Breaking down Brexit in the lead-up to BLE

As the CP industry preps for Brand Licensing in London, questions loom over the UK's decision to leave the EU. But there’s no need to panic—just yet.
September 13, 2016

The question of whether or not the UK was going to leave or stay in the European Union was answered by the historic Brexit referendum held on June 23. To say its results were an upset might be a typical British way of understating things. The country’s currency took a nosedive and “What is the EU?” became the second-most-searched term on Google in the early morning hours of June 24. But as new UK Prime Minister Theresa May has famously declared, “Brexit means Brexit.” So what does that mean for the UK consumer products community in light of its ever-growing ties to rest of Europe? The short answer is: “Remain calm while we try to figure it out.”

“The climate is very uncertain at the moment,” says Danny Schweiger, joint MD of UK-based licensed textile manufacturer Character World. “It’s very difficult to second-guess what’s going to happen, exactly. And it’s then very difficult to formulate strategies, because as a business, we need to try and understand what it all means for us.”

That uncertainty has been building since the day after the vote. Ultimately, the UK voted to leave the EU by a margin of 52% to 48%, which would make it the first country to exit the EU since its formation in 1993. However, the process of separating from the trade has yet to begin, and the UK continues to be subject to EU laws and obligations. Brexit will only truly be triggered when the UK government informs other member countries that it wishes to leave under Article 50 of the Lisbon Treaty.

If and when it announces its intention to leave the EU, the UK will start a two-year transition period during which negotiations will take place in an effort to cement new trade deals. And it’s this ongoing delay in invoking article 50 that is making the formulation of future strategies difficult for many businesses in the licensing industry.

“The button hasn’t even been pressed yet by the UK Prime Minister,” says Schweiger. “There’s a huge question mark over everything. This is quite possibly the most seismic change, certainly the most seismic change politically since the end of the Second World War.”

Currency fluctuations are also reflecting these feelings of uncertainty, with the value of the British pound against the US dollar declining immediately after the vote. In fact, the pound fell to US$1.32 following the vote—its lowest level against the US dollar since 1985—and then dipped even further before recovering slightly. (At press time, the pound sat at US$1.319.) And the financial consequences of these shifts are significant for the licensing industry, says Schweiger.

“From a currency point of view, the dollar rate with pound sterling means it’s more expensive for us to buy products in China. If it’s more expensive to produce, we have to pass that on to the retailers,” he notes. “They will then pass that on, no doubt, to the consumers. So there’s going to be some inflationary pressure on everybody, and everyone’s being a bit careful about what they say at the moment.”

In fact, many industry execs seem to be reluctant to say anything about Brexit at all. A number of Kidscreen’s interview requests were politely declined, while many went unanswered altogether. Rob Corney, group MD of London-based Bulldog Licensing, however, feels the UK licensing industry is a bit too worried right now about what the future might hold.

“It does make things more challenging, obviously,” Corney says of the British pound’s decline. “Our licensees are buying products in the Far East in US dollars and selling in sterling, so it does make the cost of goods higher. But it’s a few percentage points more, not the 40% hike people were predicting.”

Looking beyond the initial panic, Corney says, Brexit will in fact boost the UK’s economy in the long term. “As an EU member, you can’t negotiate on your own terms. You’re trying to negotiate terms that would [for example] suit Greece as well as the UK, countries with wildly different cultures and economies. So a lot of people voted on economic grounds.”

Negotiating trade agreements with the rest of the world will be easier, he says, when the UK is not saddled with taking into account the interests of the rest of the EU nations. Corney believes that the Treaty of Rome and the European Economic Community (EEC) have proven to be big obstacles for UK licensing.
“[Due to the free movement of goods], if you make an agreement for a European nation, you’re allowed to sell your goods in any other European nation,” Corney says. “So if you sign a deal to make t-shirts in France, and then Tesco in the UK wants to buy them, you have every legal right to sell your t-shirts to Tesco, too.” He contends this type of cross-border trading has become a real issue as UK licensees, thanks to the economic strength of the UK relative to other EU countries, are disproportionately affected.

“Because while France and the UK may have similar sorts of finances and reach, we’re finding quite a lot of countries and territories are taking preferential deals in smaller territories, so [the licensor] might get percentage points off their royalty rate or a preferential guarantee, but they are then able to trade into territories like the UK.”

Changes in the free movement of goods following Brexit could benefit smaller licensees struggling with the current system, Corney says. But the ability to negotiate contracts independent of the EU goes far beyond the limitations of the EEC.

“The biggest benefit overall is the ability for the UK to look overseas to strike trade agreements,” says Corney. “The horizon for business is much bigger than the EU. The EU is effectively a tariff barrier to prevent trade from outside the EU, so once you remove those barriers, it’s a much bigger world. In many ways, Brexit removes the shackles.”

Schweiger agrees that independent trading could be hugely beneficial to the UK, but contends there should be caution against becoming too distant from the EU.

“Personally, I believe we need each other,” he says. “The UK and its trading with Europe will still be key to the UK’s future financial prosperity. If you just think of that alone, then it’s incredibly advantageous for the UK to have strong links with Europe, and I think for Europe to have strong links with the UK, as well.”

Because so much is still up in the air as licensors and licensees wait for the UK government to act on Brexit, Schweiger says patience is crucial. “I think, overall, it’s dangerous to get too carried away. I think it’s dangerous to create too many strategies at the moment. I think from our point of view, we’re adopting a ‘wait and see’ policy. When new information comes out, we can then deal with it.”

Timothy Sinnott, a partner at law firm Bereskin & Parr in Toronto, Canada, also advised against knee-jerk reactions. A significant amount of intellectual property is protected by copyright, Sinnott says, and should not be affected by Brexit. Similarly, patents will remain largely untouched, although the current efforts to establish unitary European patent courts might be delayed as one of the courts was expected to be in the UK.

With copyright and patents out of the picture, says Sinnott, the majority of professionals in the licensing world are worried about trademarks. “We file quite a few EU trademark applications because it’s a good way to go,” he says. “You can cover all 28 countries of the EU with one application. You can cover up to three classes for one fee. It’s fairly cost-effective, and the process is very efficient.” These benefits could very well be affected by Brexit as the UK will no longer be included under the EU umbrella.

However, Sinnott says the party negotiations leading to the UK’s exit could very well include an agreement that allows companies with European registrations to maintain rights in the UK. “The UK will probably allow you to convert existing European trademark registrations to UK trademark registrations,” he says. “We don’t know that for sure, but it’s unlikely that existing owners with European registrations will be left out in the cold in the UK. There’s no need to panic.”

Property owners feeling unsure, however, have been advised to file trademark applications in both the UK and the EU going forward, he says. Sinnott also cautioned licensors to be aware that like Canada and the US, the UK has common-law rights, which allow a party to acquire trademark rights through use. In Europe, he says, the majority of countries are first-to-file, which means a registration is necessary to acquire and enforce a trademark. Licensors who have only previously approached the EU through the gateway of the UK, in other words, should do their due diligence to ensure they are familiar with each territory they are partnering with.

Corney, though, believes this is also a non-issue. “Most people don’t sign ‘Europe’ as the territory in their agreement. They specify the territory in their agreement because Europe is a non-event, there are completely different meanings of Europe. The European Economic Area is a completely different set of countries to the European Union. There are all sorts of different definitions of Europe,” he says.

“Anybody with any sense would have contracts that state the territory you want to trade in. And in the same way the US is not part of the trading block of European countries, but you still have agreements that include the US and European territories, there’s absolutely no reason why a European deal can’t be struck with the UK [as a separate entity]. ”

Contractually, Corney believes very little adjustment will be needed. The uncertainty surrounding Brexit has been borne out of the fear of change, he says, rather than the actual facts of the matter, and issues of changing trademarks or the pound’s value are unimportant when compared to the single most significant aspect of licensing.

“Licensing is all about having the right brand,” says Corney. “The barometer in licensing is really about the strength of your property and your ability to deliver it to market. And in a good economy, people may well buy more than they will in a poor economy. But if you’re delivering the right brand to the right retailers, then your brands will do better or worse depending on their strengths, rather than the strength of the overall economy.”

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