Protect your brand the supply-side way

May 2015 | EXPERT BRIEFING | CORPORATE GOVERNANCE

financierworldwide.com

Your brand may be an intangible asset, but it’s also your most valuable. ‘Father of advertising’ David Ogilvy has defined a brand as “the intangible sum of a product’s attributes”. It will often have taken years to build, and is what distinguishes you from all the rest. The last thing you want is to lose control over how it’s used.

Controlling ‘knock-offs’ is an arduous process, to which any fashion or sportswear brand will attest. By the time the websites that sell them are on your radar, they will probably have been taken down before you can react. But in the case of official licensed merchandise, rights owners are keen to make sure that they are being manufactured with correct controls and that proper royalties are being paid.

To ensure that the final product has been properly vetted – and with control over how many are sold and where – it is paramount that any global brand has quality assurance (QA) and a formal sign-off process.

Quality control is essential. But when it comes to protecting your brand, it’s equally important to turn your attention to the control of the actual supply chain. The methods that brands have tried and tested to exert control over this area are various, with the use of holograms being one of the most widely used at present.

On the face of it, holograms seem perfect for the purpose of tracking the supply chain of a product – as they use technology which can’t be copied, ensuring that all official products are stamped with a seal of approval.

However, what about the supply issues of the holograms themselves? This stage in brand protection is often overlooked as a priority. The least of these issues is the case of how many hologram suppliers a brand uses. A single supplier is preferable for record keeping, but in many cases, businesses use several at once. In this instance, keeping tabs on products bearing the official mark of your brand is made all the more difficult.

Whilst it’s the supplier’s responsibility to record how many holograms have been issued, it’s up to the licensee in different territories to record usage – how many tagged products there are, and how many remain in stock. However, in many instances, this process is far from seamless. All too often we’ve found poor or non-existent records, or audit clauses in licensing agreements that speak only of product sales and leave out any mention of the holograms used to mark each item as authentic.

This negligence can manifest itself in a number of ways. For example, a royalty audit might show 200,000 items – but only 90,000 holograms used. Or, there might be multi-part products where hologram usage is higher than the actual product sales because, supposedly, each component of the final item has a separate hologram. However, many times auditors will discover the final product being shipped with just a single hologram tag – implying that additional hologram-tagged products have been sold, but never reported to the licensor for royalty purposes.

We have even seen the case of an agent reporting sales on behalf of its licensees based on hologram usage alone, when in reality actual physical sales of licensed product by the licensees were much higher. Had the licensor been given both sets of numbers, reconciliation would have revealed the under-reporting and enabled the licensor to recover the foregone royalties. However, it was up to our audit to resolve this issue and to negotiate a settlement, allowing the parties to ‘true up’ and for their business relationship to continue.

The lesson to be learnt from all of this is that companies need to be more attentive in how they monitor and control usage of their names, logos and likenesses. In numerous incidents, we’ve seen products being sold in territories where the licensee doesn’t have a licence that covers the correct territory. For example, selling products in Japan when the licence only covers South Korea, or, in other cases, where no licence exists in the first place.

Licensing agreements are complex creatures. They have blurred lines and technicalities, which aren’t easily spotted by the untrained eye. A good example of this is sports licensing. A licence may cover a football player’s headshot – but does it cover the entire team, or popular former players?

Publishing is another example. Images of literary characters underpin some of the best-selling licences globally. But again, there are rules about how these are used, with each character portrayed and the type of product produced having to be permitted within the licence agreement. A publisher might be allowed to use two characters, but unless the licence agreement specifically allows for a ‘hybrid’ product, publishers do not have the right to use the two characters together. Separate licences must be obtained, or at least, separate specification within the same licence.

People of course try to get around this, and try to sneak rights in where none exist, thereby ‘expanding’ their portfolio of allegedly licensed products. This tends to happen in cases where companies have paid an upfront Minimum Guarantee (MG) for those images or other IP rights. Rather than having to pay a greater MG to acquire additional rights, they quietly assume them.

Businesses must be willing to monitor this through regular audit and exercise market vigilance. In reality, most audits simply result in a negotiated settlement with relevant amendments, so that the licensing agreement covers the company using the merchandise in the correct way.

The situation can be even more complex than this. Take, for example, the case of a particular celebrity who has created his or her own line of clothing, accessories or perfume. In this instance, the brand name is the celebrity in question – and the product exists solely, or primarily, as a licence. However, it isn’t the case that the celebrity will have designed, manufactured and marketed all those clothes themselves, as they will have contracted in people to do this.

What this can lead to is IP issues over these parties – designers, manufacturers and the like – using similar designs either in their own name or for other licensors. The brand owner’s specific IP needs to be conveyed and stipulated as clearly as possible in the commissioning and licensing agreement to avoid this.

Any individual, even a celebrity, is unlikely to have the global power of an established brand. For this reason, most of them will partner with a larger business to control the process or hire management expertise. Still, the brand owner will have to be monitoring the marketplace for any unlicensed use of their brand.

This brings us on to another complication: third party manufacturers. If you are dealing with IP and merchandising on a global scale, it’s unlikely that the licensees will be able to supply world demand from a single, easily controllable manufacturer. A third party factory that creates licensed merchandise for a licensee is therefore in possession of templates and designs, which can mean they could well try and make additional items outside of the remit of their agreement with the licensee.

If you don’t have complete control over the party that manufactures your brand, you certainly don’t have control of their working practices. It might be that your product is being made in an Asian ‘sweat shop’ factory, employing children, or even just with working conditions which are considerably below-par. Should this become public knowledge, the damage this could do to your brand might be beyond repair. It’s for this reason that the QA process for a brand operating on a global scale and the licensing agreement should include a list of ‘approved’ suppliers.

Licensing is a multi-faceted and complex subject matter that demands specialist expertise. This expertise is not only required when licensing agreements are first drafted, but also throughout the merchandising process. Businesses that are vigilant in controlling the supply-side of their products won’t miss out on royalties that they should be getting – and are in a far better position to mitigate the risk of their brand being damaged or abused through inappropriate and unofficial usage.

Stuart Burns is a partner at HW Fisher and Company. He can be contacted on +44 (0)20 7380 4964 or by email: sburns@hwfisher.co.uk.

Stuart Burns

HW Fisher and Company