Licensing by Litigation: A Bad Business Plan

Two large-scale lawsuits in the licensing world have recently been stopped by injunctions.  After spending millions of dollars on legal fees and months distracted from their real business of selling great products, the opposing parties in the Cracker Barrel litigation between Kraft and the Cracker Barrel restaurant chain, and in the Martha Stewart litigation between Macy’s and JC Penney, are now either waiting for a judge’s ruling or joining each other at the bargaining table to negotiate a settlement.

In neither case is the company that wants to launch a new line of products able to go about the business it intended.  I wonder if their lawyers made this point clear enough to them before they decided to carry out their business plans in court.

At IMC we take the idea of partnerships seriously; we even changed our URL from www.IMCLicensing.com to www.IMCPartnerships.com to reflect this intent.  One thing that means to us is that the idea of partnerships is even more important than the idea of licensing, and accomplishing your goals through other companies is more often about how you work together than the specific language in your contract.

I’ve already written about the Cracker Barrel lawsuit and explained how it might have been avoided with a partnership orientation.  When Cracker Barrel the restaurant chain decided to license its brand name to the John Morrell Group, a division of Smithfield Foods (which in turn is trying to sell itself to a Chinese buyer), it took a high risk that Kraft Foods (which produces Cracker Barrel cheese) would take offense.  Earlier this month Kraft won an injunction in federal court banning John Morrell from introducing the Cracker Barrel-licensed meat products at retail.

It seems likely that someone at Cracker Barrel Old Country Stores and John Morrell thought that proceeding with their license (and daring Kraft to sue) was a better way to establish their rights than resolving this with Kraft beforehand.  Whether they based that decision on advice of counsel or a pure business reasoning doesn’t matter now, and when the parties return to the bargaining table Kraft now does so with even more leverage than it had before.  (Even if they tried to negotiate before suing and failed, proceeding with their own partnership in the face of Kraft’s certain opposition was also a high-risk gamble.) This is a risky and expensive way to launch new products.

In the Martha Stewart case, JC Penney wanted to sell Martha-branded housewares products so badly that it persuaded itself that using stores-within-the-store to sell Martha’s products fit within an exception to her exclusive license agreement with Macy’s.  Whether or not the court ultimately agrees with this argument, I have noted before proceeding with an extensive product launch based on a newfangled theory like this was guaranteed to get Macy’s (which has been a loyal Martha Stewart partner) to sue.  While the New Jersey judge’s injunction left a little business in Penney’s court pending the resolution of the case (Penney’s can sell Martha-branded products outside the exclusivity provisions of her deal with Macy’s as well as Martha-designed products that don’t bear her name), the decision to license by litigation likely led the Penney board to fire Apple store-genius Ron Johnson as CEO.

Meanwhile, both parties continue to spend millions of dollars (per month, probably), and JC Penney is facing even bigger challenges than whether it can build a housewares department around Martha Stewart.  But the case goes on.

It may seem strange for a lawyer like me to resist the idea of litigation so strongly.  Sometimes litigation is the only way to resolve an intractable dispute, and I have a lot of respect for good litigators and judges.  I also don’t have any inside knowledge about these two cases, and there may be factors that made litigation a better option than it looks like from here.

But making great new products happen between partners is already a complicated business proposition, and having to build litigation into your product launch plans makes it a lot riskier than it should be.

At IMC, we would rather spend time strategizing with a client about alternative ways to achieve their goals, or developing creative solutions to a potential brand-conflict, than fighting to resolve these issues in court.  And we would have a hard time ever persuading a manufacturer to take on a deal that may represent nothing more than a license . . . to be sued.