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Pete Canalichio is a brand-licensing strategist with more than 25 years of business experience. Having worked in brand licensing for close to 20 years for companies such as The Coca-Cola

Company and Newell Rubbermaid, he is consid-ered an expert on the subject and is repeatedly

asked to speak at branding and licensing confer-ences and leading business schools globally. In

2009, Mr. Canalichio founded Licensing Brands, Inc., a company dedicated to helping brand

owners and manufacturers harness the power of brand extensions through licensing. He is co-

author with Mark Di Somma of Lasso the World, Reframing How Brands Expand in Today’s

Competitive Environment, forthcoming in 2016.

One way to begin to define brand licensing is to break the subject into its two component parts: (1) brand and (2) licensing. Let’s begin with licens-ing? Licensing means nothing more than the rent-ing or leasing of an intangible asset. An example of intangible assets includes a song (“Somewhere Over the Rainbow”), a character (Donald Duck), a name (Michael Jordan) or a brand (The Ritz-Carlton). An arrangement to license a brand requires a licensing agreement. A licensing agreement authorizes a com-pany that markets a product or service (a licensee) to lease or rent a brand from a brand owner who oper-ates a licensing program (a licensor).

Now what is meant by a brand? According to Philip Kotler and Gary Armstrong a brand is defined as “a name, term, sign symbol, or combination of these, that identifies the maker or seller of the product” or service. The brand or its legal term, trademark, affixed to the product helps the consumer understand where it was manufactured or produced. In essence, a trademark simply states “I made this.” From the brand owner’s perspective, it distinguishes the products or services from those of its competitors. Consumers, in turn, can be assured the product they are purchasing is exactly what they want. Based on its reputation, a brand will convey a level of quality, reliability, and durability.

Why Do Companies Brand Their Products?

The primary reason companies choose to brand their products is to differentiate them from their

competitors’ products. For example, most consumers have no problem differentiating a Coke from a Pepsi. By giving their products a brand, a company or brand owner can begin to communicate with their consum-ers regarding the attributes of their products. Over time, a consumer can rely on the brand to connote not only a product’s value but also its reputation. If a consumer likes what a brand represents and they have purchased it before, there is a higher likelihood they will choose the brand of their preference over a competitor. In fact, consumers often will purchase a brand for the first time if it has a strong reputation or if it is used by friends or celebrities. Brands also lead consumers to develop certain expectations of products. The longer they experience predictable, consistent quality and performance, the more they will expect any new products sold under the same brand to have the same. The brand, therefore, adds value to these products.

For example, customers expect new products sold under the BMW brand to be of the same quality as an existing BMW. Consumers will associate a brand with a certain price level and standard of performance. If we look at two distinct watch brands: Rolex and Timex, one is associated with a high price and high performance and the other with value through a low price and durability. These same attributes also can be of benefit to businesses. Many companies as well as consumers look to UPS for their shipping needs because “Brown” has developed the reputation of actually adding value to an organization through its understanding of its customers’ needs and its consis-tent reliability.

When consumers and businesses get into the habit of buying certain brands, they automatically buy them again. This reduces the amount of time and promotion needed to make future sales, and it results in brand loyalty. According to Philip Kotler, brand loyalty, in marketing, consists of a “consumer’s commitment to repurchase or otherwise continue using the brand” and can be demonstrated by repeated buying of a product or service or other positive behaviors such as word of mouth advocacy. Brands usually pass through successive stages of brand loyalty, which is the cus-tomers’ allegiance to a particular brand. The stronger the brand loyalty, the higher the value of the brand and the greater revenue it will drive for its owner.

AU: Is this

correct?

The Basics of Brand LicensingPete Canalichio

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Why Do Companies License Their Brands?

As was said above, a licensing agreement autho-rizes a company that markets a product or service (a licensee) to lease or rent a brand from a brand owner who operates a licensing program (a licensor). Companies who know their brands well will have a good understanding of the equity of the brand. A brand’s equity is derived from the awareness and image a brand holds with its consumers.

Licensing enables companies whose brands have high preference to unlock a brand’s latent value and satisfy pent up demand that exists. After Apple launched the iPod a number of years ago it created an immediate need for accessories; Apple could have chosen to manufacture and distribute these accesso-ries, but decided it was not core to the business and therefore, chose to satisfy the need through licensing. Licensing the iPod brand enabled many companies to produce all kinds of terrific products to make the iPod more user-friendly and enhance the listening experience. Examples include the Bose Sound System with iPod docking station, other products that enable an iPod to be heard through a vehicle’s built-in stereo and iPod holding devices that allow users “to take their music with them” when they go running. All these accessories are sold by licensees.

Apart from benefits to licensors, there are ben-efits to licensees as well. Licensees lease the rights to a certain property for incorporation into their

merchandise, but traditionally they do not share ownership in it. Having access to major national and global brands, and the logos and trademarks associated with those brands, gives the licensee sig-nificant benefits it previously did not possess. The most important of these is the marketing power the brand brings to the licensee’s products. Building a brand from scratch can take years, millions of dol-lars, and a lot of luck. The company that licenses a brand gains immediate access to all the positive brand and image building that went before it. The licensee also takes with them the reputation of the licensor. Often this “halo” effect can translate into many intangible and immeasurable benefits such as returned calls, an agreement to meet, or simply the benefit of the doubt.

Using Licensing to Enter New Categories

Often brand managers will enter or extend their brands into new product categories to drive strategic growth for the company. For example, Crest several years ago extended its brand from toothpaste into whitening (Crest Whitestrips). Before, Procter & Gamble (P&G), the owner of the Crest brand launched Crest Whitestrips, they conducted research to understand if the brand had permission to enter into the retail whitening category, long held by estab-lished brands such as Rembrandt and Aquafresh.

Exhibit 1

Licensor picks theproduct

categories to belicensed

Licensor or itsagent finds and

negotiates alicense with thebest licensees

Licensees developconcepts,

prototypes andfinal productionsamples and

submit forapproval

Licensor approveslicensed products

for sale

Licensees selllicensed product

in authorizedchannels to

retailers

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P&G wanted to find out if consumers would expect Crest to offer a whitening product and if so, based on the preference for the Crest brand, purchase this new product. As we know Crest Whitestrips have performed well since their launch in the market and have achieved high rankings and advocacy ratings. While P&G decided to source the product overseas and distribute globally, they could have chosen to manufacturer it themselves and distribute or enter the market through licensing. In the case of P&G’s Mr. Clean brand, P&G discovered that consumers expected them to sell cleaning accessories under the Mr. Clean brand. In this case, P&G decided to enter the market by licensing the category to Magla, a com-pany that already had expertise and presence in this category. Exhibit 1 illustrates the different stages that are a part of the Licensed Product Process Flow.

What Are the Expectations of Licensors and Licensees?

Licensors expect that the licensee will be com-mitted to investing in the category it licenses. This means the licensee will work hard to understand the essence of the brand and develop its licensed product in a way that captures that essence. In other words, the licensed products should connect with the consumer both functionally and emotionally. If the licensee does this, the products it develops normally will be approved without delay or dif-ficulty. To achieve this takes time and money. So

while both parties want to commercialize the cat-egory as soon as possible, the licensor will expect the licensee to start with building the brand into the product first. The licensor also will expect the licensee to be familiar with the contract and to meet the obligations of the contract. That is why it is important for the licensee to ensure all employees in the licensee’s organization working on the license are familiar with its contractual obligations. For example, when a product becomes approved, the licensor will expect the licensee to commercialize the licensed product expeditiously in each of the authorized channels. Finally, the licensor will expect the licensee to meet or exceed the projected sales targets for the category as outlined in the contract. When all of these things happen, the result can truly be award winning products that meet or exceed annual sales and royalty projections.

Licensees, in turn, expect that the licenses they have acquired will provide them with sales growth. This sales growth may be in the form of growth within existing channels or the opportunity to enter a new channel or new market. To accomplish this objective, licensees expect that the brands they are licensing are as strong or stronger than they believe or have been told, that the brands will open doors and ultimately help them meet or exceed their business objectives. Moreover, licensees expect that the licensors or their agents will run a simple, straight forward licensing program that will not administratively tax their orga-nization. Finally, they expect that the licensors will approach the licensing relationship with a win-win

Exhibit 2

Retailers such as Searsand Target sell $10million of licensed

product e.g., tee-shirtsand caps in a calendar

year

The tee-shirt and caplicensee sells $5 millionof licensed product to

Sears and Target (basedon 100% markup)

The tee-shirt and caplicensee pays Disney,

the licensor, $500,000 inroyalties ($5 million ×

10% rate)

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attitude that will allow them to move quickly to take advantage of opportunities that present themselves. Because licensing contracts obligate the licensee to sales targets and royalties, the licensee’s goal will be to quickly achieve sales of licensed product to meet these requirements.

Royalty and Payment FlowRoyalty is the monies that are paid to a licensor by

the licensee for the right to use the licensed property. It is calculated by multiplying the Royalty Rate by the Net Sales. Exhibit 2 is an example of how the royalty payments would flow from the retailer to the licensee and ultimately to the licensor. The example assumes a 10 percent royalty rate.

Brand licensing is probably one of the least explored methods to enter a new product category by most brands. However, hopefully this article has explained what brand licensing is and the numerous benefits that it has to offer both to licensors and licensees.

Needless to say, the entire process is lengthy and time consuming. One must keep in mind that the goal is not to achieve the license but to make a suc-cess of it and the activities that follow the signing of the contract. These processes, if executed well, on the one hand, can ensure huge success of the pro-gram. While on the other hand, if either the licensee or the licensor does not live up to its commitments, it can affect sales, and more importantly the reputa-tion of the brand.

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Commingled Intellectual Property—Like Peanut Butter and Jelly?Jennifer A. Kearns, John M. Neclerio, and Vicki G. Norton

Who doesn’t like the favorite childhood sandwich peanut butter and jelly? The two substances blend and meld together, creating a delectable gooey, messy, sticky, and sweet treat.

In the life sciences, commingled intellectual prop-erty also can create “gooey,” messy and sticky prob-lems for companies. Unfortunately, there’s nothing sweet about commingled IP and the complications that can arise from it, and you can be sure that an experience arising from claims of commingled IP will leave a sour taste in your mouth. This article dis-cusses proactive or preventative steps that companies can take to reduce the risk of commingling IP.

Jennifer A. Kearns, a partner at Duane Morris in Philadelphia, PA, practices in the area of

employment law, both in the transactional and counseling arena, and in the litigation context.

Ms. Kearns has over two decades of experience in counseling and advising employers on all aspects of employment law. Ms. Kearns also has substan-tial experience as a product liability litigator and has tried to jury verdict cases involving claims

of wrongful death and injury allegedly caused by exposure to various products.

John M. Neclerio is chair of the Technology Transactions and Licensing Practice Group at

Duane Morris in Philadelphis, PA. He practices in the areas of general business and corporate law, commercial finance, mergers and acquisitions,

distribution and franchising law, patent licensing, software licensing, copyright and trade secret law, computer, e-commerce and technology law, and

privacy and data security.

Vicki G. Norton, PhD practices in the area of intellectual property law with a focus on bio-

technology and chemical patent counseling and litigation. She also advises clients on worldwide

patent strategy, including identifying patent cover-age issues, auditing technology portfolios to assist clients in transactions and venture opportunities

and formulating strategic objectives for prosecution.

Defining Commingled IPIn layperson’s terms, commingled IP arises when

intellectual property belonging to one party becomes incorporated into a proprietary creation belonging to another party, or is used by the second party in developing the second party’s proprietary intellectual property. How might this happen?

An R&D company might in-license the use of cer-tain materials or processes for use in its own Research and Development program. Typically, in a licensing agreement, the licensor will allow the licensee to use the licensor’s proprietary materials or IP in connec-tion with the licensee’s pursuit of a specific research project. However, scientists in research companies and universities commonly confer with one another; collaboration and exchange of ideas is a hallmark of scientific innovation. This sharing of information about materials and processes used by one research group may influence a group of colleagues to use the same materials or processes in an unlicensed project.

A clear hypothetical example of commingled IP involving materials could be a situation in which Company A licenses the rights to use stem cells pro-duced by Company B in developing a biologic drug or vaccine relating to prevention of shingles. Scientists at Company B confer with colleagues and due to absence of appropriate safeguards in the license and/or deficiencies in Company B’s IP management, the colleagues use the licensed stem cell strains on a proj-ect, which leads to development of a biologic drug for a condition other than shingles.

Another hypothetical example would be one in which there is a proprietary process (“know how”) which is licensed by Company B to use in connec-tion with its shingles biologic drug development. In regular scientific roundtables, scientists on the shingles biologic drug team discuss their methodolo-gies, including the steps that constituted the licensed “know how.” The scientists who are not working on the shingles vaccine do not know that the “know how” methodology was licensed from Company A. They go on to use the same methodological steps in their own, unrelated experiments, which result in fruitful, com-mercially viable results.