A global supply chain for apparel, accessories and footwear can provide cost advantages that can secure a worldwide competitive advantage, but wages and working conditions in garment factories in Bangladesh and other low wage countries are concerns that present liabilities for potential reputational damage. Many companies are now working to improve factory conditions as part of corporate social responsibility initiatives. While maintaining a cost advantage can be at odds with working condition transparency, the problems are even more complex when products are manufactured by a third party under a licensing agreement.
License agreements for the manufacture of apparel, accessories or footwear usually include specific provisions regarding the licensee’s factories. The nature and extent of these provisions vary significantly, but here are a few of the most common variations of these provisions and notes on each:
Adherence to Licensee’s Codes
For licensees that are large and/or public companies, written corporate codes of conduct addressing such issues as child labor, slave labor, working conditions, discrimination, wages and collective bargaining at the factories that produce its products are common. The licensee may be required to covenant that all of its factories under the license adhere to the licensee’s codes. But even with such a covenant, the licensee is unlikely to agree not to amend its codes (or to seek consent to amend its codes from the licensor). THe result is that the licensor may not be assured of continuing protection. To address this, a licensor might also seek a covenant similar to the ones below.
Assurances that the Licensee’s Factories Meet Specified Standards
A licensor may requires the licensee’s factories to meet certain standards. Two common standards are:
“compliance with all applicable federal, state and foreign laws and ethical industry standards”
“conformity with best industry practices and standards”
Alternatively, a licensee might specify a full listing of the actual standards, similar to a corporate code of conduct. The third approach is the clearest and most specific, and in some cases “compliance with applicable laws and ethical industry standards” may be too vague a standard to enforce. Also, it may be difficult to determine “best practices” in light of the wide variety of practices across geographic areas.
For either type of covenant, the licensees would want a materiality, or knowledge, qualifier to minimize the risk of a breach. But the licensor may seek to have each factory certify in writing that it complies with the applicable standard or may require the licensee to periodically verify compliance or may seek access to the factories to ascertain compliance.
It is critical that these license agreement provisions be drafted and negotiated with care.
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