Important to keep an eye to the future in co-branding deals

Intellectual Property /
John Simpson
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By Tony Poland, LegalMatters Staff • Co-branding deals can help businesses expand their market but caution is required when entering into such agreements. It is especially important to consider what happens when the partnership ends, says Toronto intellectual property lawyer John Simpson.

Simpson, principal of IP and new media law boutique Shift Law Professional Corporation, points to a recent trademark and copyright infringement lawsuit filed in the United States by Canadian athletic apparel-maker Lululemon accusing Peloton of trade dress infringement, false designation of origin, and unfair competition as an example of a co-branding endeavour that ended up in court.

Lululemon filed its claim in California in November, less than a week after Peloton asked a Manhattan federal court to summarily dismiss Lululemon’s claim following a cease-and-desist letter from the apparel maker.

“Cases such as these should serve as a warning that if you are going to enter into a co-branding agreement, you need to pay close attention to the terms of the deal and specifically what happens after it ends,” he tells LegalMattersCanada.ca. “You really have to try to anticipate as much as possible where your partner is going to go after the arrangement ends and ensure that you include terms in that deal that are going to prevent your business and your brand being harmed in the future.”

Apparel was branded with both companies’ trademarks

Lululemon and Peloton entered into a wholesale co-branding partnership in 2016, which saw the athletic-wear company supply apparel to the fitness-equipment manufacturer. The apparel was branded with both companies’ trademarks and sold through Peloton’s showrooms and website. 

“There was a benefit to both parties. Lululemon became part of the craze of working out from home and Peloton was able to get in on the fashion aspect of athletic wear,” says Simpson, who is not involved in the case but comments generally.

After the partnership ended last year, Peloton launched its own product line. In its claim, Lululemon accused Peloton of selling copycat products that closely resemble several of the retailer’s best-selling designs. 

Without addressing the merits of the case, Simpson says when the co-branding agreement began, there appeared to be advantages for both companies.

“These types of agreements are not unusual and can come up in all sorts of contexts where brands may be in different industries,” he explains. “Companies with a similar type of customer or target demographic get together and use each other’s brand equity to help each other increase their visibility in the marketplace.”

Partnerships are formed to reach desired customer audience

For example, a high-end luggage maker may partner with a luxury automobile manufacturer to reach their desired customer audience, Simpson says.

“Another example would be companies in the same business selling the same product but in different regions,” he says. “One of the benefits to co-branding is synergy. You can share the same sort of social media platforms and the same customer lists to market your product. For Lululemon and Peloton, you can imagine that there might have been some cross-promotional advantages and sharing of marketing information.

“However, while this kind of agreement may be profitable while it lasts, it is not always good when it is over,” Simpson warns.

A company may be able to take advantage of a co-branding relationship to expand its business into new markets, using the knowledge it picked up from its partner, he says.

‘One company can move into a new market through its affiliation with another’

“One company can move into a new market through its affiliation with another,” says Simpson. “They learn about their co-branding partner’s business and then discover that their own customers really like the new product. Then they decide to just do it themselves with similar designs and their own logo. 

“Did Lululemon foresee that Peloton would become more than just an exercise manufacturer and become a fashion brand? The lesson is you have to be careful who you enter into these agreements with,” he adds. “You should be aware that there exists the possibility you could be potentially harmed by entering into a branding relationship with someone who may later become a competitor.”

He says a co-branding contract is not unlike a prenuptial agreement in a marriage. 

“In both agreements, you want to do as much as you can to protect yourself from some of the harms that may result,” Simpson says. “Just like a marriage, things can get messy when a co-branding relationship ends. You may have shared many things and some of it you are not going to get back. Just like in a marriage contract, you want to be very clear about what belongs to who and what happens after.

Important to consider end of relationship

“It is essential to consider not just what occurs during the term of the agreement, but the fallout when it is over,” he adds. “First of all, how do you terminate the partnership? If one party decides they are no longer profiting from the arrangement, can they end it immediately? And then what happens after termination if one company still wants to ride the benefits of that association?”

Using Lululemon and Peloton as an example, Simpson says an apparel company could share their clothing line co-branded with an fitness-equipment manufacturer’s logo for the duration of the agreement on the condition that the exercise-equipment maker agree not to start its own clothing line when the deal expires.

Co-branding has its advantages, he says, but, in the end, it is important to consider the possible consequences.

“Often the advice given by marketing consultants and trademark lawyers is aligned and this would be an example of that,” says Simpson. “You must be careful who you enter into these agreements with and cautious when negotiating the terms to ensure you are as protected as you can be after termination of the arrangement.”