Private Label and
Co-Branding Deals by Eric Goldman,
Esq., Cooley Godward LLP,
Palo Alto, CA Introduction The Web has created a new way for information providers to interact
with their users. Because linking on
the Web can create a network of sites that appear integrated and seamless to
users, from the user’s perspective it is often unimportant which server they
are accessing when moving around the Web.
As a result, relationships are being struck where one site (the
“brander”) will place its branding on the content or functionality of another
site (the “provider”), extending the perceived boundaries of the website. These types of relationships can take a
number of forms. Sometimes the provider
will have no branding on the pages it provides; this type of arrangement is
called a “private label” deal. More
frequently, the provider and brander will each have their brands on the site;
this type of arrangement is called a “co-branding” deal. Although this article focuses on private
label deals, much of the analysis applies to co-branding deals as well. Co-branding relationships have become ubiquitous on the Internet,
particularly with the emergence of the “portals” who have established networks
of websites under a common branding.
For example, most of the features below the home pages of the search
engines are co-branded pages operated by third parties. A number of companies have emerged to
provide services virtually exclusively on a co-branded basis, either through the
portals or more generally. Examples of
such companies include WhoWhere?’s email service, iName’s email service and
Vicinity’s map services. While private label and the co-branding agreements raise a number of
new issues on the Web, there are numerous existing analogies. For example, most supermarkets and many
other retail stores will carry goods manufactured by a third party but carrying
the retail outlet’s brands. This type
of arrangement has historically been called a private label deal. (Compare the classic Original Equipment
Manufacturer (OEM) relationship, where the branding party sells the goods
through a chain of distribution). Private label and co-branding deals raise interesting issues in part
because they expose a dichotomy between the business practices and the legal
implications. From a business
perspective, the parties to the deal are often less concerned about whose
servers content sits on—as long as the intended audience can reach the pages and
branding is appropriate, the rest of the aspects of the relationship are just
“details.” However, as discussed in
this Article, this decision may have a number of legal ramifications. At the heart of the relationship, a private label deal is primarily a
trademark license from the brander to the provider and an agreement for the
provider to provide services and perhaps access to intellectual property to the
world (or occasionally only to traffic generated by the provider). In practice, this relatively simplistic
description masks a number of complexities that must be addressed for the
parties to achieve their objectives. Why Do It? There are a number of reasons for a brander to enter into a private
label deal. First, like any other
outsourcing arrangement, the brander can take advantage of the provider’s
expertise or economies of scale. For
example, the provider may be in the business of building and maintaining a
database that the brander does not wish to try to replicate (i.e., it is cheaper
to buy than to build). Alternatively,
the provider may have superior software tools, and the brander simply cannot
cost-effectively or time-effectively develop competing tools. Second, content is critical on the Internet. A private label deal allows the brander to appear to have a
larger website, or to have a more extensive set of features, than it really
has. There are also several advantages from the provider’s point of view. First, a private label relationship takes the place of a licensing
arrangement. Rather than using its
intellectual property in only one channel—its own website—the provider can
“recycle” the content. A private label
arrangement allows the provider to establish parallel channels, thereby
potentially getting multiple revenue streams from the same content or functionality
instead of one. Of course there is
always the risk of channel conflict or cannibalization, but if the provider
strikes relationships with different brands with access to significantly
different types of consumers, this risk may be worth bearing. For a perfect example of multi-channel recycling, consider the business
practices of Vicinity <http://www.vicinity.com/>. Vicinity provides a database of maps and
related materials (such as driving instructions). Vicinity has successfully private labeled its content to search
engines, travel sites, yellow page directories, newspapers, retailers and
others. See <http://www.vicinity.com/vicinity/publisher_cust.html
and http://www.vicinity.com/vicinity/corporate_cust.html>. Each of these customers is presumably
getting the same database, but the relationship stills makes sense because each
site is—in users’ minds—adding valuable add-on content/services to its existing
offerings. This is true even though a
user could go directly to Vicinity or elsewhere to get access to the same
content. Second, the provider can effectuate this “license” without actually
having to provide a physical copy of its content. This has numerous benefits for the provider, not the least of
which is that the provider has fewer issues to worry about under intellectual
property law. For example, consider a
publicly accessible database of facts, such as a directory of phone
numbers. These types of databases are
currently subject to little if any protection under US intellectual property
laws. Databases of facts are unlikely
to be covered by copyright, which does not protect facts; at best, the database
will be subject to a thin compilation copyright, which may be easy to
circumvent. Because it will be made
available to the public, the database cannot be treated as a trade secret. Therefore, historically the database owner’s
only option was to license the database using a set of restrictions
synthetically created by contract and lacking any intellectual property
protection to act as a backstop or as a more powerful point of leverage in case
of breach. Further, because there are no intellectual property rights underlying
the content, if the content escaped the control of a contract licensee, the
licensor had no power to stop downstream recipients from further
“infringement.” As a result, the
licensor’s asset was constantly in jeopardy. Using private label deals, the provider can offer all of the benefits
of the content without circulating a copy of the content to third parties. Because the provider can provide access to a
single copy of the database over the Web, the provider can much more easily and
reliably use technology to control the content rather than contracts and law. Additionally, by controlling the number of copies of the database
circulating in the world, it is much easier to ensure that all copies of the
database are “in sync” and current.
This can be a significant logistical consideration for complex,
time-sensitive databases such as reservations databases. A final benefit of these types of arrangements occurs in the
co-branding context or when the provider is able to insert some branding on the
brander’s pages. By being exposed to
new users, the provider may see increased traffic on its own site. Making Money from the Relationship There are two primary flows of revenues from the brander to the
provider. First, there are set-up and
maintenance fees analogous to hosting fees.
Second, there can be a revenue share or other royalty-like relationship. a. Set-up
and maintenance fees The set-up and maintenance fees represent one of the first potential
pitfalls for providers. At its core,
the set-up and maintenance of the pages is a hosting relationship. Hosting relationships are notoriously
difficult to make a profit from on a large scale. Although frequently these set-up and maintenance costs are priced
on a “package” basis, these services are effectively priced either on an hourly
basis or on a cost-plus basis. The
provider needs to carefully circumscribe its obligations or to price the
obligations at a high enough level, or the provider may find that set-up and
maintenance creates a drag on profits from the relationship. While it may sound obvious that set-up and maintenance costs be passed
through to the brander, in practice many providers trivialize these costs (“oh,
that won’t take much time to do!”). As
a result, a provider often offers services at no cost as an inducement to “get
the upside” that presumably will flow from the royalty/revenue share. Clearly this decision can be justified at
times, but generally providing services upfront in anticipation of downstream
royalties can have serious implications for cash flow, accounting profitability
(i.e., costs are incurred before revenue is recognized), and business risk
being taken on from the deal. The provider also needs to be careful about deriving the bulk of the
revenues from the set-up and maintenance costs without upside potential. This clearly turns the provider into a web
host, and as suggested earlier, web hosts have a very difficult time obtaining
significant margins. While web hosts
can find profitable niches, this business model needs to be carefully
considered. b. Revenue
Sharing—Advertising There are a number of ways to structure the royalty or revenue sharing
relationship. The most popular way is
to sell banner advertisements on the branded pages and share revenues from
those advertisements. Banner
advertisements, or similar advertiser-driven relationships, raise a few
difficult issues. First, there is the issue of who controls the advertising. The brander may wish to control the
advertising on the branded pages to ensure that the advertising messages are
acceptable—the brander may not want competitors advertising on the site, and
the brander may not want “objectionable” advertising placed on the site because
of the potential dilution effect on the brander’s trademarks and branding. Often (although not exclusively), the
brander may also be the party with superior access to potential advertisers and
therefore be in a better position to procure advertising. The provider may wish to control advertising to ensure that maximum
dollars are achieved. This is critical,
of course, because most providers expect to make their profits from the
relationship from the revenue split, and as discussed above, often will make
little or no money from the set-up and maintenance aspects despite incurring
those upfront costs. Although it may sound odd that a revenue split does not properly create
an incentive for branders to maximize revenues from advertising, there are a
number of reasons why branders may not do so.
First, if the brander has unsold page impression inventory on its site
(and few—if any—sites do not), the brander may not need to obtain any
advertising revenues from the branded pages.
Rather, if the branded pages enhance overall traffic to the brander’s
site, then the brander in fact may be able to see increased revenues from the
rest of its site. In this situation,
unless the provider gets a share of revenues generated from the brander’s site,
the brander will not obtain a fair share of revenues merely by splitting the
revenues from the branded pages. Second, if the brander controls the advertising, the brander could
place barter ads (i.e., advertisements that are given space freely in exchange
for the brander’s banner advertisements being placed freely on the advertiser’s
site) or its own banner advertisements in the inventory, again undercutting the
provider’s expectation that revenues will be maximized from the branded pages. There are a number of alternative solutions to these problems. First, the provider can remain in control of
the advertisement, subject to a rigorous set of standards provided by the
brander or subject to brander’s veto power, which will not be unreasonably
exercised. Second, the parties can
outsource the advertising to an advertising representative firm, effectively
letting this “neutral” third party take some control over the problem. Third, the brander can take control but
guarantee the provider minimum payments (either per page-impression or per
month). Fourth, the parties can
exercise “joint” control, giving each party with veto power over the other
party’s actions. Finally, the provider
can let the brander control and establish a business model that is not predicated
on maximizing advertising revenues, such as the other revenue sharing models
discussed below. c. Revenue
Sharing—Transactions An alternative business model is for the parties to sell goods or
services on the branded pages, thereby letting the parties share the revenues
flowing from these transactions.
Obviously, there are a limitless number of types of transactions that
the parties might do. For example, a
growing number of companies are offering co-branded “affiliates” programs,
whereby the provider will display a co-branded sales page to traffic generated
by the brander. For a set of examples,
see Geoffrey Gussis, Drafting Vendor-Oriented Affiliate Agreements (April 27,
1998) <http://www.digidem.com/legal/afil/>. d. Revenue
Sharing—Providing Traffic to Provider A completely different business model can arise in a co-branding deal
when the primary purpose of the branded pages is to transfer users from the
brander’s site to the provider’s site.
Typically, then, the co-branded pages will contain numerous links to the
provider’s site, and often there will be some sort of “sample” or freebie to
get the users to consider continuing their surfing to the provider’s site. In this situation, the brander will want to share in the revenues the
provider generates from these users.
The provider might generate revenues from users based on page
impression-based advertising, which can be accounted for by tracking the users
who come from the branded pages onto provider’s site and counting the number of
page impressions generated by these users.
Alternatively, the provider may offer transactions from its website, and
the brander could share in those revenues. In these situations, then, it may be the brander who is concerned about
the provider’s incentives. The brander
will be letting the provider use its valuable trademarks, and perhaps more
importantly, the brander will be losing its traffic to the provider’s
site. Therefore, the brander must
ensure that adequate mechanisms are in place to compensate the brander. In most of these cases, the brander will want to “tag” its users so
that their incremental benefits to provider can be measured. There are four primary ways to do this. First, the parties can try to use IP address
analysis, but this remains a crude science and is rarely helpful. Second, the parties can use registration, whereby the users being
transferred are forced to register.
These users can then be tracked by requiring subsequent log-ins, by
issuing the users a digital certificate, or by loading a token into a cookie
(discussed below). Registration is
rarely a good result because of user antipathy towards such impediments. Third, the parties can load a token into the user’s cookie without
registration. This method is the least
intrusive to users, but the brander should recognize that the cookie method is
not foolproof. First, users might
refuse the token. Second, the user
might edit the cookie file. Third, the
user might switch browsers. Fourth, the
user may be using a browser that does not support cookies. Finally, the parties need to decide if the
token should expire per session or on some other basis, depending on whether
the brander’s contribution is best measured by instant response or any response. If the token expires per session, of course,
the brander may lose some users who return to the provider’s site after the
token has expired. Fourth, the provider can analyze users based on their referring URL.
This can be done on a one-iteration basis (i.e., if the user is linking from the
brander’s website), or users can be traced through the site by building custom
URLs for these users that contains some information about the user or the
brander in the URL. For an example of
how information about a person can be tracked by the URL from page to page,
consider the URLs built based on searches in Altavista <http://altavista.digital.com/>. Tagging, transferring and tracking users creates some difficult issues
about “ownership” of those users, discussed below. e. Defining
Net Revenues In all cases of revenue sharing, the parties will need to define
whether gross or net revenue is being shared.
Defining net revenue in this context is not much more difficult than in
other contexts, but there are a few issues that need to be addressed. In the case of advertising revenues, the key issue is how the
advertising representative’s fee will be split. Currently, advertising representatives are taking up to 50% of
the revenues from the ads they are placing, so effectively this means the
parties are in a three way split. To
avoid such heavy fees, the parties might let the party that directly sells the
advertising (i.e., if the brander or provider can sell the advertising without
relying on the advertising representative firm) keep a larger percentage of the
revenues. The parties will also want to
deal with the issue of how unsold advertising is allocated, and if a party to
the deal is permitted to use the unsold inventory for a fee. In the case of transactions, it is usually fair to subtract sales or
use tax, shipping costs and actual returns from net revenues. Since almost all online sales will be made
pursuant to a payment system, the parties should also consider how the payment
system fees, such as credit card fees, will be treated. Intellectual Property Ownership and Licenses Because the parties are in a close relationship, the parties need to
carefully consider a number of issues regarding ownership of various aspects of
the branded pages. a. Owning
“Customers” It is very common for the parties to think about one party or the other
“owning” customers. Of course, customer
lists are valid subject matter for trade secret protection, and in this context
the parties could structure this aspect of the relationship as a trade secret
license. In fact, the confidential
information is not just the list of customers, but all information gleaned
about the customers—including their demographics, their psychographics and any
information provided via registration.
The number of page impressions being delivered, the rate being charged
advertisers and the number of transactions being consummated is also
information that could harm one or both parties if released and therefore is
extremely sensitive. It may be that
this information should be categorized as the confidential information of both
parties and subject to use and disclosure restrictions on both parties. At minimum, it is likely that this
information should be the confidential information of one party. Because the server logs will contain most of the information one would
need to know to deduce proprietary customer information, the server logs must
be made confidential information of at least one party. Both parties presumably will want either
access to the server logs, or an analysis of the server logs. One particular use restriction to consider is the spamming of users to
the extent that email addresses are collected.
Each party will most certainly not want this database of email addresses
being available to competitors.
Furthermore, because of the negative connotations of spamming, and the
associated ill-will directed at sites that collect email addresses that are
used for spamming, each party may want to restrict the other party’s rights to
send email to the addresses for any reason. It makes little sense to address copyright rights in the database of
information regarding customers, although sometimes the parties will be
confused about this. b. Ownership
of Site’s “Look and Feel” To the extent that the parties will jointly design the look and feel of
the branded site (which will incorporate existing branding from the brander),
the parties will need to determine the ownership of this look and feel. While there are some trademark aspects to
the ownership of the look and feel, there are likely to be numerous elements of
the look and feel which may receive copyright protection, and the entire look
and feel could be subject to its own separate copyright. Frequently the parties will initially intend that the parties “jointly”
own all copyrightable elements. Joint
ownership of copyrights is usually a bad idea, because the joint owners will
have numerous duties to each other that are not clearly defined under U.S.
copyright law. Once the joint ownership
issues are analyzed, the parties rarely will conclude that it meets their
needs. If the parties do not want joint ownership, they should be careful to
avoid their efforts being classified as “joint works of authorship” under U.S.
copyright law. The status of joint works
of authorship can be easily destroyed in the parties’ contract by expressly
saying that no joint works of authorship are intended. In all cases, the parties need to define what will happen to the
branded pages following termination of the relationship. There are no standard resolutions to this
matter, but usually a satisfactory resolution can be reached if discussed by
the parties as part of the contract negotiations. Finally, if the provider is developing some or all aspects of the look
and feel, the provider usually will need a license to create a derivative work
(perhaps only in the form of the compilation) of the brander’s materials. If the provider will be the owner of the
look and feel and if the provider needed a license to create the derivative
work, such license will need to continue following termination if the provider
is intended to have the right to use the derivative work thereafter. c. Trademarks Trademark issues are critical to the success of the private label and
co-branding deals. Close attention is
warranted to all aspects of the trademark issues. The brander’s license to the provider of the brander’s trademarks
raises few unique issues. As in other
situations, the brander must establish mechanisms to ensure quality
control. If there are personality or
character rights involved, these require special attention. The brander should consider to what extent the branded pages should
permit the use of provider’s trademarks.
This is likely to be a material element of the business relationship and
therefore is rarely overlooked.
However, there are a few special issues that can arise. First, if the brander does not intend to
allow the provider to use its trademarks on the page, does this further include
a prohibition on “credits” or other acknowledgments of effort? Second, the domain name raises its own issues. If the brander wants to completely make the
branded pages appear to be part of the brander’s site, the brander’s domain
name must be used, and the provider should obtain a trademark license to use
this domain name. If the brander’s
domain name is not used, the agreement has effectively become a co-branding
agreement and the brander should assume that all users will realize that the
provider is involved. Occasionally the
parties will procure a new domain name for the branded pages; the domain name
should be treated as a trademark and its ownership addressed accordingly. If provider’s trademarks are permitted on the branded pages, the
brander needs to decide if combination marks can be formed. In fact, often times combination marks are
intended to be formed, and the parties must address the resultant rights and
obligations. In particular, the parties
should consider who will have the right to register the combination marks and
what rights the respective parties will have to use the combination marks
following termination of the relationship. Finally, franchise law is a theoretical but nettlesome issue in these
relationships. Each state has its own
set of franchise laws, and franchisors usually must follow certain procedures
before offering franchises in the state.
Furthermore, usually franchisees cannot be terminated except for cause,
even if the agreement expires by its terms.
As a result of these unexpected and often unfortunate results, the party
that would be characterized as a franchisor has strong incentives to avoid the
application of franchise law. The
factors for determining whether a relationship is a franchise vary from state
to state, but usually there are several elements, including a trademark
license, an upfront fee, a marketing plan prescribed by the franchisor, and a
“community of interest” in marketing the product. Frequently the brander will meet a number of these factors, so
care and consideration must be given to the structure of the relationship to
destroy as many of the requirements for franchises as possible. Unfortunately for branders, many aspects of
franchise law cannot be waived contractually, so a statement by the provider
expressly waiving the application of franchise law may not prove to be adequate
protection. The Service Aspect of the Relationship Because the brander is effectively outsourcing a portion of the
brander’s website to provider, the brander will want to impose all of the
duties on the provider that the brander would impose on any web host. In all cases, the goal is to provide a good
experience for users so they will keep coming back. While usually both parties interests are in alignment on this,
the brander may have more at stake given that the user’s failure to have a good
experience will be associated with brander’s trademarks and the brander will
suffer that loss of good will in connection with the provider’s content or
software. First, the brander will want to ensure that the branded pages are
available 24 hours a day, 7 days a week without interruption. In particular, the brander will want to
institute requirements to keep the branded pages from going offline due to a
service interruption (such as a power interruption or the provider’s Internet
connection failing). Not only does this
avoid angry users, but downtime may very well be costing the brander money from
lost revenue splits or advertising. Second, the brander will want some standards for the provider’s
services. If the provider is providing
functionality (such as a chat engine or a search engine), the brander will want
to ensure that the functionality works properly. If the provider is providing access to content, the provider will
want to ensure that the content is reasonably accurate and current. In both cases the brander will want some
protection from third party claims, such as infringement of third party intellectual
property rights or misappropriation of rights of publicity or privacy. The brander should also impose some
parameters on the content added by the provider, and in particular prevent the
provider from distributing viruses or other harmful code in connection with the
provider’s content or software. Third, the brander will want to impose requirements on the provider to
keep latency times low. This means that
the provider will not only need adequate bandwidth connection to the Internet,
but the provider will also need to provide upgrades to the routers and servers
necessary to provide a fast connection. Fourth, the brander will want to consider the security methods used by
provider. Among the potential concerns
are changes made by hackers to the branded pages, spoof sites, and the storage
of sensitive materials (such as databases of customers’ credit card numbers)
behind adequately secured firewalls. Fifth, the parties should address how customer support inquiries will
be handled. Also, time periods for
responses to customer support inquiries may be appropriate. Finally, the brander should consider its stance towards caching and
indexing. Both caching and indexing may
make it difficult to destroy evidence of the branded page’s existence at the
end of the relationship, and therefore the brander should consider if this is a
problem and, if so, the best method of resolution. Conclusion We are evolving towards a more sophisticated level of deal-making on
the Web. In 1995 and 1996, many
companies eager to get on the Web launched their sites with ambitious features
and functions that prove costly and burdensome to maintain. As these companies have gained more insights
into their business, they have realized that outsourcing these obligations make
economic sense. At the same time, the seamless
nature of the Web permits an outsourcing relationship to be virtually invisible
to end users. In some circumstances,
large portions of the brander’s site will be outsourced; in other cases, the
relationship will deal with just a small aspect of a larger project. In the future, it is likely that parties
will be both providers and branders in the same agreement. In any case, it is likely that private label
and co-branding deals will become ubiquitous on the Web and warrant careful
consideration. About the author: Eric Goldman
(formerly Eric Schlachter) is an attorney practicing cyberspace law with Cooley
Godward LLP, Palo Alto, CA. He also is
an adjunct professor of Cyberspace Law at Santa Clara University School of Law. Cooley Godward’s web page is located at
http://www.cooley.com, and Eric’s personal home page is located at http://eric_goldman.tripod.com. Eric can be reached at ericgoldman@onebox.com. The original version of this article was presented at University of
Texas’ 10th Annual Computer Law Conference: Communicating and Conducting
Business On-Line in Austin, Texas on May 15, 1997, and was published in the
Journal of Internet Law, August 1997 at 11.
Cooley Godward LLP Sample Contract #1 Affiliate Agreement/Brander-Favorable As discussed, affiliate agreements are agreements whereby the provider
agrees to compensate branders for directing traffic to the provider’s site by
giving them a cut of transactional revenues generated from the provider’s
site. Most of the affiliate agreements
available on the Net are favorable to the provider, not the brander. This agreement was drafted from the
perspective of the brander. This agreement contemplates that the brander may choose to brand the
provider’s pages only by framing the pages, not by actually inserting the
branding on the provider’s servers. The
frame could be a navigational frame, or it could be a more functional frame
(including possibly containing advertising). This agreement was set up to handle any of the common user tracking
devices on a check-the-box basis. Note
that there are different provisions that apply depending on which tracking
device is used. Often clients do not
know which tracking device will be used upfront, or are reluctant to discuss
this with the attorney (“it’s a technical issue unimportant to you”), but this
choice does make a difference from a drafting perspective. Section 4 takes the position that the referring website (i.e., the
affiliate) “owns” all user data collected from the referred traffic. This is a reasonably aggressive approach for
the affiliate to take, but as used in this contract it has been frequently
successful. MERCHANDISING AGREEMENT This Merchandising
Agreement (the “Agreement”) is made as of ______________,
19___ by and between Affiliate, Inc.,
with its principal place of business at ___________ (“Affiliate”), and ________________, with its
principal place of business at ______________________ (“Merchant”). 1. The Standard Terms and
Conditions are incorporated herein by reference. 2. The following business
terms shall apply: The “Merchant Pages” are defined as the following URLs: Percent of Net Revenues payable to Affiliate: “Net Revenues” is defined as all gross revenues (including without
limitation any shipping, handling or transaction fees) received by Merchant
from Referrals for goods and services offered from the Merchant Pages, less:
(a) any taxes collected on behalf of a government agency, (b) actual postage
expenses, and (c) refunds (but not exchanges) actually refunded to Referrals. A “Referral” is
defined as (check one): ___
Option #1: a person who has Merchant’s token in their cookie. Merchant shall place the token in the cookie
each time such person comes to the Merchant Pages from a Affiliate page (unless
the person already has an active token).
The token shall expire (check one): ___ at the end of the user’s session ___ [___] days from initial placement ___ never ___ Option #2: a
person who accesses the Merchant Pages ___ Option #3: a
person whose URL includes the search argument “________.” Merchant shall
include the search argument “XXX” (a) when a person comes to the Merchant Pages
from a Affiliate page, or (b) when the referring URL includes the search
argument “_________” (i.e., as the user moves around in the Merchant Pages) Length of time
following termination that Affiliate shall receive a percent of Net Revenues: The Merchant Pages
shall be (check one): ___ Option
A: framed by Affiliate’s frames ___ Option B:
framed by Affiliate’s frames and co-branded with Affiliate’s logos/trademarks Location/position of the link from
Affiliate’s Marketplace to the Merchant Pages: Number of page impressions Affiliate will
deliver per month: Such pages will be of (choose one):
___ banner ads delivered by Merchant ___ Merchant’s trademarks and logos ___ both banner ads and trademarks/logos Location of such page impressions: 3. The following special
terms apply (describe):