Merchandise Licence Agreement NZ: What To Include

Aroha is an illustrator in Wellington with a loyal Instagram following. A local apparel brand asks to put her designs on hoodies and tote bags, and they offer her 10% of sales. It sounds exciting, until she realises they haven't agreed who approves the samples, what happens to unsold stock, or whether the brand can keep using her artwork after the campaign ends.

If you're an artist, influencer, designer or brand owner, licensing your work for merchandise can be a smart way to grow without manufacturing everything yourself. But the details matter.

A good merchandise licence agreement turns the commercial deal into clear rules. It should cover royalties, quality control, approvals, territory, stock, IP ownership and what happens when the arrangement ends.

What Is A Merchandise Licence Agreement?

A merchandise licence agreement is a contract that lets another business use your artwork, name, logo, character, design or branding on physical products, while you keep ownership of the intellectual property.

In practical terms, you're saying: you can use this IP, in this way, for these products, for this period, in this territory, and you need to pay me like this.

For NZ creators and brands, the IP behind a merchandise deal often includes:

• Copyright in illustrations, graphics, photography, written slogans, character designs or other original creative work under the Copyright Act 1994.
• Trade marks such as your brand name, logo or product name, especially if you've registered them with IPONZ under the Trade Marks Act 2002.
• Brand assets such as style guides, colour palettes, packaging designs and approved product descriptions.
• Confidential information such as unreleased designs, campaign plans, supplier details or sales data.

The agreement doesn't need to be overly complicated, but it does need to be specific. A one line email saying a brand can use your artwork on merchandise will rarely answer the questions that come up once money, production timelines and customers are involved.

What Should The Licence Cover?

The first job of the agreement is to describe exactly what is being licensed. This should be more precise than saying "the designs" or "the brand". If the licensee can use three illustrations, list them. If they can use your logo, specify which version. If they can use a character name or tagline, include that too.

You should also make it clear what products the IP can appear on. For example, you might allow use on t shirts, hoodies, caps and tote bags, but not posters, phone cases, packaging or digital products. This matters because different products can affect your brand in different ways. A design that looks great on apparel might not be something you want printed on low quality novelty items.

The agreement should also deal with territory. Can the products be sold only in New Zealand, or also in Australia, the United States or worldwide through an online store? If the licensee sells online, the territory clause should match how their website and shipping arrangements actually work.

Next, set the term of the licence. This is the period when the licensee can manufacture, market and sell the merchandise. Some deals run for a short campaign, such as three months. Others run for one or two years with renewal options. A clear term helps avoid the awkward situation where products are still being sold long after you thought the campaign had finished.

You should also decide whether the licence is exclusive or non exclusive. An exclusive licence means you won't allow anyone else, and sometimes even yourself, to use the same IP for the same products or territory during the term. A non exclusive licence gives you more flexibility. If you're granting exclusivity, be careful to limit it by product, territory and time, and consider whether the licensee must meet minimum sales targets to keep it.

Royalties, Reporting And Payment Terms

Money clauses are often where merchandise deals become unclear. Your agreement should explain how you'll be paid, when you'll be paid and what information the licensee must provide.

Common payment structures include:

• Royalty percentage: For example, 10% of net sales or gross sales. The agreement should define the sales figure carefully, including whether GST, refunds, discounts, freight, marketplace fees or payment processing fees are deducted.
• Upfront fee: A fixed amount paid when the agreement is signed, sometimes in addition to royalties.
• Minimum guarantee: A minimum amount the licensee must pay you, even if sales are lower than expected.
• Per unit fee: A set amount for each item manufactured or sold.

If royalties are based on sales, you'll need reporting obligations. The licensee should give you regular sales reports, usually monthly or quarterly, showing units manufactured, units sold, sale price, returns, discounts and royalties payable. The agreement can also give you the right to inspect records or request reasonable supporting information if the numbers don't look right.

Set payment dates clearly. For example, royalties might be payable within 14 days after the end of each calendar quarter. You can also include what happens if payment is late, such as interest, suspension of the licence or a right to terminate if the issue isn't fixed after notice.

If the licensee is manufacturing at scale, think about whether royalties are payable on products sold, products shipped or products manufactured. From your perspective, a sold basis is common, but a manufactured basis can reduce the risk of stock being produced but never properly reported. The right approach depends on the deal and your bargaining power.

Quality Control, Samples And Approvals

Quality control is one of the most important parts of a merchandise licence agreement. When your name, artwork or brand appears on a product, customers will often associate the product with you, even if another business made it.

Your agreement should require the licensee to follow your brand guidelines and produce merchandise to an agreed standard. It should also set out an approval process before anything goes on sale. This might include approval of product mockups, samples, packaging, labels, product descriptions, website listings, social media ads and any use of your name or image in marketing.

Try to make the approval process practical. For example, you might have five business days to approve or reject a sample, and you shouldn't unreasonably withhold approval if the product meets the agreed standard. On the other hand, the licensee shouldn't be allowed to rely on silence as approval unless you're comfortable with that.

It's also useful to state that any changes need fresh approval. A hoodie sample might be approved in black cotton, but that doesn't necessarily mean the licensee can switch to a different fabric, colour, print method or supplier without asking you.

For physical products, also consider compliance and safety. Depending on the product, the licensee may need to comply with consumer guarantees, product safety rules, labelling requirements and advertising standards. The agreement should make it clear that the licensee is responsible for manufacturing, selling and promoting the products lawfully.

Stock, Unsold Products And Distribution

Merchandise deals often run into trouble at the end of the term because no one has decided what happens to leftover stock. Your agreement should deal with this upfront.

There are a few common options. You might allow a limited sell off period, such as 30, 60 or 90 days, during which the licensee can sell stock that was properly made before the licence ended. You might require the licensee to stop selling immediately and destroy or return remaining stock. Or you might let them sell through stock only with your written approval and only at agreed prices.

The right approach depends on your brand and the products. If the merchandise is tied to a short campaign, event or limited release, you may not want old stock appearing months later. If the products are evergreen and high quality, a short sell off period might be commercially sensible.

You can also include rules about where the merchandise can be sold. For example, you may approve the licensee's own website and physical stores, but not discount marketplaces, third party resellers, overseas distributors or clearance outlets. Distribution clauses help protect your brand positioning and prevent products from turning up in places you didn't expect.

If stock levels matter, the agreement can require the licensee to provide inventory reports. This is especially helpful where royalties are high, exclusivity has been granted, or unsold stock could affect future launches.

Ownership, Confidentiality And Ending The Deal

A merchandise licence should be clear that you retain ownership of your IP. The licensee is only receiving permission to use it for the agreed purpose. They shouldn't be able to register your trade marks, claim ownership of your artwork, adapt your designs outside the scope of the licence, or use confusingly similar branding.

If the licensee creates new materials using your IP, such as product photography, packaging designs or social media content, the agreement should say who owns those materials and who can use them after the deal ends. Sometimes the licensee owns the new content but you can use it for your portfolio or promotion. In other cases, you may want ownership or a broad right to keep using it.

Confidentiality is also important. You may be sharing unreleased designs, pricing, sales data, customer insights, launch dates or supplier information. The agreement should require both parties to keep confidential information secure and use it only for the merchandise arrangement.

Termination clauses explain when the deal can end early. Common triggers include non payment, breach of approval rules, poor quality products, misuse of IP, insolvency, reputational harm or failure to meet minimum sales targets. Usually, the agreement gives the breaching party a short period to fix the issue, unless the breach is serious and can't reasonably be fixed.

Finally, set out what happens after termination or expiry. The licensee should stop manufacturing, marketing and selling the products, stop using your IP, remove online listings and advertising, return or delete confidential information, pay any outstanding royalties and provide a final sales report. If a sell off period applies, spell out exactly how long it lasts and what stock it covers.

Common Mistakes To Avoid

One common mistake is relying on a friendly conversation or brief email because the parties trust each other. Trust is helpful, but it doesn't replace clear terms. A short written agreement can preserve the relationship by reducing misunderstandings.

Another mistake is granting rights that are too broad. If you allow worldwide use on all products for several years, you may find it hard to do better deals later. It's often smarter to start narrower and expand the licence once the licensee has proven they can sell quality products and report properly.

Be careful with exclusivity. It can be valuable for the licensee, but it can limit your options. If you agree to exclusivity, consider tying it to minimum sales, marketing commitments and regular reporting.

Creators also sometimes forget about approvals. If you care how your work is presented, don't leave approvals to goodwill. Build in practical checkpoints before production and before launch.

Finally, don't ignore the end of the deal. Post termination use, unsold stock and takedown obligations are often the clauses you need most when the relationship doesn't go to plan.

Key Takeaways

• A merchandise licence agreement lets another business use your IP on agreed products while you keep ownership.
• Your agreement should clearly describe the licensed IP, permitted products, territory, term and whether the licence is exclusive.
• Royalty clauses should define how payments are calculated, when reports are due and what records you can check.
• Quality control and approval rights help protect your brand before products, packaging and marketing go public.
• Deal with unsold stock, confidentiality, termination and post termination use before the arrangement starts.

If you'd like help with merchandise licence agreements, royalty terms, approval processes or protecting your IP, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.