How to Draft a Merchandising Agreement

Whether you have created a popular logo or image and want others to produce and distribute products using that image, or you are a shop-owner who wants to manufacture and sell products with popular logos in your place of business, you need a merchandising agreement. A merchandising agreement essentially is an intellectual property license, and grants the merchandiser a license to use the trademarked image on products he or she manufactures and sells. Typically intellectual property owners draft a single merchandising agreement and adapt it for several licensees.^{[1]XResearch source}

Part 1

Part 1 of 4:

Formatting Your Agreement

1
Search for forms or templates. Since most merchandising agreements are created once and used multiple times, there are many forms and templates online that you can use to guide you as you draft your agreement.^{[2]XResearch source}
- Make sure you read any sample agreements carefully and use them as guides rather than simply copying them verbatim.
- If a form or template includes a clause that you don't understand, either find out what it means or leave it out of your own agreement.
2
Consider consulting an attorney. If there are special considerations involved in your merchandising agreement, such as if it's exclusive or involves substantial sums of money, you may want to have an attorney help you with it.^{[3]XResearch source}
- You don't need to hire an attorney to represent you in full, including negotiating the contract. You can pay a flat rate for an attorney to draft your contract, or to review a contract you've drafted.
- While you may feel confident drafting the contract yourself, it probably is worth the fee to at least have an attorney review it before you and the other party sign it to make sure it has all the requirements to be legally binding.
3
Create an outline. Since contracts are organized in topical sections, it may be easier for you to draft your agreement by creating an outline of those sections, then filling in the terms that apply.^{[4]XResearch source}^{[5]XResearch source}
- Sections of your document may include Work Licensed, Rights Granted, Territory, Payment, Duration, and Miscellaneous.
- Your section titles typically should be bolded or set out in some way from the rest of the text.
- The easiest way to format your document is to use the outline function available on most word processing application. This function ensures that each section, paragraph, and subparagraph of your agreement is numbered or lettered for easy reference.
4
Write your introduction. The first paragraph of an agreement identifies the parties to that agreement and the date the agreement was entered, as well as the title and basic purpose of the agreement.^{[6]XResearch source}^{[7]XResearch source}
- You also may want to include the business structure of each party and its principal place of business. For example, you might identify the merchandiser as "Massive Merchandising, Inc., located at 1234 Factory Blvd., Anytown, Anystate."
- At the same time you identify each party, you also will provide a name by which that party will be known throughout the agreement. Doing this allows you to use the same agreement for multiple merchandising situations – you just have to enter the names of the parties once.
- For example, you may refer to the intellectual property owner as "Artist" and the merchandise company as "Merchandiser" or "Manufacturer." You also can use more generic terms such as licensee and licensor, but people often prefer more descriptive labels for the parties.
5
Include relevant recitals. Below the introduction, contracts typically include standard legal language that recites the basic requirements for a legally binding contract.
- Recitals typically can be copied wholesale from any pre-existing merchandising agreement that you're using as a template or guide to create your own.
- These paragraphs typically include a statement that the contract is based on a mutual exchange of consideration, that the receipt and exchange of that consideration is acknowledged by the parties, and that both parties have the power and authority to enter into the agreement.
Advertisement

Part 2

Part 2 of 4:

Defining the Scope of the License

1
Identify the intellectual property covered by the agreement. Your contract should specifically list the trademarks or other intellectual property that you are licensing. If there is a trademark registration number, you can identify the property that way.^{[8]XResearch source}^{[9]XResearch source}
- As with the parties, you will identify the work throughout the document using a single word – most typically "Work," but you can use a different word if it more accurately describes the intellectual property being licensed.
- Typically you're not going to go into tremendous detail about the intellectual property being licensed in the contract itself. Rather, you should attach the trademark registration or an image of the artwork being licensed.
2
Describe the licensed product. This section outlines what the merchandiser may do with the intellectual property he or she has licensed, as well as any limitations on the merchandiser's rights..^{[10]XResearch source}^{[11]XResearch source}
- For example, if you've created a logo and the agreement allows the merchandiser to create T-shirts, sweatshirts, and tote bags with the logo on them, these items should be listed.
- If the types of products the merchandiser can create using the logo is open-ended, you may want to include a phrase such as "and other such items of clothing" or "and other products."
- On the other hand, if the products the merchandiser can produce is limited, you may want to add the word "only" before your list, and include a limiting phrase such as "and no other items or products."
- Be careful with your descriptions of included items, and make sure you're not inadvertently excluded a product that should be included in the agreement. For example, if you write "cotton T-shirts," this could be interpreted to mean the merchandiser can't manufacture T-shirts using a polyester blend fabric.
3
Set the geographic boundaries. The merchandiser may only be permitted to distribute items made under the agreement in certain areas, or through certain channels. If this is the case, it should be carefully delineated as part of the scope of the license.^{[12]XResearch source}
- If there are no geographic boundaries or limitations, include a statement in your agreement to that effect, rather than just leaving it up in the air.
- Geographic boundaries are especially common in exclusive agreements, where one merchandiser has the exclusive right to manufacture and sell products in a specific geographic area. Merchandisers typically will pay more money for a larger geographic area of exclusivity.
- In non-exclusive agreements, royalty rates may be determined by the geographic range of distribution as well. For example, a merchandiser may pay more to be able to distribute the licensed product nationally as opposed to simply selling them in one physical store.
4
State the rights granted by the contract. This section of your agreement defines exactly what the merchandiser can do under the agreement and may also include whether the rights granted are exclusive or non-exclusive, and to what degree.^{[13]XResearch source}^{[14]XResearch source}
- An exclusive license means the merchandiser is the only one permitted to use the intellectual property in the ways covered by the license.
- Most merchandising agreements are non-exclusive, meaning the intellectual property owner can enter into similar licenses with other merchandisers who want to manufacture and sell similar products.
- The rights granted depend on how the intellectual property will be used. Typically, you will include a right to reproduce (which allows the merchandiser to prepare the intellectual property for printing and copy it on multiple products) and a right to distribute those copies embodied on the manufactured products.
- Depending on the uses anticipated by the contract, you also may want to grant the right to adapt or alter the design or intellectual property to work on particular products, or the right to publicly display the product.
5
Specify how long the agreement will last. Your agreement should only last for a reasonable period of time, which may be measured by years or by items sold. You also may provide details on renewal of the agreement.^{[15]XResearch source}
- In this section, you also can provide details on how the agreement can be terminated. For example, you might want to allow either party to terminate the agreement at any time provided two weeks' written notice is delivered to the other party.
- You also may require the agreement to be terminated or re-negotiated after a certain period of time has elapsed, or a certain number of products have been sold.
- These factors may have been included in your negotiations with the other party. If you're an intellectual property owner drafting a merchandising agreement to be used for may potential merchandisers, you can create the provision you want and that maximizes your interests.
- Keep in mind that businesses and interests can change over time, and don't make the agreement last too long. For example, you may have intellectual property that carries a certain value now, but that value may increase substantially in five years. You don't want to be locked into a longer contract in which the merchandiser is paying you a lower royalty rate than your property is worth.
Advertisement

Part 3

Part 3 of 4:

Calculating Compensation

1
State the agreed-upon rate of compensation. A merchandising agreement provides compensation to the intellectual property owner for using his or her creations, typically measured as a percentage of sales receipts.^{[16]XResearch source}^{[17]XResearch source}
- Typically payments to intellectual property owners are structured as a percentage of the profits on the sale of licensed merchandise.
- In some circumstances, you may want to set the royalty amount at a specific dollar amount rather than a percentage. This allows merchandisers the flexibility to change prices in response to demand without altering the amount the intellectual property owner will make.
- Some agreements also provide for a guaranteed minimum royalty payment per year. This protects the intellectual property owner in the event merchandise isn't selling very well.
2
Address recoupment if necessary. If the merchandiser has provided any sort of advance in payment to the intellectual property owner, he or she is entitled to recover that amount from royalties before the intellectual property owner begins to receive royalty payments.^{[18]XResearch source}
- An advance is an up-front payment made by the merchandiser to the intellectual property owner, typically when the merchandising agreement is signed.
- For example, if the merchandiser has provided the intellectual property owner with a $1,000 advance against royalties, the intellectual property owner is not entitled to receive royalties until after he or she would have earned $1,000 from sales of the licensed product.
- In cases where an advance is being recouped, your contract should make provisions for statements each pay period that indicate how much of the advance has been recouped and how much remains before the intellectual property owner will begin receiving checks.
3
Create a schedule of payments. You may want to structure your agreement so payments are made on specific dates, or you may want to have payments made each quarter. The schedule typically will provide deadlines by which a payment or statement must be received.
- Your agreement may specify payments made monthly or quarterly, but in addition to this you should establish deadlines for payments to be made.
- This also gives you the opportunity to describe how payments will be delivered and the methods of payment accepted.
- For example, you might write "Merchandiser will remit payments in a check drawn on a U.S. bank once per month. Payment will be sent using certified mail and must be received within 5 business days of the last day of each month."
4
Provide for regular audits. Particularly if payment is being made based on a percentage, you want your agreement to provide a mechanism through which the intellectual property owner can audit the merchandiser's books to ensure he or she is getting paid the correct amounts.^{[19]XResearch source}
- The provision should allow the intellectual property owner to hire an independent professional, such as a CPA, to conduct the audit.
- Often these clauses permit the intellectual property owner to conduct an audit at any time for any reason at least once a year.
- The clause also may provide for additional audits each year provided the intellectual property owner supplies advance written notice to the merchandiser.
Advertisement

Part 4

Part 4 of 4:

Including Standard Provisions

1
Cover the choice of law and forum. Rather than having to determine jurisdictional issues if one party wants to sue the other for breach of contract, you can specify in the contract where lawsuits must be brought.
- Choice of law and forum can be fairly complex issues in the event of a breach of contract lawsuit – particularly if the parties to the contract reside in different states.
- However, you can eliminate this complexity by making the choice within the contract. These clauses typically are upheld by courts.
- In many cases, the contract drafter will want to choose the state's law that treats them the most favorably in the event the other party breaches. However, since intellectual property licenses and rights are determined primarily by federal law, this isn't as big of an issue with a merchandising agreement.
- Since you are drafting the agreement, you probably want to choose the law of your state, and a forum that is convenient to you, such as your state's courts or a federal district court near where you reside.
- If you want disputes decided through arbitration or mediation, rather than through the courts, this is the section of your contract that will define how disputes are to be resolved.
2
Specify remedies for breach of contract. Since lost revenue can be hard to quantify, some parties prefer to list a specific amount the breaching party owes the other as liquidated damages in case the contract is breached.
- Liquidated damages allow the party who sues for breach of contract to recover a predetermined amount of money, regardless of how long the contract has been in effect or how many licensed products have been sold.
- Allowing for liquidated damages also takes quite a bit of the guesswork out of the amount a party might recover in a lawsuit in the event of a breach.
- However, it's important to keep in mind that the contract actually may end up being worth a lot more than you anticipated at the start, meaning the non-breaching party stands to recover a lot less under a liquidated damages clause than he or she would recover otherwise.
- Along with remedies for breach of contract, you also want to specify when a failure to perform under the contract is excused. These clauses often are called "force majeure" clauses, and excuse the parties from performing when some major event happens that is beyond either party's control, such as an earthquake or tornado.
3
Address assignment of the contract by either party. A contract can last for several years, so it must anticipate changes in business structure and address what will happen to the contract if the people who signed the contract no longer have the power or control to perform their contractual duties.
- It is typical for merchandising agreements to permit assignment by "successors in interest." In other words, if the merchandiser is bought out by another company, that company would inherit the license under the same terms and it wouldn't have to be renegotiated.
- However, the merchandiser typically is prohibited from transferring, selling, or assigning the rights under the agreement to another company.
- So, for example, if a company called Merch-R-Us entered into a merchandising agreement with Polly Painter, it couldn't sell its rights under that agreement to a different company called Main Street Merch.
4
List representations and warranties. Every contract includes these standard provisions, also called "boilerplate," which state that each party has the power and authority to promise and perform the agreed-upon duties and responsibilities of the contract.
- For example, the intellectual property owner typically warrants to the merchandiser that he or she actually owns the property described in the contract and is free to license the rights covered in the contract.
- Both parties also represent that they have full power and authority to enter into the agreement.
- This section also typically includes a clause indemnifying the other party against any losses incurred as a result of performance under the contract. This means that if the merchandiser manufactures more licensed products than it is able to sell, it can't come after the intellectual property owner for damages.
Advertisement