When the Deal Goes Sideways: Common Disputes in Licensing and Merchandising
A licensing deal can turn a celebrity, brand, character, or design into sustantial income -- and, many times, licensing unlocks hidden income many IP owners didn't know they could access. That arrangement creates ongoing obligations between two businesses (the "licensor" and the "licensee"), and when those interests split, disputes usually follow a familiar pattern. If you want to avoid the pattern (and, you do), start with two key concepts: counsel with industry experience and a well-thought out, clear agreement.
Royalty underpayment. Most licensing disputes are about money. Licensors often find that royalties were calculated on the wrong base: deductions that were never authorized, sales to related companies at artificially low prices, or products that never appeared on royalty reports at all. An audit clause is only as useful as its terms. Owners should make sure it covers how far back the audit can reach, who pays for it, and what interest or penalties apply when an underpayment is found.
Exceeding the scope of the license. A license grants specific rights: particular products, territories, sales channels, and a fixed term. Disputes come up in many ways -- when a licensee expands a license into other categories, sells through discount channels the licensor had excluded, or ships into a territory the license doesn't cover. Selling outside the license can be a breach of contract and raise other potential violations.
Quality control failures. Licensors are expected to police the quality of licensed goods, both to protect the brand and, in the trademark context, to protect the validity, value, and goodwill of the mark itself. Disagreements over approvals, rejected samples, and substandard production runs are common, especially when the approval process was never clearly written down.
Unauthorized manufacturing and overruns. Factories sometimes produce more units than were ordered and sell the extras through unofficial channels, often called "third-shift" goods. Licensees may also sublicense or outsource production without consent. Both erode the licensor's control and revenue.
Ownership of new designs. When a licensee develops new artwork, packaging, or product designs that incorporate the licensed property, it is often unclear who owns them.
Termination and sell-off. When a license ends, the parties frequently disagree over leftover inventory: how long the licensee may keep selling, at what prices, and whether royalties still apply. Minimum guaranteed royalties that were never met become a second point of conflict.
The practical takeaway. Nearly all of these disputes trace back to two core concepts: needing a clear, well-thoughout agreement and counsel with industry experience. Vague or incomplete agreements create conflict -- and expensive litigation; and, the failure to use counsel with experience can have the same result.
