Before You Sign A Merchandising Agreement: Key Commercial Terms To Review

Merchandising agreements can be a game-changer for US startups and small businesses looking to expand their brand reach and generate new revenue. However, rushing into these deals without a clear understanding of the contract terms can lead to expensive mistakes. Many founders and operators are eager to see their brand on new products or in new markets, but overlook critical details like payment structure, intellectual property (IP) ownership, or state-specific legal requirements. These oversights can result in lost revenue, legal disputes, or damage to your brand. This guide covers the essential commercial terms to review in any merchandising agreement, highlights common pitfalls, and provides practical checklists and examples to help you protect your business interests before you sign.

What Is a Merchandising Agreement?

A merchandising agreement is a contract where a brand owner (the licensor) allows another party (the licensee) to use certain brand elements, such as logos, trademarks, characters, or designs, on products or in marketing. In return, the licensee pays royalties or fees to the brand owner. These agreements are common in entertainment, sports, fashion, and consumer goods, but can apply to any business with valuable brand assets.

For example, a startup with a popular podcast logo might license that logo to a T-shirt company, or a children's book author might license characters to a toy manufacturer. A sports team might license its name and logo to a beverage company for use on limited edition cans. In each case, the merchandising agreement sets out the rules, rights, and obligations for both parties.

There is no single federal law that governs merchandising agreements. Instead, these contracts are shaped by a mix of federal intellectual property law (mainly trademark and copyright), state contract law, and the specific terms negotiated by the parties. State contract law can vary significantly, affecting enforceability, remedies, and interpretation. For example, some states have special laws for contracts involving celebrities or right of publicity, while others have unique rules about indemnity or non-compete clauses. Always check which state's law will apply to your agreement and consider consulting an attorney familiar with merchandising deals in your state or industry.

Key Commercial Terms to Review

Before signing a merchandising agreement, it is essential to review and negotiate several key commercial terms. Here is a checklist of what to look for, with practical examples and common mistakes to avoid:

• Scope of Rights: What exactly is being licensed? Is it a logo, character, slogan, or other brand element? Are there restrictions on how it can be used (for example, only on apparel, not on toys)? Clearly define the IP covered to avoid disputes. Mistake: Using vague language like "brand assets" without listing specific trademarks or designs.
• Territory: Where can the licensee sell the merchandise? Is it limited to the US, North America, or worldwide? Example: A licensee sells products in Canada, but the agreement only covers the US, this could be a breach. Checklist: List all countries or regions included.
• Term: How long does the agreement last? Are there options to renew? Example: A two-year term with an automatic renewal unless either party gives 60 days' notice. Mistake: Failing to specify an end date or renewal process, leading to confusion.
• Exclusivity: Is the license exclusive, non-exclusive, or sole? Example: An exclusive license means only one licensee can use the IP in the territory. Mistake: Accidentally granting exclusivity when you want to work with multiple partners.
• Approval Rights: Does the brand owner have the right to approve product designs, marketing materials, or quality standards before merchandise goes to market? Checklist: Include a clear process and timelines for approvals.
• Payment Terms: How are royalties or fees calculated and paid? Are there minimum guarantees, advances, or audit rights? Example: 8% royalty on net sales, with a $10,000 minimum guarantee per year. Mistake: Not defining "net sales" or allowing excessive deductions.
• Intellectual Property Ownership: Who owns new designs, artwork, or improvements created under the agreement? Example: The licensee creates new packaging, does the licensor own it? Checklist: Specify ownership and rights to use new works.
• Termination and Exit: Under what circumstances can either party end the agreement early? What happens to unsold merchandise or inventory? Mistake: No exit clause, making it hard to end a bad deal.

Each of these terms can have a major impact on your business. For instance, if you grant a worldwide, exclusive license, you may be unable to work with other partners or expand into new markets during the agreement's term. Or, if payment terms are unclear, you might not receive the royalties you expect. Always review these terms carefully and ask questions if anything is unclear.

Checklist: Key Terms to Confirm Before Signing

• All IP being licensed is clearly listed and described
• Territory and channels of sale are defined (e.g., online, retail, wholesale)
• Term, renewal, and termination rights are specified
• Exclusivity status is clear
• Approval rights and quality standards are included
• Payment structure, reporting, and audit rights are detailed
• Ownership of new creations is addressed
• Exit and post-termination obligations are clear

Intellectual Property: Protecting Your Brand

Intellectual property is the foundation of most merchandising agreements. The contract should specify exactly which IP is being licensed and how it can be used. Here are the main points to consider:

• Trademark Rights: If you are licensing a trademark or logo, confirm that it is registered with the US Patent and Trademark Office (USPTO) or at least pending. The agreement should list the exact trademarks covered and any limitations on use (e.g., color, size, placement).
• Copyrighted Material: For characters, artwork, or creative works, clarify whether copyright applies and who owns any new works created during the partnership. Example: If the licensee creates new illustrations for packaging, does the licensor own them, or can the licensee reuse them elsewhere?
• Quality Control: US trademark law requires licensors to maintain quality control over how their marks are used. Failure to do so can result in loss of trademark rights. Your agreement should include provisions allowing you to approve or reject products, packaging, and marketing materials. Mistake: Not reserving approval rights, leading to poor-quality products that harm your brand.
• IP Ownership of New Creations: Decide in advance who owns new designs, packaging, or promotional materials developed under the agreement. Checklist: Include a "work made for hire" clause or specify assignment of rights if you want to own new creations.
• Infringement and Enforcement: Address what happens if a third party infringes the IP. Who is responsible for enforcement? Who pays for legal action?

Common mistakes include failing to specify which trademarks or copyrights are covered, not including strong quality control language, or leaving ownership of new works ambiguous. For example, a brand owner who does not reserve approval rights might see their logo used on low-quality products, damaging their reputation and potentially losing trademark protection.

It is also important to address what happens if the agreement ends. Does the licensee have to stop selling products immediately? Can they sell off remaining inventory? Spell out these details to avoid disputes.

Example: IP Clause in a Merchandising Agreement

Suppose a children's book author licenses a character to a toy company. The agreement might say:

• The licensor grants the licensee a non-exclusive, US-only license to use the character's name and likeness on plush toys.
• The licensee must submit all product designs for approval before production.
• Any new artwork created by the licensee for packaging is a "work made for hire" and owned by the licensor.
• If a third party infringes the character, the licensor will handle enforcement, but the licensee must cooperate.

This level of detail helps prevent misunderstandings and protects both parties' interests.

Payment Structures and Financial Terms

Financial terms are often the most negotiated part of a merchandising agreement. Understanding how you will get paid, and what you might owe, is critical. Here are the main financial terms to review, with examples and tips:

• Royalty Rates: Most merchandising deals involve royalties, usually a percentage of net sales. The agreement should define how net sales are calculated, what deductions are allowed (such as returns, discounts, or shipping), and when payments are due. Example: 10% royalty on net sales, paid quarterly.
• Minimum Guarantees: Some agreements require the licensee to pay a minimum amount, regardless of actual sales. This provides a safety net for the licensor but can be risky for the licensee if sales are low. Example: $20,000 minimum guarantee per year, with quarterly payments.
• Advances: An advance is an upfront payment credited against future royalties. The agreement should explain whether advances are refundable and how they are recouped. Mistake: Not clarifying whether the advance is non-refundable if sales do not meet expectations.
• Audit Rights: The licensor should have the right to audit the licensee's sales records to confirm royalty payments are accurate. The agreement should specify how often audits can occur, how much notice is required, and who pays for them. Checklist: Include a right to audit at least once per year.
• Reporting Requirements: The licensee should be required to provide regular sales reports, detailing units sold, returns, and royalty calculations. Example: Monthly or quarterly sales reports, with supporting documentation.

Common mistakes include allowing excessive deductions from net sales, failing to specify payment deadlines, or not including audit rights. For example, if a licensee can deduct marketing costs without limits, royalties may be much lower than expected. Or, if there are no audit rights, the licensor may have no way to verify sales figures.

Payment structures can also vary by industry. In the toy industry, minimum guarantees and advances are common. In apparel, royalty rates may be lower but with higher sales volumes. Benchmark your deal against similar agreements in your sector to ensure your terms are fair.

Checklist: Financial Terms to Review

• Royalty rate and calculation method are clear
• All allowed deductions from net sales are listed
• Minimum guarantees and advances are specified
• Payment schedule and deadlines are set
• Audit rights and reporting requirements are included

Liability, Indemnity, and Insurance

Merchandising agreements often include clauses about liability, indemnity, and insurance to manage risk. These terms are especially important if merchandise is sold nationwide or internationally. Here is what to look for:

• Product Liability: Who is responsible if a product is defective or causes harm? Typically, the licensee (manufacturer or distributor) is responsible for product safety, but the brand owner may still be named in lawsuits. Example: A toy causes injury, and both the toy company and the brand owner are sued.
• Indemnity: Indemnity clauses require one party to cover the other's losses if certain events occur, such as IP infringement or product liability claims. Review who is indemnifying whom, and for what types of claims. Mistake: Agreeing to broad indemnity without limits.
• Insurance Requirements: The agreement may require the licensee to carry certain types of insurance, such as general liability or product liability insurance, and to name the brand owner as an additional insured. Checklist: Request a certificate of insurance as proof.
• Limitation of Liability: Many agreements limit each party's liability for damages, except in cases of willful misconduct or gross negligence. Check whether these limits are reasonable and comply with state law. Example: Limiting liability to the amount paid under the agreement, except for IP infringement.

State laws can affect how indemnity and limitation of liability clauses are interpreted. For example, some states do not allow parties to waive liability for certain types of claims, or may require specific language for indemnity provisions to be enforceable. California, for instance, has strict rules about indemnity in contracts involving construction or design professionals, and other states may have unique requirements for consumer product liability. Always check the governing law clause and consider state-specific requirements.

Common mistakes include agreeing to overly broad indemnity, failing to require insurance, or not understanding how state law affects liability clauses. For example, if your agreement is governed by New York law, certain indemnity clauses may be interpreted more narrowly than in other states.

Checklist: Risk Management Terms

• Product liability responsibility is clearly assigned
• Indemnity clauses specify scope and limits
• Insurance requirements are detailed and certificates are provided
• Limitation of liability is reasonable and state law is considered

State Law and Industry-Specific Issues

While federal IP law provides a baseline, merchandising agreements are primarily governed by state contract law. This means that key terms, such as termination rights, indemnity, and enforceability, can vary depending on which state's law applies. The agreement should include a governing law clause specifying which state's law will control. Here are some state and industry-specific issues to watch for:

• California: California law has specific requirements for contracts involving the licensing of a celebrity's name, image, or likeness. These contracts may be subject to the California Talent Agencies Act or the state's right of publicity laws. California courts also scrutinize non-compete and indemnity clauses more strictly than some other states.
• New York: New York's right of publicity law affects merchandising deals involving living or deceased individuals. If your agreement covers a celebrity or personality, special rules may apply.
• Consumer Products: If the merchandise is aimed at children, additional federal and state safety regulations may apply, such as the Consumer Product Safety Improvement Act (CPSIA). Some states have stricter labeling or safety rules for children's products.
• Industry Standards: In the toy industry, third-party safety testing and compliance with ASTM standards are common. In apparel, labeling and care instructions must comply with Federal Trade Commission (FTC) rules and state requirements. Food and beverage products may require FDA compliance and state health department approvals.

Common mistakes include using a template agreement from another state or industry without adapting it for your specific situation, or failing to check for special state or industry rules. For example, a merchandising agreement for a celebrity in California may need extra disclosures and compliance steps not required elsewhere. Always check whether your deal involves any special state or industry rules, and consider seeking a review from an attorney familiar with merchandising agreements in your sector.

Checklist: State and Industry Issues

• Governing law clause specifies the correct state
• State-specific rules for publicity, indemnity, or non-compete are addressed
• Industry standards and regulatory requirements are included
• Special rules for children's, food, or celebrity merchandise are checked

FAQs

What is the difference between a merchandising agreement and a licensing agreement?

While the terms are sometimes used interchangeably, a merchandising agreement typically refers to licensing brand elements (like logos or characters) for use on consumer products. A broader licensing agreement can cover many types of IP and uses, not just merchandise. Merchandising agreements often include detailed terms about product quality, approvals, and royalties specific to physical goods.

Can I use a template merchandising agreement?

Templates can be a helpful starting point, but they rarely address the unique needs of your brand, products, or state law requirements. Relying solely on a template can lead to missed issues, such as unclear IP rights, insufficient quality control, or unenforceable clauses. It is usually best to customize the agreement or seek a legal review before signing.

What happens if the licensee sells products outside the agreed territory?

If the licensee sells merchandise outside the permitted territory, it may be a breach of contract. The agreement should specify remedies, such as the right to terminate the contract, seek damages, or require the licensee to recall unauthorized products. Clear reporting and audit rights can help detect and address territorial breaches early.

Do I need to register my trademark before signing a merchandising agreement?

While you are not legally required to register your trademark before entering a merchandising agreement, registration with the USPTO provides stronger protection and makes it easier to enforce your rights. Many licensors require registration as a condition of the agreement.

Can I terminate a merchandising agreement early?

Most agreements include provisions for early termination, such as for breach of contract, failure to meet sales targets, or insolvency. The agreement should spell out the grounds for termination, notice requirements, and what happens to unsold inventory. State law may affect your rights and remedies, so review the termination clause carefully.

Key Takeaways

• Merchandising agreements are complex contracts that involve licensing brand elements for use on products. Key terms include scope, territory, exclusivity, payment, and IP ownership.
• Carefully review financial terms, approval rights, indemnity, and insurance requirements to protect your business interests.
• Federal IP law sets a baseline, but state contract law and industry-specific rules can significantly affect your agreement.
• Common mistakes include using generic templates, overlooking state law, or failing to specify quality control and IP rights.
• Consider seeking a legal review before signing, especially for deals involving multiple states, celebrities, or high-value merchandise.

If you are considering a merchandising agreement or want a legal review of your contract, contact our team at (888) 449-8437 or team@sprintlaw.com. Where legal services are required, they are delivered by licensed lawyers at trusted US law firms through the Sprintlaw platform. We can help you understand your options and avoid common pitfalls before you sign.