What determines royalty rates in merchandise license agreements?

Attorney David Koehser writes that royalty rates in merchandise license agreements are dependent upon several factors, many of them unique to consumer markets:

• Consumer recognition of the licensed property;
• Current or anticipated exposure for the licensed property;
• The licensed products on which the licensee will be authorized to use the property;
• The territory, channels of distribution and degree of exclusivity offered to the licensee;
• The start date and term of the license;
• Professed or actual retailer interest in the licensed property and/or licensed products; and
• Advertising commitments by the licensor, licensee or other licensees.

Of course, the royalty rate will ultimately be the result of negotiation between the parties. “Both the licensor and the licensee will have to find a [royalty] rate that is mutually acceptable …, or the deal will not go forward.” Parties preparing with the factors mentioned above in mind can be successful in those negotiations.