Licensing Character Designs for Merchandise: Key Terms for International Deals

Begin With a Rights Audit

Before licensing a character, confirm that the party making the deal actually controls the material being offered.

A character package can contain several separate elements:

• original character artwork;
• character names and logos;
• costume and visual design elements;
• illustrations created by freelancers;
• fonts, patterns or stock elements;
• phrases associated with the character;
• artwork adapted from an animated production.

If an outside artist created important material, check the relevant agreement instead of assuming that payment alone transferred every necessary right.

Build the Deal From Four Coordinates

WIPO’s current licensing guidance uses the same basic logic: identify the IP, define how it may be used, specify the relevant field or market, establish the duration and determine what rights the licensee actually receives.

Define the Character Material Precisely

A license for “the character” can be unnecessarily ambiguous.

Consider whether the license covers:

• the full character illustration;
• specific poses or model sheets;
• the character name;
• logos and word marks;
• catchphrases;
• approved color palettes;
• supporting characters;
• new artwork created by the licensee.

An attached style guide or approved asset library can make the creative boundaries much easier to understand.

Product Categories Should Be Specific

Character merchandising can be divided between different licensees by product category. One company might receive apparel rights while another receives rights for collectibles or stationery.

Create a Licensing Brief Before the Contract

Exclusivity Should Have Boundaries

An exclusive license can be valuable to a manufacturer because competitors can be prevented from receiving the same licensed rights within the agreed scope.

But “exclusive worldwide merchandise license” may be far broader than necessary.

Exclusivity can instead be divided by:

• country;
• product category;
• retail channel;
• customer segment;
• time period.

A studio may therefore license apparel exclusively to one company without giving that company exclusive rights to toys, publishing or every other use of the character.

Creative Approval Protects More Than Artwork

Character merchandising can affect how audiences perceive the underlying animation property. A badly manufactured product or off-model character image can damage that perception even when the licensee technically paid for permission.

WIPO’s licensing guidance specifically identifies quality guidelines as one tool licensors can use to protect their IP from misuse.

The agreement should also establish how approval requests are submitted and how the parties handle revisions so the process does not become a production bottleneck.

Royalties Need a Defined Calculation Base

A royalty percentage has little meaning until the agreement explains what the percentage is applied to.

If compensation is based on sales, define the relevant revenue base and the permitted deductions rather than relying on an undefined phrase such as “net sales.”

Licensing economics may also include an upfront payment, minimum guarantee, ongoing royalty or a combination of structures. WIPO’s current guidance recognizes several of these compensation approaches.

What should the commercial section clarify?

Reporting frequency, currency, royalty calculation, permitted deductions, payment dates, treatment of returns, records to be maintained and any agreed audit rights.

Control Sublicensing and Manufacturing

The company signing the license may not manufacture the products itself. Factories, distributors, ecommerce operators and other subcontractors may enter the chain.

The agreement should make clear whether sublicensing or subcontracted use of the character is permitted and what responsibilities remain with the licensee.

This becomes especially important when products are manufactured in one country and sold in several others.

“Worldwide” Does Not Mean One Worldwide IP Law

WIPO emphasizes that intellectual-property rights are territorial. Copyright receives automatic protection in Berne Convention member states subject to the applicable legal framework, while trademarks and industrial-design rights generally require territory-specific protection strategies.

For trademarks, eligible rights holders can use WIPO’s Madrid System to seek protection in multiple participating markets through an international filing system.

For industrial designs, the Hague System can similarly provide a centralized route for seeking design protection across participating jurisdictions.

Plan the End of the License Before It Starts

A merchandising agreement should explain what happens when the term expires or the agreement is terminated.

Questions to resolve include:

• When must manufacturing stop?
• Can existing inventory still be sold?
• How long does any permitted sell-off period last?
• Must digital product listings be removed?
• What happens to unused packaging?
• Do outstanding royalties remain payable?
• Which confidential materials must be returned or destroyed?

Without a clear exit plan, merchandise may remain in distribution long after the parties believe the license has ended.

Use the Contract to Protect the Character’s Future

An animated character may later expand into games, publishing, new series, feature films or different merchandise categories.

The licensing deal should therefore be broad enough to support the current business opportunity without accidentally giving away unrelated future rights.