#259 - Mini-Episode: Legal Considerations for Co-Branding Agreements with Foster Garvey

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1:20Most of the times, both parties want approval rights over what their brand is going on. It would be rare for one party to not have an approval right over what the branding looks like, what the marketing looks like, how it's being used. So generally, both parties will have approval rights. I mean, in my experience, most successful collaborations are when both brands are kind of obligated to promote it. It feels sometimes a little unfair and uncomfortable if you're just paying a flat royalty fee to a brand that's licensed in their logo and they have no obligation to promote it. So you're getting some exposure to their customers because their brand is on it.

1:56But if the customer is not discovering it through its search for that brand, then you're not fully opening the door to their customer base. Welcome, everybody. Today we have a mini episode and it focuses on co-branding agreements. They seem to be all the rage these days. Collaborations between two brands to create something unique. But as you can imagine, there are a lot of legal considerations that are really important to get right. And in my opinion, the sooner you can understand them, the better. Because you'd hate to put in all the technical work together and due diligence. And then find out at the end, there's a legal point where the two brands are just inflexible.

2:33So today, Hilary Hughes from Foster Garvey is taking us through all the key points and considerations. And you can tell it comes from years of experience. Foster Garvey is a full-service legal firm. They help brands with everything from business formation and capital raising all the way through to IP protection and regulatory compliance. You can check them out at foster.com. All right, let's do it. Here we go.

2:58All right, Hillary, welcome back to the podcast. I am always really appreciative when we can have a lawyer on here to just take us through so many of the details of these topics that are probably not so well understood by brands, but we're very curious. So today we are here to talk about co-branding. So to kick us off, can you just tell us a little bit about what is co-branding? What are some examples to help people understand the concept? Yeah, co-branding is basically when two brands are lending their brand to a joint product or service or campaign, right? it's a product in the world that you and I live in, a product that has two brands or two trademarks on it in some capacity.

3:36Some famous examples, one of my favorites, although it's more in a food service setting, is the Doritos Taco Bell co-branding. I wrote, Taco Bell used the Dorito flavored shell, which is just super yummy, but not good for you. There are other ones like it can be just a component rather than two products mashing together. Like you think of a lap top that says Intel inside. So it has an Intel chip in it. So that is a branded element of a larger product. I think the Oreo Coke Zero one, while like kind of a weird marriage, I think they did a co-branding initiative where there was the products on both sides, like an Oreo flavor, Coke Zero, and then some sort of fizzly Coke Zero components and Oreo.

4:21So things like that works. Two brands, sometimes on a jointly created product and sometimes on an existing product of one brand or sometimes an element of it. Another example would be think of like a menu item at a food service restaurant besides the Taco Bell Doritos one where it features some other brand's component of it, like a plant based meat, like a beyond meat in a think of like a Chipotle product or something. I don't know that they've done that, but something like that. Yes. When I was at Just Egg, that was the dream. We wanted to be branded on menus, which they did not always want, but we desperately wanted.

4:56And I also did actually get to work on a co-branded project there where we were selling plant-based egg as an ingredient into a major CPG multinational that would then use it as an ingredient in a breakfast sandwich. Yeah, that was pretty fun. I guess for us, I mean, we were interested in it because we felt like we had a really good and unique product as pretty much the best regarded plant-based egg at the time. And they were interested because plant-based was huge at the time and that would be interesting for them. And I think we had the credibility where they would be open to co-branding, something like that.

5:27Is that common? Is that why people would typically look at it, especially if it's not like a co-branding of equals, but like one brand that's really big and one that's really small? For sure. If it's a smaller brand, a co-branding opportunity with a larger brand is really kind of feathering your cap achievement because the real idea behind co-branding is to kind of acquire new customers, one brand acquiring some of the customers from the other brand. So it's like a way to get customer acquisition without the normal spin to acquire customers. So you're getting exposed to a whole new audience following customer base.

5:59So when a smaller brand is getting those to larger brands, customer base, that's a real win. But it can also be cross category, right? We've been giving examples like two food brands or food service and food product brands doing something that could be promotions across channels or categories, right? So you can have sort of like a giveaway or sweep stakes where it could be a trip and it's co-branded with an airline who's the partner for providing the tickets to get there or to the end destination like a resort or a hotel partnership with a CPG company. So it doesn't have to be within the same category.

6:36Yes, I think I recently saw something like a Liquid Death branded baby wipe co-branding. I was like, whoa, all right. I don't know about that one but there we go yeah pretty interesting i like what you said a lot about getting the chance to access the other brands customers i feel like actually although it's you know kind of a funny thing the oreo coca-cola like coke zero collaboration for sure i had not bought oreos in a very long time and it did make me buy those oreos from walmart the day they launched because i wanted to just try what these new coke zero oreos were all about and the oreo flavored coca-cola zero And I think for them, it was really successful.

7:14Like, I just remember seeing an article about it, like, for the first time in a long time, they actually were just getting new consumers flooding into both of the companies just to try one or the other product. Well, for something like that, it's almost like it's not necessarily like Oreo getting the Coca-Cola fans and vice versa. It's almost like a curiosity in the consumer, like, ooh, these two brands had a baby. What's that going to look like? Yeah, brand new consumers to both. Right. When you're combining two things, right? Yeah. Yeah. You're so right about that. OK, because I know you work with a lot of brands on this topic and it is very important to have it all spelled out, especially when you're talking about people's branding.

7:52People get very sensitive and picky about, yeah, where can it be? How can it be? What can you do? What can't you do? When do you feel like it's a good idea for brands to consider something like this versus when might it actually just be a little bit risky or distracting? Well, I think brands, when they think of their marketing teams or maybe it depends on how the idea of the white ball comes up. Is it because of discussions with another brand or you're interacting with them in some different setting and the idea for collaboration comes up? Or whether you're deciding, hey, let's expand our customer base or audience.

8:23Let's find a brand that would be good to partner with. I think it's important to match the brand value and the brand feel so that it feels on brand and on messaging for the brand and authentic to it. I think it's important to choose a partner that is matches on the value side. But I find a lot of brands spend time, 90 % of their time, thinking about the excitement of the launch and how to make it successful. And sometimes not so much about what if things go wrong and how to get out of it. And that's where us lawyers come in and helping to plan for sort of the what ifs scenarios. But it can't, you know, when a breed is growing and looking for new and things to shake up their customer base or acquiring new customers, it's a good opportunity to think about.

9:03But again, some of these can be very cost intensive and some of them are a lighter list. If we're just talking about packaging costs, we're changing the product at all and you're just having a promotion or co-brainage promotion element to it. That can be a lot cheaper than, say, we're combining like the Oreo flavor Coke. I mean, that's a whole product development, right, or a new formulation or something. So that's a little more of an investment than, say, partnering with an airline for a giveaway or something like that, where it might just be packaging and promotion. And so I know I've seen a ton of these out in the market and I remember seeing they're like energy drinks that will be starburst flavored, stuff like that.

9:39But are some of them maybe licensing deals or what is the difference between licensing deals and co-branding collaborations? Well, licensing is a form of co-branding or collaboration. So it's just one element to it. If one party is just truly licensing their brand for you to use and they don't really have any other obligations, right? They don't have to promote on their side of the ledger. They're not doing any selling. And so there's no cross accounting and recording and sales sharing. Then it's more of a licensing play. We're taking our brand or trademark or whatever it is and allowing you to use it in promoting your product.

10:16So that's a more basic form. Okay. So just to start at the bottom then, can you actually just define what a co-branding arrangement would look like from a legal perspective? What are the major components and things that you have to really spell out? Well, first is figuring out whether what's the product that's being co-branded and is it something different or something that already exists? So are we forming a new flavor? Are we forming a new format of the product, a new size? Are we really changing everything or are we just slapping a different label or packaging around it that has an additional logo and maybe some text about the partnership or the collaboration.

10:51So I think it's what's going to be involved in the co-branding. And then it's figure out things like if there is some new element to it, who's going to own it or who owns any new IP, a new formulation that comes out of it? How long is it going to continue? Is it a limited time situation or is it we're going to do it until we see sales start fall off or we're going to do it for a specific amount of time or until we reach a certain amount or for a season. You got to figure out sort of the term, how long you're going to be doing it. And then who's responsible for what? The economics, right? Are we sharing sales or revenue?

11:23Are we paying a fixed fee? Are we paying a royalty or a per unit fee? So all of those typical things. And then, of course, termination rights and how would you get out of it if something went wrong? Who's going to handle whose insurance? What happens if there's a recall or product issue? All of this good stuff. I imagine that that is a big concern, actually, because the last thing you want is a brand. It's like, I know I'm an ingredient in that product. We're not associated with that mess, that recall that happened. I don't want the buyer to hate me. I didn't even do that. Right. So I imagine there's a lot of attention paid to that.

11:53And I mean, you pretty much must always want a lawyer involved when you're doing this kind of an agreement. You should, because you have to ask yourself as the brand, are the terms that we settled on here economically, would I be happy with this if this was a huge success? Would I feel like it's been fair to me, I'll knock and honest of it? But you have to ask yourself, would I be protected if worst case scenario disaster happened? So that would be a recall or maybe some scandal at the other brand. They're involved in some kind of money laundering or sexual harassment or slave labor or something you just don't want to be associated with and then would want to be able to separate the two brands.

12:32It could be bankruptcy. One of the brands goes bankrupt and you need to sort of separate, not be associated with that. Or it could be one of the brands gets acquired. Do I want to still be in that partnership if they've exited and gotten acquired by a larger brand? So these are kind of the main things you want to think through on sort of the divorce front. Yeah. And I mean, I guess if I were, let's say the primary brand, like, hey, I want to do this skew. Let me reach out to these brands I think could be cool collaborators. Find one that I think has this ingredient we want. The main concern I would have is their supply chain stability, because just it can happen with emerging brands.

13:05We know stock outs like one flavor you need can be out of stock and you're just like, OK, are they going to prioritize your product that you're co-branding with or their own actual products when they have limited inventory? Right. So there must be a lot of language in there, especially when just the power of one ingredient in your co-branded product could actually prevent you from manufacturing. You're talking about the kind of the commercial terms or what you would think of in a supply arrangement and making sure that you're going to have to supply when you need it. So it's going to be delivered on time and in full and that there's the quality and safety controls there as well.

13:40So, yeah, all of that has to be thought through. I imagine also that just there must be so much specificity when it comes to the marketing side as well, because you're giving someone your brand basically to use. And, OK, you agree what it's going to look like on the packaging, but then there could be promotions about it or, I don't know, a TV spot, something like that. Let's say you're the brand that's providing it more almost as like an ingredient. Would you have any input on that control? Is that going to be typically spelled out in a contract? Yeah, most of the times, both parties want approval rights over what their brand is going on.

14:13It would be rare for one party to not have an approval right over what the branding looks like, what the marketing looks like, how it's being used. So generally, both parties will have approval rights. I mean, in my experience, the most successful collaborations are when both brands are kind of obligated to promote it. It feels sometimes a little unfair and uncomfortable if you're just paying a flat royalty fee to a brand that's licensed in their logo and they have no obligation to promote it. So you're getting some exposure to their customers because their brand is on it. But if the customer is not discovering it through its search for that brand, then you're not fully opening the door to their customer base.

14:51I can imagine almost that part of the agreement looking something like an influencer or ambassador agreement where you just want to spell it out. Because especially if you're more almost like an ingredient provider, yeah, you don't care about that product as much as you do the rest of your line where you get 100 % of the revenue. So like, yes, you would want to spell out you are going to do 12 social posts and do this every month and do this. Is that common? I don't know that it's always as granular as how many social posts, but you're going to regularly promote it, whatever cadence, or you're going to dedicate this marketing spend to it.

15:25Sometimes you would put actual dollars in it on what a brand's going to spend on it rather than specifying X number of posts. So there are different ways to accomplishment, but you want the other brand to promote it as well, particularly if their financial incentive is based on per unit sales or revenue sharing or something like that. you want them to really help promote it. So I can imagine getting into one of these situations where both of the partners have the best intentions, like, yeah, we both want to do this. And I mean, we'll figure it out because we're all reasonable people. And you even have an agreement and then somebody needs to change something or one of the companies is rebranding and something's changing and there's just a disagreement on the packaging or exactly how things are going to appear.

16:04They want to adjust something. I don't know. It can't always be that things are going to just be able to be easily resolved amicably. Like you must have seen some these situations where it can get a little sticky, the discussions? Like what are the keys to getting that done right? Yeah. If you're thinking through the key terms and changes to packaging is not an unforeseen situation that a brand may need to do. And sometimes brands are rebranding. You're at some point in their life cycle, they're going to do a refresh. You kind of want to address what's going to happen if that happens during the term of the co-branding relationship.

16:36Usually these things do not last forever. You're trying to make kind of a quick splash, get some visibility in their customer base, generate some sales from it, hopefully retain some of those customers, and then kind of go back to your normal brand lane. So these things are not super long-term, jumbled, with some exceptions, but they're not meant to be sort of like long-term relationships. So you can control the amount of things typically that happen within that term and provide for what's going to happen if there's a brand refresh or change in packaging or something like that. Okay. So for the commercial terms, I guess it sounds like you're saying typically there are two models that are most common.

17:12One is they might just be buying your product like an ingredient, and there's agreed upon price where they will be paying. Hopefully that's profitable for you, and you have some margin, who knows? And another method could be like a royalty or revenue share. Is that right? Like how would that typically work? Sometimes either it could just be a fixed fee for the deal or it could be a per unit sales royalty or could be worth sharing what comes in or it could be some quarterly sales payment or something like that. I mean, there are many different ways to structure it. I mean, obviously, if something is an ingredient, smaller piece of a larger product, then usually the economics reflect that rather than it's like takes over the whole product.

17:52Right. But you're putting two products together like Oreo and a beverage. like we were talking about. So it depends on how material of a component the product is and also the strength and visibility of the brand. I imagine when you do those kind of deals, there is also an interaction of, well, how much volume are you going to sell also, right? Because if you're on this kind of royalty thing, like, okay, but how much are you going to sell? Are you really going to be putting in your best effort to sell it? Are you guys going to prioritize this or are you going to be prioritizing other SKUs? Because at the end of the day, if we're just getting a small amount of like nothing, we don't even want to be involved in that, right?

18:25So like there must be an interaction of the volume and then also thinking about exit clauses on both ends. Yeah. So sometimes you're committing to minimum fee or minimum royalty or minimum revenue share, and that's how they justify whether it's worth it. So it's not just based on rosy projections by one brain. They're like, OK, if those are your projections, put your money where your mouth is, you're going to pay me a minimum amount of this, and then you can true up if you go above that. And that way it's sort of quantifiable to the partnering grand where we're at least going to get this enough from it.

18:59We may get more, but we can only count on sort of the minimum royalty or the minimum revenue share. And then you can also have termination clauses with or without that minimum structure that says, if we're not making at least this month, this much by whatever day or whatever time period, then we have the right to terminate. And of course, you have to cover kind of sell off for anything you've had pre-produced or that's already out there in the marketplace. at the time that termination right is exercised. So those are common ways to deal with the sort of how much are we going to get here? Is it worth it?

19:31And so in your experience, what have you seen when brands maybe think, okay, you're under promoting from what you should be doing? Is it pretty clear cut? Like, no, but it's in the agreement. You said you would do this. You're not doing it. Please do that. And it gets done. Or do you see it play out differently from that one party feels like the other party is underperforming on their commitments? Well, sometimes there's marketing commitments in them. Most commonly, it is the parties will agree on marketing plan and a marketing budget, marketing spend. And now whether it's both parties contributing to that or one party, but they're agreeing on the spend and the plan or sometimes just a spend or sometimes just a plan.

20:07And so you're holding them to that. Did you invest that amount? Did you follow the marketing plan as the way to kind of check in balance? And the other, again, is the minimums. If there's minimum, you're getting that and you're counting on that. And if anything above that, it's usually just gravy extra. You have the right to get out if it's not going well. That's usually how it's addressed. That is very important to have. OK, so last question for you is when do you think you actually should involve the lawyer? You may have the idea to do this or maybe another brand reaches out to you. Maybe you have to do some technical due diligence for a while, right?

20:43Even figure out if the ingredient is going to work or if the format that you make it in is OK for them. maybe they need a different size or configuration or shipping option, whatever. When do you think it's important, especially if you don't have in-house counsel, to get a lawyer involved for both parties? I would say it depends. But early is good in the sense that you want an NDA in place if you're going to be exchanging any sensitive, confidential information. Now, you can usually do an NDA on your own. Hopefully, your lawyer is giving you a good form to use and you get that in place without getting the lawyer involved.

21:13But if you're doing anything like in your example, I think you kind of hinted that there might be some product trials where you're doing some formulation work. That's an important time to get the lawyer involved because you need to address who's going to own what comes out of that formulation process. So anytime you're dealing with I-key ownership, time for a lawyer, for sure. And then beyond that, I usually recommend that you do some sort of term sheet or letter of intent or something to make sure the parties are aligned on the material terms before you invest in a long-form agreement. Because if you can't read agreement on the material terms, then you don't want to spend the legal fees or your own team's time and money investing in something that won't ever get signed.

21:53So agreeing early on those kind of big terms. All right. I think we covered it. Hilary, thank you so much. This has just been super informational in a really short amount of time. This is great. And can you just remind me the best way for everybody to follow up with your team? Sure. I'm at Foster Garvey. My email is hillary.hughes at foster.com. All right. And can you just remind us all, because you guys do so much different stuff, including this. What is the full scope of what people could reach out to you for? So we're full service for CBG brands, capital raising, commercial agreements, regulatory compliance, influencer arrangements, commands, supply, crop 65, anything that comes up that a CBG brand needs, we can help it.

22:39I love it. Thank you so much. And you guys have done such a great amount of awesome educational content with us. We really appreciate it. And I will just reinforce everyone out there. Hillary is very helpful. If you reach out to her, she definitely always really tries to help. Even if you're not a client of her, she really does like to help emerging brands. So definitely take her up on the offer to reach out. All right. Thank you, Hillary. Good to see you. Good to see you. Well, my friends, we've now arrived together at the end of another episode of the Startup CPG podcast, the top globally ranked podcast in CPG.

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