Anatomy of Licensing Agreements – Part I

Previously, The Legal Supplement covered how athletes returning from Sochi have signed deals with companies to monetize on post Olympic endorsement opportunities. With endorsement deals, an athlete permits use of his or her intellectual property rights, which includes the athlete’s name and likeness. If a company wishes to use an athlete’s name, photograph, image, and/or signature in connection with the company’s product, legally, they are required to obtain permission to avoid liability for infringement or misappropriation. Permission is obtained through what is essentially a licensing agreement. To understand the legal mechanics of this, lets look at the anatomy of a licensing agreement:

Grant/Restriction

These are two of the most important provisions of a licensing agreement. The grant identifies what the athlete (licensor) is giving permission to the company (licensee) for. What specific intellectual property may be used (name, likeness, trademark), how the company may use the rights, and the geographic scope. For example, can the right to use the athlete’s name and likeness in connection with a particular product within a particular location, whether that’s the United States, North America or world-wide. And the grant will identify whether the licensing agreement is exclusive. If an agreement is exclusive only the company can use the licensed intellectual property rights for a specific (or related) product, duration and geographic location. .

Obviously licensing agreements have limits. Companies can’t do what ever they want with an athlete’s name and image. The athlete will want to know exactly how their image is being used and ensure that their image is being used in such a way that correlates with his or her personal beliefs, a desired image and perception and business goals. To accomplish this, a licensing agreement includes restrictions. These restrictions hold back rights from the company and limit the use of the athlete’s image or logo. For example, Tiger Woods endorses Nike products and Nike uses Tiger’s logo on their golf apparel. However, Nike does not have permission to change or alter Tiger’s logo without his permission.

Term and Early Termination

Licensing agreements almost always contain a specific time period before it naturally terminates. However, not all endorsement deals go smoothly. An athlete will have grounds for early termination if a material term in the licensing agreement is breached. For example, if company uses an Olympic athlete’s name in connection with a product that is not identified in the grant, this may constitute a material breach and lead to early termination of the licensing agreement. But without grounds for early termination, the athlete endorsement deal continues until the term naturally expires.

Intellectual Property Ownership

A key feature of licensing agreements is that the athlete retains the ownership rights to his or her intellectual property. Failure to clearly spell this out can create uncertainty, especially where there is a design or other creation for a licensing deal, and lead to expensive litigation battles. Using the Tiger Woods example, Tiger owns all trademark rights to the “TW” design mark even when he permits Nike to use it on golf apparel.

Royalty Payments and Payment Schedule

Most athletes, and really most licensors that sign endorsement deals want to know when and how much he or she will be paid. This is the section that receives the most attention. It’s all about up-front lump sum payments (e.g. bonus) and royalty payments. The other boring provisions can be left to the lawyers. When an athlete endorses a company or product they may receive a percentage of the company’s gross or net revenue generated from that product. This is known as a royalty payment. The percentage can be anywhere between 7-12% depending on the relative bargaining strengths of the athlete and company. Obviously Lebron James possesses much more bargaining power than a relatively anonymous Olympic athlete. Similarly, a large company such as Nike possesses more bargaining power than a small or start up company because of their market reach and brand recognition.

From the athletes perspective, gross revenue is ideal, because otherwise the company shifts a portion of the company’s operating expenses onto the athlete. The gross v. net revenue, and royalty payment percentage, are feveriously negotiated, and again, depends on the relative bargaining strength of both parties.

A payment schedule also needs to be identified. Are royalty payments paid monthly, quarterly or bi-annually. And how soon after the month, quarter or six-month terms ends does the payment need to be made. All terms ripe for negotiation.

Duties and Warranties

In athlete endorsement deals, most e affirmative responsibilities fall on the company or licensee. However, there are some actions required of athletes in licensing agreements. Tasks required of athletes vary from participating in the design of new t-shirts, to attending a photo/video session, or making public appearances to promote the product. These tasks help both the athlete and the company. As we know an athlete receives royalty payments from the products they endorse so promoting the product will naturally bring in more income. And it’s also important for the athlete to clearly know and understand what his or her obligations under the licensing agreement will be.

The Legal Supplement will resume exploring the anatomy of licensing agreements in the next post. As you can see they can be quite complex, and each particular athlete endorsement deal unique.

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