Merchandise Licensing Basics

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[Click here to buy an eGuide containing merchandise agreements and explanations] Acquiring a license to sell merchandise that incorporates copyrighted material is similar to other licensing arrangements--you need to locate the copyright owner, negotiate an agreement, and sign it. However, the agreement used in merchandise licensing is usually complex than and contains additional responsibilities for the parties.

Basic Terms

Under the terms of a merchandise license, the owner of the image or text (the licensor) is usually paid an advance and a royalty based on a percentage of income from sales. The company selling the merchandise (the licensee) must meet certain obligations including payments, quality control and enforcement of rights. If the licensee fails to do so, the license can be terminated. Termination can cause great expense for both parties including the loss of income for the licensor and the loss of a substantial investment for the licensee.

Alternatives to Licensing

There are alternatives to licensing rights under a merchandise agreement. One alternative is to purchase the copyright in the artwork (known as an assignment). The other choice is to hire an artist; photographer or musician to create the material and acquire ownership under a work made for hire agreement.

What is Merchandise?

Licensable merchandise is any consumer product on which an image or text can be affixed. In general, merchandise has some utility or function, for example a T-shirt or ceramic cup. Below is a list of products that are commonly the subject of merchandise licenses. However, there are no limitations on what can be merchandise; artwork can be placed on anything that can be reproduced.

auto sunshades, auto tire covers, back packs, badges, bank checks, beach mats, bed sheets, belt buckles, belts, blankets, bumper stickers, caps, casual shoes, calendars, ceramic cups, children’s wear, clocks, cuff links, decals, desk sets, dress shirts, drink holders, fabric, flags, gift wrap, golf bags, golf club covers, greeting cards, handkerchiefs, hats, heat transfer patches, jackets, jerseys, jewelry, key rings, knit shirts, lamps, letter openers, license plate frames, loose-leaf binders, magnets, mittens, napkins, neckties, notebooks, pennants, pens, pins, polo shirts, postcards, posters, pot holders, rings, running shorts, running shoes, scarves, shower curtains, sleepwear, snack trays, socks,  squeeze bottles, stationery, stuffed animals, sunglasses, sweat pants, sweat shirts, sweaters, swimwear, tablecloths, tie clips, tote bags, towels, toys, training suits, T-shirts, umbrellas, underwear, wallpaper, watches and wind breakers.

Different Types of Copyrighted Materials Used on Merchandise

Most merchandise licenses are for artwork or photographs. However, text and music are also licensed in connection with merchandise. In general, the rules are the same. However, when it comes to licensing music there are some additional issues that arise depending on whether you are licensing a recorded composition or whether you will be re-recording a previously written compositions.

Using Art on Merchandise

Using art on merchandise generally consists of using an artistic image such as a drawing or painting on items you plan to sell. Examples include reproducing a Keith Haring painting on a T-shirt or using images from Georgia O’Keefe paintings on notecards. Of course, if the image is in the public domain, such as the Mona Lisa, no permission is required. If the artwork is labeled “copyright-free,” you will need to review the license or agreement that accompanies the purchase of the artwork (see sidebar) to determine if your merchandise use is permitted.

Agreements for the use of art on merchandise are sometimes called "art licenses" or "design licenses." Whatever such an agreement is called, it is essentially a merchandise license as described in this chapter. You may occasionally find unique provisions in some art licenses for the use of fine art works—for example, a clause permitting the artist to enter and inspect a poster-making facility to ensure a quality production process. While special provisions such as these are sometimes included to protect the artist, they don’t change the basic character of the agreement as a merchandise license.

Using Music On Merchandise

The ability to place music onto computer chips has made it possible to include music in merchandise such as greeting cards, watches, toys, musical equipment, music boxes and even clothing. Most songs used on merchandise are not copied directly from an existing recording; instead, they are re-recorded in order to be embedded on a computer chip. Since the recording of the song isn’t being used, permission is not needed from the record company. Similarly, if lyrics will be reprinted on merchandise but no recording will be reproduced, permission is required from the music publisher, not the record company.

Using Trademarks, Fictional Characters or Celebrities on Merchandise

A trademark is any word, photograph or symbol that is used to identify a business’s products or service. Trademarks are commonly licensed for merchandise--for example, the licensing of a university’s trademark (the school name or the name of its mascot) on sports equipment or apparel.

Fictional characters include characters from books, television or movies such as Mickey Mouse, Sabrina the Witch, or Daffy Duck. A fictional character may be animated (Homer Simpson) literary (Willie Loman) or cinematic (James Bond). The rules for licensing characters may change if a real person has portrayed the character (John Goodman as Fred Flintstone). In that case, additional permission is required.

Most of the provisions contained in a merchandise agreement are also used in trademark, character and celebrity licenses. However, there are some unique aspects to these agreements, some of which require knowledge of trademark law or the right of publicity. For example, character licensing involves overlapping trademark, copyright and design patent laws. These types of licenses are often handled by special licensing agencies that represent trademark owners, fictional characters and celebrities.

Using Short Phrases On Merchandise

Merchandise, by its nature, can generally only accommodate small amounts of text. Since copyright law does not protect short phrases, most of the text used on merchandise--for example, “Honk if you like Prune Tacos” can be used without permission.

However, in the following situations, permission should be obtained to use a short phrase.

  • The phrase is associated with a fictional character. For example, the unauthorized use of the phrase “E.T., Phone Home.” on a ceramic cup was a copyright infringement. (Universal City Studios, Inc. v. Kamar Indus., 217 U.S.P.Q. (BNA) 1162, (S.D Texas 1982).) In this case, the outcome was directly related to use of E.T. in the phrase. The use of “Phone Home” without E.T. would not require authorization.
  • The phrase is a trademark. You should always obtain permission to use a phrase on merchandise if it is used as a trademark or is taken from an advertising campaign, such as Coke’s “It’s the Real Thing” or Microsoft’s “Where Do You Want to Go Today?” Permission is also needed to use a phrase that is used to indicate a product or service such as the Marlboro Man.
  • The phrase is extremely inventive. An extremely clever phrase such as Ashleigh Brilliant’s epigram, “I may not be perfect but parts of me are excellent” or Lewis Caroll’s phrase, “Twas 

Royalty Rates for Merchandise Licensing

When you license text, art, graphics or music for use on merchandise, you are ordinarily required to pay the owner the licensed material a royalty--that is, a continuing payment based upon a percentage of the income you earn from the sale of the merchandise.

Royalty rates for merchandise licensing vary depending on the merchandise involved. Below are some royalty estimates:

  • Greeting cards and gift wrap—2% to 5%
  • Household (cups, sheets, towels)—3% to 8%
  • Fabrics, Apparel (T-shirts, caps, etc.) decals, bumper stickers—5% to 10%
  • Posters and prints—10% or more

The License Agreement

Occasionally, a seasoned copyright owner who has licensed many properties may furnish the merchandise license agreement. However, most of the time, the licensee – the company that is manufacturing and selling the merchandise, furnishes the merchandise license agreement. Usually, prior to furnishing the agreement, the licensee and the licensor have worked out all of the business terms. For example, they have determined the royalty rate, the rights being transferred, the length of time for the agreement and other financial terms.  If you would like to purchase a sample Merchandise License, click here.

This article is provided for informational purposes only. If you need legal advice or representation,
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