing all the time, and we need to be prepared to change with it. What’s popular and cool right now might not be considered popular and cool in ten years. Brands and celebrities should stay up to date with political and socio-economic concerns and keep up with fast-aging audiences. Suffice it to say, it’ll certainly be interesting to see what kind of collaborations and brand deals will be formed in the near future!
Footnotes
