When House Foods, one of Japan’s largest food manufacturers, decided to develop a line of weight loss food products for sale in Japan, it reached out to Kleinbard client Nutrisystem, which has been a leader in the weight loss food industry since the mid-70s.
Because Japanese food culture is very different from America’s, what House Foods needed from Nutrisystem was not recipes or technology involving the actual food sold by Nutrisystem. Instead, House Foods wanted the right to use Nutrisystem’s well-known trademarks and its unique business model – i.e., the methods Nutrisystem uses to promote, market and sell its food products through various trade channels (online, television, print and direct mail); provide weight loss and weight management counseling; and operate its industry-leading ecommerce site. House Foods also determined that it needed certain portions of the software used to run Nutrisystem’s website since the new line of House Foods products would only be sold via the Internet.
Following several in-person meetings among executives from both companies (including some held in Japan) and the development of a term sheet, Nutrisystem engaged Kleinbard to draft and negotiate a license agreement with House Foods granting it exclusive rights to Nutrisystem’s intellectual property in Japan.
Several complex issues needed to be resolved in the negotiations, including: (1) which parties would own future improvements and refinements to Nutrisystem’s business model (whether developed by Nutrisystem or House Foods); (2) whether and to what extent House Foods would have access to and the right to use future improvements to Nutrisystem’s business practices that Nutrisystem deployed in the American market; (3) how Nutrisystem, with its limited knowledge of Japanese food culture, would monitor and exercise quality control over the House Foods products sold under the Nutrisystem trademarks (U.S. trademark law requires licensors to exercise such control); and (4) the extent to which House Foods could sell Nutrisystem-branded products to purchasers located outside of Japan (the planned e-commerce site would be accessible to anyone in the world with an Internet connection).
After several weeks of negotiation with House Foods’ in-house counsel, the license agreement was signed and House Foods made significant advance royalty payments in exchange for the right to begin developing its new line of Nutrisystem products. Although the development phase lasted for more than a year, the new products were immediately successful in the Japanese market. Because the license’s royalties were calculated based upon net sales of the products (subject to minimum annual payments in the early years), Nutrisystem considers the license to be a successful way to create an income stream from its intellectual property in an unfamiliar market.