Feature By Marc A Lieberstein and Na Du

Brand licensing in the US – advice for Chinese

If they are not already, Chinese owners are 2009 from consumers in the United States. In 2010, Haier’s revenue poised to expand westward into the lucrative US reached $21 billion, with 26% coming from the overseas market, which accounted for $5.5 billion. market. They will boost their chances of success Taking their cues from these successful US brand expansions, by taking care to define and differentiate their Chinese apparel and footwear brands are now seeking to break into own products and finding strong US licensees to the US market, attracting and earning product endorsements from partner with well-known US athletes. Notably, National Basketball Association (NBA) star Steve Nash recently ended his contract with Nike in order to sponsor Chinese China’s economy has experienced unprecedented growth over athletic brand Luyou, a move that groups him with other NBA the past 30 years, putting it in an excellent position to capitalise superstars who already endorse other Chinese brands, including on global branding opportunities for its own home-grown brands. Kevin Garnett, who partners with sportswear manufacturer ANTA; Indeed, some Chinese brand owners are already making moves to Ron Artest, who partners with BALL’N; Jason Kidd, who partners expand worldwide – and in particular, to the United States. with Peak; and Shaquille O’Neal, who partners with Li-Ning. This article focuses on the various considerations for Chinese So far, these athletes have been promoting the Chinese brands in brand owners seeking to expand their brands in this way. It explores China. However, should the brand owners seek to sell their products the benefits of such expansion, addressing specific needs for in the United States, endorsement from these athletes could lead to Chinese brand owners and their potential US licensing partners, and tremendous there. discusses important licensing provisions that Chinese brand owners Chinese brands such as Luyou and Li-Ning are already should consider in connection with any licensing arrangement in the themselves for expansion into the United States. In fact, United States. 22-year-old Beijing-based company Li-Ning, which trailed Nike in the apparel category in 2010 in China, has already dipped a toe into The lure of the US market the US market with the recent launch of an e-commerce site for US A study carried out by the International Licensing Industry consumers. Li-Ning is trying to establish itself as an Eastern-inspired Merchandisers’ Association found that in 2010, brand owners in the brand and carve out a unique niche in the US market, promoting United States generated in excess of $5 billion in royalty revenues and emphasising the spiritual side of sports, and focusing on from licensing. This translates into $84 billion in sales. Indeed, balance of mind and body over brute strength and power. licensing royalty revenues in the United States have exceeded $5 Differentiation is an important element of success in the US billion every year since 2000, with the five largest licensing sectors marketplace, which presents a myriad of channels being entertainment, corporate trademarks, sports, fashion and through which to achieve this. collegiate. These sectors accounted for 94% of all licensing revenues in 2010. US distribution channels allow for brand expansion Clearly, the United States represents a golden opportunity The wide range of distribution channels in the US marketplace for Chinese brand owners that have already begun to establish permits brand owners to succeed in many ways. With multiple sufficient global goodwill in their own home-grown brands. outlets available in the luxury, retail, mass market, discount and club markets, a Chinese brand owner has several paths to Chinese brands on the road to success choose from when it comes to and selling its products. Chinese brand owners have already proved that they can operate For example, a mass retailer can be categorised as a general successfully in the US market. For example, Lenovo, a maker and merchandiser (eg, a department store or drugstore) or a specialty supplier of personal technology such as laptop computers and merchandiser (eg, a clothing or toy store). servers, earned nearly $2.5 billion in revenue in 2010 by expanding Within these categories, outlets can be divided into economic its dominant position in China westward to the United States. sub-categories ranging from luxury or upper-price range retailers Likewise, Haier – ranked first worldwide in the large appliance (eg, Saks Fifth Avenue, Bergdorf Goodman or Nordstroms) to mid- industry – generated a large chunk of its $1.7 billion revenue in price range retailers (eg, Macy’s) to lower-price range or discount

84 World Trademark Review June/July 2013 www.WorldTrademarkReview.com retailers (eg, JC Penney, Wal-Mart and Costco). declares the infringement of the following statutory rights to These different market segments provide Chinese brand owners be unlawful import practices: “a U.S. patent or a U.S. copyright with a variety of distribution channels that are directed at different registered under Title 17, [and] a registered trademark… In cases consumers, each with particular demographic profiles. involving infringement of these intellectual property rights, This highly specialised system can enable Chinese brand owners there is no injury requirement”); to increase the likelihood of brand success in the United States • FTC regulations dealing with unfair competition (see 16 CFR by pinpointing and targeting the most appropriate consumer Part 500); base. Alternatively, brand owners can use this varied and diverse • federal criminal counterfeiting statutes providing penalties for marketplace to develop additional brands, or sub-brands from its trafficking in counterfeit goods or services (see 18 USC §2320. original brands, thus enabling them to succeed at multiple levels in Anyone who intentionally traffics or attempts to traffic in goods the market. or services and knowingly uses a counterfeit mark on or in connection with such goods or services shall, if an individual, Licensing objectives for Chinese brand owners be fined up to $2 million or imprisoned for up to 10 years or Find a suitable US partner both, and if a person other than an individual, be fined up to $5 Chinese brand owners looking to succeed in the US market should million. In the case of repeat offences, the person convicted, if an find a suitable licensing partner with a good reputation, which can be individual, shall be fined up to $5 million or imprisoned for up to trusted in daily business transactions and which fully understands 20 years or both, and if other than an individual, shall be fined up how to the Chinese brand and how to find the best fit for it to $15 million); within the vast US market. • state law barring unfair competition law (eg, the Uniform Below is a list of attributes that a Chinese brand owner should Deceptive Trade Practices Act was adopted by Colorado, look for in a US licensee: Delaware, Georgia and several other states); and • several years’ experience in the relevant US market for • state civil and criminal penalties for counterfeiting (see New the products of both the Chinese brand owner and its US York Penal Law §165.74 (2010) – “Any goods manufactured, sold, competitors; offered for sale, distributed or produced in violation of this • an understanding of the Chinese brand, its products and its article may be seized by any police officer… Upon conviction history; of the defendant, the articles in respect whereof the defendant • in-depth knowledge of the Chinese brand’s US competition and stands convicted shall be destroyed”). how the Chinese brand is superior to or different from this; • in-depth knowledge of the relevant US distribution and To take advantage of these laws, Chinese brand owners should marketing channels, including familiarity with how to enter seek to register their trademarks at the US Patent and Trademark those channels and any barriers to entry; Office (USPTO). While this is not a legal requirement, it allows rights • an excellent reputation in the relevant product area, to facilitate holders to gain certain advantages, including a constructive first-use introductions to buyers and retailers; and date for the mark in the United States. • an understanding of both Chinese and US culture. This is important because in the United States – unlike in China and many other countries – the first use of a mark in commerce is Finding a suitable US licensee that satisfies these criteria should what grants the owner rights in it. help Chinese brand owners to avoid most of the hurdles associated Once use is made, the owner can obtain a registration; but with expanding into a new market. until then, the mere filing of an application will prevent later filed applications for confusingly similar marks from proceeding, and Using the US legal system to protect Chinese brands also put third parties on notice that a US application for this mark Unlike in other countries, where trademark infringement and has been filed. counterfeiting are damaging brand owners, Chinese brand owners Before entering the US market, a Chinese brand owner should: have much less to worry about in the United States. This is not to say • clear its Chinese trademarks for use and registration in the that infringement and counterfeiting do not occur there – they do – United States; but the US law, as well as enforcement arms such as the courts, the • file applications for trademark registration with the USPTO; police, the US Marshals Service, the Federal Bureau of Investigation, • respond to and answer any objections to registration of the the Bureau of Alcohol, Tobacco, Firearms and Explosives, US Customs trademarks that may arise; and Border Protection, the International Trade Commission and the • maintain its portfolio of registered trademarks in a cost-effective Federal Trade Commission (FTC), all work together to protect brands and efficient manner; from illegal activity. • utilise US law to enforce the trademark and prevent infringing The United States has several laws that can be used to protect activity; and Chinese brands. The Lanham Act, which governs trademark law in • assist with further licensing opportunities. the United States, permits injunctions, damages and sometimes attorneys’ fees to be levelled against infringers and counterfeiters A strong trademark portfolio protected by US trademark law will (see 15 USC §1051¬1141 (2005)). Other US laws that serve to protect make licensees eager to partner with Chinese brand owners and to brands include (but are not limited to): participate in the expansion of the brand. Owning such registrations • the Copyright Act (17 USC §101-810 (2010), which provides that a should also give Chinese brand owners leverage when negotiating copyright owner is entitled to actual damages and any additional licence agreements for the US market. profits earned by a copyright infringer or statutory damages for copyright infringement; Implement best practices for licensing in the United States • the Tariff Act of 1930, which bars the entry of infringing products Several key terms are particularly important in any agreement into the United States (see 19 USC §1337. Section 337 specifically between a Chinese licensor and a US licensee. www.WorldTrademarkReview.com June/July 2013 World Trademark Review 85 Feature: Advice for Chinese brands

Table: Considerations and resolutions

Key term Licensor Licensee

Initial investment/ royalties • Upfront investment • Delayed financial commitment • Royalty structure; minimum guarantees • Royalty structure; low minimum guarantees

There is a sizeable cost inherent in forging a new licensing relationship. This is reflected in the negotiated royalty payments, where an upfront investment corresponds to a high royalty percentage and a delayed financial investment corresponds to a lower royalty percentage. Although licensors prefer upfront investments or high royalty percentages, owners of relatively unknown brands may find that US licensees are unwilling to make such an upfront commitment due to risk that an unknown Chinese brand will not sell well in the US market. In such a situation, Chinese brand owners can suggest a sliding scale royalty pay-out that ensures royalty percentages will increase once threshold sales revenues are reached, (ie, the brand has demonstrated commercial success). For example, if sales exceed the threshold for any given quarter, then the royalty percentage is raised for the subsequent quarter. Clearly, Chinese brand owners with pre-existing recognition in the US market could demand higher royalties and upfront investments by US licensees.

Exclusivity • Define the trademark narrowly • Define the trademark broadly • Non-exclusive rights • Exclusive rights • Define the products/services

In the United States, non-exclusive licensees may not bring an action for trademark infringement against third parties. However, an exclusive licensee may bring a claim under Section 43 of the Lanham Act based on the right to preclude unfair competition and, in some courts, even under Section 32 based on a right to preclude infringing a trademark registration. Granting an exclusive licence to a licensee in the United States can be a valuable asset, as it allows the licensee to police the mark and bring actions against potential infringers when the brand owner is in China and the infringing party is in the United States. A Chinese brand owner could always join in any such enforcement actions, but it would not necessarily have to if it obligated the licensee to take such steps on its behalf.

Advertising and marketing costs • Expansion of the brand at the cost • Expansion of the brand at the cost of of the licensee the brand owner

Similar to the different royalty expectations mentioned above, one way to negotiate which party will incur the cost of and marketing the licensed products is to set up a sliding-scale provision. In other words, the advertising/marketing requirements for the licensee escalate if sales hit a certain threshold. In most US licence agreements, these costs are shared between the brand owner and the licensee, so Chinese brand owners should expect to invest in the brand’s promotion in the United States.

Internet/social media distribution • Narrow • Broad • Internet/social media usage • Geographic options

Internet/social media distribution and/or promotion should be treated in the same way as any other existing distribution or promotional channel. However, there are additional considerations to take into account. For example, a licence should address whether a licensee can sell or promote the licensed products via the Internet or social media, and whether it can sell to customers outside the defined territory (although there may not be trademarks registered in places outside the territory). In addition, the type of sales outlets on the Internet or via social media should be defined narrowly now that secondary trade websites such as eBay have become so significant. Limiting online sales or social media promotion to certain websites or outlets can also make enforcement against grey goods and parallel imports easier. Questions such as “Who will own the online identity?” and “Has the licensor filed trademark applications for online use of the licensed trademark?” are also important to consider when determining the scope of internet distribution. Mobile phone sales are also another distribution channel consideration in any US licensing arrangements.

Approved customers • Everything must be submitted for approval • Reduced interference • Silence is not approval

As mentioned earlier, the existence of numerous market segments in the United States allows a brand owner to develop and sell different products or derivative brands in different market segments. For example, a clothing brand can develop a product line with high manufacturing costs to target the luxury market segment at higher prices, but also simultaneously develop a derivative brand to sell at lower prices to discount or off-price market segments. By requiring a US licensee to obtain consent before selling to a particular market segment or customer, a Chinese brand owner can control the distribution of its branded goods within the United States and maintain several sub-brands under one name.

86 World Trademark Review June/July 2013 www.WorldTrademarkReview.com Key term Licensor Licensee

Quality assurance, controls • Strict quality control • Self regulation and monitoring • Supervision • Less supervision • Narrow testing guidelines • More leeway in testing, manufacturing, • Broad audit rights packaging advertising • Third-party manufacturing control • Reduced time for approval process

It is not common knowledge that quality control provisions in a licence agreement are legally required in the United States. Such provisions require licensors to monitor actively the quality of the goods that are manufactured and sold under the brand. The lack of such controls may lead to forfeiture of the US trademark altogether, and could also violate the laws of certain individual states that regulate the products sold within their states, such as California.

Termination rights • Licensors can terminate at will • Licensees have the right to terminate • Right to damages for breach, including • Choice of law, jurisdictions and venue for guaranteed revenue dispute resolution • Choice of law, jurisdictions and venue for • Right to litigate dispute resolution • Arbitration/mediation clauses

Rights of first refusal and first negotiation provisions give the parties an opportunity to negotiate and discuss the future of their relationship. The right of first negotiation requires a licensor to negotiate with the existing licensee before seeking third-party licensees, while the right of first refusal requires the licensor to allow an existing licensee to match the terms of a newly negotiated licence with a third-party licensee. For a Chinese licensor seeking to expand a brand in an unfamiliar market, contemplating these terms ahead of time will ensure a smooth transition to the end of a term.

The chart accompanying this article illustrates the priorities for Conclusion each side and outlines the considerations and resolutions to any Chinese brand owners can become more international and generate apparent tension from each side’s perspective. greater revenues from licensing their branded products in the United States. As the ancient Chinese proverb states, “A journey of a Converting the Chinese brand into a US mark for the US audience thousand miles starts with a single step.” Chinese brand owners can Each regional market has its own characteristics. When Chinese increase their chances of success by: brand owners enter the US market, using the same trademark may • studying the US market to define and differentiate their own not always be the best approach. products; Consideration should be given to modifying or adapting the Chinese • researching which US licensees can best meet their needs; brand for the US market by altering it, or adding a colour or logo. • employing competent and seasoned trademark attorneys in the Tailoring the Chinese trademark to the local US culture and language United States to take full advantage of US trademark laws; and should help to satisfy the marketplace and appeal to the local • negotiating and agreeing upon important licence provisions to cultural values of targeted consumers. generate revenue and protect their brands. WTR Chinese brand owners should consider the following when bringing their Chinese trademarks into the US marketplace: • Understand US marketing trends and techniques for success in the marketplace (eg, incorporating logos, colours and slogans – all popular US branding techniques); •  Utilise social media networks to promote the brand in the United States – an active social media presence can become its own marketing platform for reaching consumers and internet users; • Seek out celebrity endorsements or product placements in various US media outlets to enhance the brand’s fame and increase visibility; and • Select a brand/mark that is easy to pronounce in English, delivers a positive and strong consumer impression and is easy to remember.

Additional resources for Chinese brand owners Additional information on licensing in the United States is available from the International Licensing Industry Merchandisers’ Marc A Lieberstein is a partner and Linda Du an associate at Association (www.licensing.org/, the International Trademark Kilpatrick Townsend & Stockton Association (www.inta.org) and the Licensing Executives Society [email protected] International (www.lesi.org). [email protected] www.WorldTrademarkReview.com June/July 2013 World Trademark Review 87