Feature

Co-Branding: The Pros, the Cons, and the Uncertainty

By Kimra Major-Morris and Dineen Pashoukos Wasylik

©2019. Published in Landslide, Vol. 11, No. 5, May/June 2019, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

You have a strong brand. I have a strong brand. Let’s make money together! That’s the business case for co-branding. While there are many benefits to brands working together to leverage their respective bottom lines, there are also pitfalls and uncertainty when the issues are not thought through or when unresolved legal questions threaten the enforceability of the subject intellectual property licenses. When lawyers represent a partner in a potential co-branding situation, they must be sure to help the client think through the legal and nonlegal implications of such an arrangement to ensure all involved get the benefit of their bargain.

Co-Branding Basics

Co-branding is a method of trademark licensing (or cross-licensing) that typically involves strategic marketing and leveraging by two strong brands to create an enhanced customer experience for each brand’s market.1 The brand partners come together and offer a single product or service under both partners’ marks.2 It can be an attractive option for brand expansion by reaching previously untapped audiences accompanied by the endorsement of a brand those consumers already know and trust. What’s not to like? Each brand’s success is proven, and the brand partners’ collective customers anticipate the launch of new products or services and are brought to the table preconditioned to trust new offerings. It can also be a cost-effective approach to entering a new market, perhaps even giving the brand partners the opportunity to charge premium rates to the new audience.

Co-branding is about leveraging relationships—not only the relationship between the brand partners, but also the relationship between the brand partners and their respective customer bases. Brand owners considering entering into a co-branding relationship must always bear in mind that their own trademark is “merely a convenient means for facilitating the protection of one’s good-will.”3 So by associating one’s own marks with the brand of another, a mark owner is lending its own goodwill to the co-branding partner, and must choose partners carefully to avoid dilution. The initial considerations for potential brand partners are common values, messaging, and vision. Moreover, it is critical that both partners be committed to maintaining quality and brand consistency while offering unique experiences to the collective customer base.

The Pros: Brand Partnerships for the Win!

The Personality Boost

Often, co-branding comes in the form of notable personalities lending their personal brands to products and services. Near the top of the 2018 world’s highest-paid athletes list are LeBron James, Steph Curry, Kevin Durant, and Russell Westbrook.4 What they all have in common is an effective co-branding deal with an athletic shoemaker. At the height of his fame, Michael Jordan boasted co-branding deals with the likes of Nike, Gatorade, McDonald’s, Coca-Cola, Wheaties, Hanes, and more, topping out in 1997 with an annual payday of more than $78 million for his basketball and co-branding efforts combined.5 But retiring from basketball didn’t reduce Jordan’s co-branding income: Nike alone pays him more than $100 million a year for his co-branding of the Jordan brand, which sounds like a lot until you realize that Nike generated $2.8 billion in revenue in 2016, and projects $4.5 billion by 2020.6 There are countless owners of “Jordans” who bought Nikes to be “like Mike.” The partnership has been a huge success.

The Service Expansion

Co-branding also gives each brand the opportunity to reach previously untapped markets. Genius, a collaborative site that allows “scholar” members of the public to annotate song lyrics and share facts and insights about the songs and artists they love,7 announced its new partnership with Apple in October 2018.8 What’s the enhanced customer experience? The collaboration will allow Apple Music subscribers to read lyrics and annotations while they listen. The annotations can be accessed through the Genius app or the Apple Music app. While it’s too early to know how well this deal will work, Genius had a similar deal with Spotify (a music, video, and podcast streaming service) that more than doubled Genius’s unique views and earned it $10 million in 2017.9 Spotify may not have realized the full benefit of its partnership, reportedly due to less updated technology than its competitors in streaming.10 Clients should be well prepared for the exponential growth from effective co-branding partnerships.

The Market Forecast

Co-branding can also help brands survive extreme shifts in their core markets. We need not look further than Blockbuster Video’s downfall to understand the necessity of staying ahead of shifting market trends. Netflix seized upon the trend by offering users the option to rent movies from the comfort of their homes, first through mail-order DVD rentals, and later by expanding partnerships with content creators to offer its subscription streaming service.11 With Amazon leading the way, technology has changed how we shop. In response, brands like Barnes & Noble co-branded with Starbucks to create an in-person bookstore experience that combats the desire for mail order simplicity.12 Now with more store closures in the forecast, Starbucks and other retailers are looking to partner with “digital giants.”13

The Cons: Pitfalls in Co-Branding

Since branding is all about “playing up” source identification, placing two different trademarks on particular goods and services can cause confusion as to source if not carefully thought through. Is Nike or Jordan to blame if my sneaker falls apart? Will Jordan’s reputation suffer if Nike shoes are accused of being manufactured in sweatshop conditions?14 Because the brands are tying their reputations and goodwill together when they co-brand, they need to be prepared to share not only the positives but also the potential negatives of the partnership.15 Dual-branded products/services create the risk of brand tarnishment if one partner draws social or political criticism. The brand partners must also be clear about their expectations as to how their respective marks will be used, and take into account not only the effect on goodwill but also possible product liability and marketplace confusion.

Social and Political Messaging

Don’t forget, strategic gambling is still gambling. You’d have to live on another planet to not know the risks associated with a sports apparel retailer delving into the sociopolitical scene. Yet, Nike boldly endorsed Colin Kaepernick, the NFL quarterback who sat, then took a knee during the national anthem at multiple NFL games, to protest the oppression of people of color in the United States. Kaepernick’s controversial protest started a movement among his fellow players, but also resulted in his unemployment as a quarterback, an onslaught of political debates about whether what he did was “appropriate” (as if protests are not by nature disruptive), an examination of the United States’ history of unfair treatment against people of color, and new corporate policies penalizing other athletes who would protest in the same manner. Nike reportedly considered dropping the association with Kaepernick that it had entered into in 2012.16 Instead, in September 2018, two years after his protest began, Nike doubled down on the association by releasing an ad featuring Kaepernick that read: “Believe in something. Even if it means sacrificing everything.”17 “Depending on who you asked, Nike was either a crusader for social justice or an unpatriotic agitator . . . .”18 Nike faced initial backlash, including boycotts and public displays of angry people burning Nike shoes. But Nike’s gamble paid off: the ad contributed to Nike’s increased revenue and sales.19 Ultimately, Kaepernick’s Nike ad has been celebrated as one of the “best ads” of 2018.20

This danger not only is found with celebrity co-branding, but also lurks in more traditional partnerships when corporate leaders or their brands make the news. Will Starbucks’ co-branding partners be scared off or negatively affected by its former CEO’s political activities?21 Will Amazon’s partners be affected by Jeff Bezos’s divorce scandal? Only time will tell. Indeed, brands themselves often take political stances: during the 2018 Super Bowl, for example, Budweiser chose to focus on its founder’s immigrant journey in a year when political discourse on legal and illegal immigration was at an all-time high, while Audi tackled gender equality.22 Anyone co-branding with those brands must be ready for the ramifications of those socially charged ads—which can be a boon or a bust, depending on each partner’s brand values and priorities.

Unclear Terms

Sometimes the expectations exceed the commitment. When the brand partnership is formed to launch a new product or service, the parties should have unambiguous written terms regarding financing, trademark license restrictions, product liability, term and termination, intellectual property reversion rights after the term, warranties and representation, indemnification, and more. Ambiguity played a key role in the dispute between sports apparel giant Adidas and “streetwear” fashion brand LPD.23 Adidas approached LPD about collaborating on a “Classics Capsule” and “Collaboration Capsule” apparel line, where Adidas’s logo would appear with LPD’s designs. Over the course of a year, the parties corresponded by e-mail without signing a formal agreement. In those e-mails, Adidas agreed to cover the cost of manufacturing with its purchase code, but when LPD’s manufacturer refused the code, LPD advanced the cost. Shortly after its representatives had product samples, without any notice to Adidas, LPD created a promotional video featuring the co-branded apparel. Adidas strongly opposed, arguing that it had not approved the video and the video ran afoul of its licensing deals with the NBA, and denying the legitimacy of the partnership to third parties.24

When Adidas presented LPD with a proposed “retroactive license” that included a 10 percent royalty and other terms allegedly never previously discussed, LPD sued. Among other allegations, LPD pursued breach of contract and trademark abandonment claims against Adidas, and Adidas countered with infringement claims. The case is still in litigation, but on a motion to dismiss the court concluded that LPD had failed to establish a binding contract between the parties. LPD unsuccessfully argued that Adidas issued a naked license by failing to exercise quality control over its marks.25 Although the court disagreed with some of LPD’s theories, this is a reminder for respective brands to play meaningful roles in the way their marks are represented in the partnership. Notably, the court found “plausible factual allegations that, if proven, could support an entitlement to relief” on LPD’s unjust enrichment and defamation claims.26 No matter what the outcome of this dispute, it is an important cautionary tale to remind brands to get on the same page in writing early to avoid a failed collaboration.27

Competing Interests

In 2017, RadioShack’s creditors sued Sprint for RadioShack’s failed comeback after bankruptcy.28 The companies had a brief romance in 2015, when they struck a deal to co-brand 1,435 stores. RadioShack, authorized by its owner, General Wireless, would only sell Sprint’s phones and would still sell its electronics.29 Sprint was looking to expand and would occupy a small space in each of the co-branded locations. In addition, the two were reportedly planning to include both logos on their merchandise.30 However, things quickly went sour with General Wireless filing a lawsuit against Sprint for breach of contract for failing to supply inventory or support to the co-branded locations and for misappropriation of RadioShack’s trade secrets.31 Sprint allegedly used RadioShack’s confidential data to identify RadioShack’s top performing stores and opened competing stores near those locations in 2016.32 This case has not concluded, but is a reminder that lost money, trade secrets, brand reputation, and future business are the potential costs of brand partnerships.

Product Liability

When co-branding on products, the threat of claims sounding in product liability always lurks. Guess, for example, found itself defending against personal injury claims when a co-branded umbrella it did not manufacture, but did authorize as a free giveaway, caused injury.33 Under the so-called apparent manufacturer doctrine, the licensor may be held liable for the injury caused by defective goods produced by a licensee where consumers perceive the licensor to be the source of the goods.34 In Kennedy v. Guess, the Supreme Court of Indiana reversed summary judgment finding Guess an apparent manufacturer, instead leaving it to a jury to determine whether the amount of oversight Guess had over the umbrellas warranted it being responsible for manufacturing defects.35 The Guess court cautioned that licensors must strike a balance between sufficient brand oversight and taking on liability for defects outside of their control. Indemnification provisions in agreements can help address these issues.

Legal Uncertainty: The Unresolved Question over the Reliability of Trademark Licenses

Because co-branding is about leveraging each brand’s strength, no one wants to think their brand partner will become insolvent. But licensors go into bankruptcy often enough that the Supreme Court recently granted review on the question: “When a debtor has entered into a pre-bankruptcy contract that granted a counterparty a license to use the debtor’s trademark, does the debtor’s ‘rejection’ of the contract that granted the license have the effect of revoking the license itself?”36

The Background

It is not uncommon for trademark licenses to be treated as executory contracts. Before you dust off your Black’s Law Dictionary, an executory contract is a contract where one or more parties has not (yet) performed or one that is actively being fulfilled. Leases and franchise agreements are examples.37 In the lease example, the tenant has outstanding payments for the remaining months and the landlord has the outstanding obligations to provide the living space and make it habitable, so the contract is executory. Accordingly, a nonexecutory contract is one that has been performed.38

In bankruptcy proceedings, once a bankruptcy trustee identifies the debtor-licensor’s executory contracts, the debtor-licensor, under § 365 of the Bankruptcy Code, may either assume and assign an executory contract to a third party or reject the contract.39 In other words, the bankruptcy trustee is authorized to disregard the debtor’s pre-bankruptcy contracts where performance by both parties is outstanding.

Recognizing that disrupting intellectual property contracts could be problematic, Congress enacted the Intellectual Property Bankruptcy Protection Act of 1988. The Act grants “intellectual property” licensees the right to treat rejection as a termination of the license or retain their intellectual property rights, provided the licensee meets certain conditions. Specifically, § 365(n) of the Bankruptcy Code provides:

(1) If the trustee rejects an executory contract under which the debtor is a licensor of a right to intellectual property, the licensee under such contract may elect—

(A) to treat such contract as terminated by such rejection if such rejection by the trustee amounts to such a breach as would entitle the licensee to treat such contract as terminated by virtue of its own terms, applicable nonbankruptcy law, or an agreement made by the licensee with another entity; or

(B) to retain its rights (including a right to enforce any exclusivity provision of such contract, but excluding any other right under applicable nonbankruptcy law to specific performance of such contract) under such contract and under any agreement supplementary to such contract, to such intellectual property (including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law), as such rights existed immediately before the case commenced, for—

(i) the duration of such contract; and

(ii) any period for which such contract may be extended by the licensee as of right under applicable nonbankruptcy law.40

However, the Bankruptcy Code omits trademarks in its definition of intellectual property. Specifically, § 101(35A) provides: “The term ‘intellectual property’ means—(A) trade secret; (B) invention, process, design, or plant protected under title 35; (C) patent application; (D) plant variety; (E) work of authorship protected under title 17; or (F) mask work protected under chapter 9 of title 17; to the extent protected by applicable nonbankruptcy law.”41

With trademarks omitted from the express language of § 101(35A), interpretations of § 365(n) have been largely inconsistent, leaving the courts to look to the intent in § 365(a) language as either protective of intellectual property licensees (including trademark licensees) or restrictive against inserting omitted language pertaining to trademarks.

The Seventh Circuit’s 2012 Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC (CAM) decision reflected this intent analysis approach when the trademark licensor, Lakewood Engineering & Manufacturing Co., was forced into bankruptcy by its creditors three months after issuing patent and trademark licenses to CAM.42 The license permitted CAM to manufacture its patented box fans and to put Lakewood’s logo on the final products.43 Just prior to Lakewood’s forced involuntary bankruptcy, CAM advanced the purchase of 1.2 million fans for the busy season, because Lakewood was struggling financially. The parties agreed that CAM had permission to independently sell (leftover) fans not purchased by Lakewood. Subsequently, Lakewood’s appointed bankruptcy trustee sold its assets, including its patents and trademarks, to Sunbeam.44 Sunbeam threatened to sue CAM for infringement, and when CAM refused to stop selling the leftover fans, Sunbeam did file suit. In its pointed disagreement with the Fourth Circuit’s Lubrizol decision, the Seventh Circuit held that Lakewood’s rejection (of the executory contract) was a breach that did not terminate CAM’s license to make and sell the agreed inventory.45

All Eyes on the Supreme Court

Six years after denying review to Sunbeam, the Supreme Court has agreed to resolve the split and decide whether a debtor-licensor’s “rejection” of a license agreement under § 365 of the Bankruptcy Code “terminates rights of the licensee that would otherwise survive the licensor’s breach under applicable nonbankruptcy law.”46

The Court granted review to Mission Product Holdings Inc. following the First Circuit’s reversal of a bankruptcy appellate panel’s decision permitting Mission Product Holdings’ continued rights under its exclusive trademark license after the licensor’s bankruptcy.47 The International Trademark Association (INTA), the New York Intellectual Property Law Association (NYIPLA), and a group of intellectual property law professors have filed briefs in support of Mission Product Holdings and the Seventh Circuit’s position (to treat rejection as a breach of contract with licensees retaining their rights).48

Conclusion

In addition to a thorough look at the commonalities between potential brand partners, strong co-branding agreements require a thoughtful approach to trademark principles and protections, product liability possibilities, remedies for breach, and conflicts of law to secure claims for damages. A strategic plan to create better customer experiences, a thoroughly vetted partner, and a comprehensive legal protection plan with a competitive product or service are the building blocks to co-branding success. Two isn’t always better than one, but when approached carefully the sum may be the greater of the parts!

Endnotes

1. Mark Kosin, Brand Partnerships That Failed Miserably (and a Few That Worked), URBO (Sept. 15, 2017), https://www.urbo.com/content/brand-partnerships-that-failed-miserably-and-a-few-that-worked/.

2. Jessica Elliot Cardon, Commentary: Co-Branding with Influencers Is in Fashion and No Longer a Trademark Faux Pas, 108 Trademark Rep. 1057 (2018) (defining traditional co-branding as “the use and affiliation of the marks of two different entities on a single product”).

3. United Drug Co. v. Theodore Rectanus Co., 248 U.S. 90, 98 (1918).

4. The World’s Highest-Paid Athletes, Forbes, https://www.forbes.com/athletes/list/ (last visited Apr. 10, 2019).

5. Kurt Badenhausen, Michael Jordan Heads the Highest-Paid Athletes of All-Time with $1.7 Billion, Forbes (Dec. 6, 2016), https://www.forbes.com/sites/kurtbadenhausen/2016/12/06/michael-jordan-heads-the-highest-paid-athletes-of-all-time-with-1-7-billion/#566a0dfc1f1d.

6. Id.

7. How Genius Works, Genius, https://genius.com/Genius-how-genius-works-annotated (last visited Apr. 10, 2019).

8. Brian Heater, Apple Music Adds Genius Lyrics, Tech Crunch (Oct. 11, 2018), https://techcrunch.com/2018/10/11/apple-music-adds-genius-lyrics.

9. After $10M of 2017 Revenues, Genius Raises $15M Funding Round, Music Ally (Mar. 6, 2018), https://musically.com/2018/03/06/10m-2017-revenues-genius-raises-15m-funding-round/.

10. Sarah Perez, Spotify Is Falling Behind on Lyrics and Voice, Tech Crunch (Aug. 15, 2018), https://techcrunch.com/2018/08/15/spotify-is-falling-behind-on-lyrics-and-voice/.

11. Rick Newman, How Netflix (and Blockbuster) Killed Blockbuster, U.S. News & World Rep. (Sept. 23, 2010), https://money.usnews.com/money/blogs/flowchart/2010/09/23/how-netflix-and-blockbuster-killed-blockbuster.

12. Starbucks Teams with Barnes & Noble in Book and Coffee Deal, United Press Int’l (Sept. 7, 1993), https://www.upi.com/Archives/1993/09/07/Starbucks-teams-with-Barnes-Noble-in-book-and-coffee-deal/6526747374400/.

13. Leonie Roderick, Starbucks Steps Up Focus on Digital Partnerships amid Store Closures, Marketing Wk. (July 28, 2017), https://www.marketingweek.com/2017/07/28/starbucks-digital-partnerships.

14. Casey Newmeyer, Cobranding Arrangements and Partner Selection: A Conceptual Framework and Managerial Guidelines, Am. Marketing Ass’n (Sept. 6, 2017), https://www.ama.org/resources/Pages/cobranding-arrangements-partner-selection.aspx.

15. Id.

16. Julie Creswell et al., Nike Nearly Dropped Colin Kaepernick before Embracing Him, N.Y. Times (Sept. 26, 2018), https://www.nytimes.com/2018/09/26/sports/nike-colin-kaepernick.html.

17. Tanya Dua, The 10 Best Ads of 2018, Bus. Insider (Dec. 27, 2018), https://www.businessinsider.com/best-ads-of-the-year-2018-12.

18. Adrianne Pasquarelli & E.J. Schultz, Nike Is Ad Age’s Marketer of the Year for 2018, Ad Age (Dec. 3, 2018), https://adage.com/article/cmo-strategy/nike-ad-age-s-marketer-year-2018/315795/.

19. Creswell et al., supra note 16.

20. Dua, supra note 17; Soo Youn, Nike Sales Booming after Colin Kaepernick Ad, Invalidating Critics, ABC News (Dec. 21, 2018), https://abcnews.go.com/Business/nike-sales-booming-kaepernick-ad-invalidating-critics/story?id=59957137.

21. Nathaniel Meyersohn, Howard Schultz Steps Down at Starbucks, May Consider Run for President, CNN Bus. (June 4, 2018), https://money.cnn.com/2018/06/04/news/companies/howard-schultz-starbucks/index.html.

22. Margie Fuchs, Our Favorite Social Good Super Bowl Ads, Ad Libbing (Feb. 3, 2018), https://www.adlibbing.org/2018/02/03/our-favorite-social-good-super-bowl-ads/.

23. LPD N.Y., LLC v. Adidas Am., Inc., No. 15-CV-6360-MKB-RLM, 2017 WL 1162181, at *2–4 (E.D.N.Y. Mar. 27, 2017), reconsideration denied, 295 F. Supp. 3d 275 (E.D.N.Y. 2017).

24. Id. at *4 (adopting report and recommendation of magistrate).

25. Id. at *13.

26. LPD N.Y., LLC v. Adidas Am., Inc., No. 15-CV-6360-MKB, 2016 WL 11264718, at *16 (E.D.N.Y. Aug. 25, 2016), report and recommendation adopted, 2017 WL 1162181.

27. For an in-depth discussion of key terms in co-branding agreements, see Eric Goldman, Private Label and Co-Branding Deals, Eric Goldman, https://www.ericgoldman.org/writings/samplecobrandagmts.htm (last visited Apr. 10, 2019).

28. GWO Litig. Tr. v. Sprint Sols., Inc., No. N17C-06-356 (Del. Oct. 25, 2018).

29. Kyle Arnold, Radio Shack Stores in Central Florida Rebranding with Sprint, Orlando Sentinel (Apr. 10, 2015), https://www.orlandosentinel.com/business/os-radio-shack-sprint-stores-20150410-story.html.

30. Id.

31. GWO Litig. Tr., No. N17C-06-356.

32. Id.

33. Kennedy v. Guess, Inc., 806 N.E.2d 776, 786 (Ind. 2004).

34. David J. Franklyn, The Apparent Manufacturer Doctrine, Trademark Licensors and the Third Restatement of Torts, 49 Case W. Res. L. Rev. 671 (1999), https://scholarlycommons.law.case.edu/caselrev/vol49/iss4/3/.

35. Kennedy, 806 N.E.2d at 784.

36. See Brief for Petitioner, Mission Prod. Holdings, Inc. v. Tempnology, LLC, No. 17-1657 (U.S. Dec. 10, 2018).

37. Executory Contract, L. Dictionary, https://thelawdictionary.org/executory-contract/ (last visited Apr. 10, 2019) (“Contractual obligation fulfillment actively being done. Some contractual expectations are yet to be done by one or more parties. An ongoing lease agreement is an example.”).

38. Executory Contract, US Legal, https://definitions.uslegal.com/e/executory-contract/ (last visited Apr. 10, 2019).

39. 11 U.S.C. § 365(a).

40. Id. § 365(n).

41. Id. § 101(35A).

42. 686 F.3d 372 (7th Cir. 2012).

43. Id. at 374.

44. Id. at 374–75.

45. In Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985), the Fourth Circuit held that when a debtor-licensor rejects an executory license agreement, the rejection terminates the license. Because the license was treated as terminated, it required that the licensee discontinue all use of the licensed intellectual property, leaving the licensee with only a pre-petition damages claim for the value of the now-terminated license. Amicus Curiae Brief of the International Trademark Association, Mission Prod. Holdings, Inc. v. Tempnology, LLC, No. 17-1657 (U.S. Dec. 17, 2018).

46. Barbara Leonard, High Court Takes Up Circuit Split over IP in Bankruptcy, Courthouse News Serv. (Oct. 29, 2018), https://www.courthousenews.com/high-court-takes-up-circuit-split-over-ip-in-bankruptcy/.

47. Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 397 (2018).

48. Mission Product Holdings Inc. v. Tempnology, LLC, SCOTUSblog, https://www.scotusblog.com/case-files/cases/mission-product-holdings-inc-v-tempnology-llc/ (last visited Apr. 10, 2019).

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Kimra Major-Morris is the principal at Major-Morris Law LLC in Apopka, Florida. She represents institutional and individual brand owners including high-profile celebrities and creative talent in their business ventures.

Dineen Pashoukos Wasylik is Florida Bar board certified as an expert in both intellectual property law and appellate practice. She represents brand owners in securing trademark registrations, before the Trademark Trial and Appeal Board, and in litigation through her Tampa-based boutique firm, DPW Legal.