WHAT IS TRADEMARK LICENSING?
If you’re the owner of a trademark, then your exclusive rights to that mark extend beyond your own immediate usage of the mark and also entail the right to license its use to others.
Licensing enables you to grow your business through third party marketing and promulgation while the actual ownership of the trademark remains with you. Trademark licensing may sound like a less-common business practice, but it’s actually quite widespread.
Here are some examples of trademark licensing many people are familiar with:
- Movie studios licensing the characters from a popular movie to toy companies (Star Wars and Marvel movies are the obvious examples.)
- Rock and pop musicians licensing their logos to merchandise producers (Think about how often you’ve seen the Rolling Stones logo on t-shirts, hats, posters, keychains, etc.)
- Kentucky Fried Chicken® licensing the use of its trademark to their franchisees.
Critically, in a licensing agreement, the licensee does not transfer complete ownership of trademark to a third party; this transaction is instead referred to as a Trademark Assignment. In an assignment, the Assignor doesn’t just give a third-party permission to use the trademark but rather provides the Assignee with the entire rights, title, and interest of the trademark.
A trademark owner may decide to assign a trademark for several reasons. They may be retiring, selling their business, cutting costs, getting tired of ensuring quality control, or are finding themselves defending against third-party claims too often. Trademark assignments are also common when a business is dissolved or a new entity for the business is formed. However, the key to understand is that in an Assignment, the ownership of the mark in its entirety is being transferred.
Conversely, in a trademark licensing agreement, the rights to the mark are simply being “leased” to the licensee. So, what exactly is the nature of the transaction with a trademark licensing agreement? Well, as we shall see, there are different types of licensing deals but the essential proposition is that the licensor (the entity which owns the trademark) is providing the licensee (the entitle assuming temporary control of the mark) with the right to use the trademark in a limited and temporary capacity.
THREE TYPES OF TRADEMARK LICENSING
When entering into a licensing agreement, the licensee is strictly buying the right to use the trademark as outlined in the written agreement.
There are basically three types of trademark licenses that can be agreed upon:
- Exclusive License: The licensing rights are given to one party exclusively. No other party, including the owner of the trademark, can exercise any commercial rights.
- Sole License: The licensing rights are given to one party exclusively. However, the owner of the trademark can continue to use the trademark.
- Non-exclusive License: The licensor retains the right to license it to additional third-parties, not contemplated by the present agreement.
What is critical to understand is that the rights afforded by the licensor will not extend beyond what is written in the agreement. Thus, it is critical to delineate all possible terms and conditions of the arrangement.
LICENSING AGREEMENTS: THE DEVIL IS IN THE DETAILS
Trademark licensing agreements must be fully transparent and comprehensive in scope. The following are key provisions which must be included in any licensing agreement.
The full legal name of the licensor and licensee
Trademark Ownership: The licensing agreement should designate the parties involved (licensor and licensee) and the respective trademarks covered under the agreement.
Dates: Licensing agreements are largely dictated by time constraints. When does the agreement begin? When is it terminated? If the licensing agreement does not explicitly set out the time constraints of the deal, it will be difficult to enforce.
Nature of Trademark License: Recall, not all trademark licensing agreements are designed to provide an equal extension of rights. Is this agreement an Exclusive License? A Sole License? A Non-Exclusive License? You don’t want a judge to have to play a guessing game when going through a contested deal and therefore please ensure that your agreement explicitly sets out the exclusive nature of the agreement.
Goods and Services: Remember, trademarks only function as trademarks when they are used in conjunction with the sale of a good or service. Please ensure that the trademark licensing agreement dictates which goods/services will be sold under the trademark and if necessary, specify which goods/services may not be sold under the mark. Can the goods only be sold online? Only in physical stores? If you have a preference, include it in the agreement.
Territorial Constraints: Perhaps among the most important of provisions, geographical limitations of use are absolutely essential terms that must be included in the agreement. Perhaps the licensor is comfortable licensing his rights to the trademark on the East Coast of the US but absolutely does not want to license his rights anywhere on the West Coast. These territory-based limitations are often hotly contested and may very well dictate the fees associated with the licensing agreement. Don’t skip this provision.
Quality Control: Beyond the business imperative of ensuring that one’s trademark does not become dilute in value, trademark law itself dicates that one controls the quality of the mark in order for the mark to remain and not go abandoned. Remember, a trademark is a source identifier – if the quality of the goods/services under the licensee’s use is poor, the trademark itself begins to lose its status as a source identifier along with all of the good will it has built up. Please ensure that a detailed quality control provision is included in the agreement with measures that will ensure the continued and original quality standards set forth by the licensor.
Fee Schedule: Remember, with a licensing deal, the licensor still ultimately owns the trademark; he is simply “renting” the rights to the mark to the licensee on a somewhat temporary basis. What are the mechanics, from a financial perspective, of this lease agreement? Typically, the licensee will pay the licensor a royalty fee based on the percentage of net sales – the more sales, the greater the royalty for the licensor. Alternatively, the licensee may pay the licensor a flat fee according to the scope of exclusivity and geographic use of the trademark license.
Termination: As any experienced businessman will know, things don’t always work out as planned. It is critical that the trademark licensing agreement includes a provision which allows for the termination of the agreement and a resolution policy that provides for an easy and expedient resolution of the dispute. Perhaps this means an arbitration clause which mandates that arbitration will be the proper forum for a dispute resolution rather than the court system. Perhaps a specific forum will be mandated by the agreement with specific choice of law provisions. Whatever it is that makes sense, make sure these considerations are properly taken into account and drafted into the trademark licensing agreement.
Mind reading is not part of the legal industry; All of these details must be outlined in a written contract prepared by a trademark attorney.
CONSIDERATIONS TO MIND WHEN ENTERING INTO A TRADEMARK LICENSING AGREEMENT
Trademark licensing is ultimately about maximizing the utility and financial potential of one’s mark. Licensing your trademark has many benefits, including:
- New market penetration: A licensee can use their marketing and distribution resources to bring your trademark to new states or even new countries.
- Brand Ubiquity: The fastest way to get your brand logo or trademark seen by as many people as possible is to license it.
- Royal Fees: As a licensor, you’ll reap financial rewards based on the work of others. This of course is the essence of the royalty model and is desirable precisely because
However, naturally, licensing agreements do not always operate entirely smoothly and there are pitfalls that should be considered before striking any new agreement. Perhaps the most important consideration is the retention of one’s trademark rights. Trademark law in the United States places a priority on maintaining the integrity of the trademark as a key factor in permitting the owner of the trademark to retain control over its use. If the licensee mishandles the mark or fails to enforce its use, the original trademark owner may ultimately lose its rights to the mark. Licensees must ensure that quality measures stay in place and that the licensee only uses the mark as he/she is explicitly entitled to do so under the terms of the agreement. Similarly, the Licensor should think carefully about liability implications for the misuse of the mark and potential lawsuits as a consequence of the mark’s misuse.
Remember, not every licensing agreement is the same; different parties have different interests. Fundamentally, the licensing agreement needs to cover the Who, What, When, How of the deal and ensure that the trademark owner maintains a sufficient amount of control over the mark. If you have a certain stipulation that you want enforced, make sure it is in the agreement.