Trademark License Agreement – What You Need to Know
Trademark license agreement is a legal contract between a trademark owner and another party that have agreed to use the trademark on preapproved terms. A trademark owner can commercially exploit its brand through its own use or by licensing others to use the brand. However, a trademark owner risks devaluing or even losing its trademark rights through licensing if it fails to obtain and enforce key contractual protections in the license agreement.The complexity and length of trademark license agreements vary depending on a variety of factors, including:
- The relationship between the parties
- The types of licensed products or services
- The value and duration of the licensing arrangement
Elements of Trademark License Agreement
There are several elements to a trademark licensing agreement. One of the most important ones is to properly demonstrate that the licensor remains in control of the quality of the goods or services sold in connection with use of the mark. This provision regarding quality control is one of the most central elements integral to trademark licensing agreements. The quality control provision of a trademark licensing agreement must ensure that the licensor of the trademark has set standards to maintain the goodwill attached to the mark that consumers of the goods or services have come to rely upon.
Where the licensor exercises no quality control (also called a naked license), the licensor risks abandonment of the mark. Common requirements under the quality control provision of a trademark licensing agreement may include, but are not limited to, the ability to audit the licensee’s accounting records or bookkeeping, reviewing and approving prototype and production samples for any new products, inspecting of the licensee’s facilities, internal audits of the licensee’s protocols, reviewing of media and advertisement use printed in connection with use of the mark, requiring proper disposal of defective or rejected products or other materials bearing the mark, and reviewing customer service comments and complaints.
However, one needs to be careful with the amount of quality control. Too much of it risks having the license construed as a franchise agreement and increased exposure to product liability claims.
Ensure that the license grant clearly addresses the licensed mark; the specific goods and services covered by the license; and the specific licensed uses of the mark for the licensed goods or services, for example, sale, distribution, and advertising and promotion.It should also address any restrictions on the trade or distribution channels to be used by the licensee; exclusivity, for example, particular goods or services or geographic areas. Moreover, whether the licensee can sublicense some or all of its rights, and, if so, any conditions that the licensee must satisfy before entering into a sublicensing agreement and what control the licensor will have over the sublicensee; and an express reservation to the licensor of all rights not expressly granted to the licensee.
There are several types of trademark licenses. The licensor may grant to the licensee an exclusive license. An exclusive license grants the rights to the licensee to the exclusion of all others, including the licensor. An exclusive licensee has the contractual right to exclude all others from its particular area of exclusivity.A non-exclusive license grants the rights to the licensee, but does not preclude the licensor from granting similar licenses to others, so the licensor can license the same rights to third parties as well as use them itself.A sole license is one that grants the rights to only the licensee, but not to the exclusion of the licensor. Therefore, a sole license prevents the licensor from granting other similar licenses, but does not prevent the licensor itself from using the licensed rights. This is appropriate where the licensor is already operating in or plans to operate in the license territory.
Consideration and Payment Terms
The financial terms of trademark license agreements vary based on the particular transaction. A trademark license agreement can be fully paid-up and royalty-free, or it may require payment of a license fee, ongoing royalties, or other consideration. License fees and royalty provisions vary greatly.The licensor may consider requiring the licensee to pay fixed license fees at set dates during the term of the license, which would likely be instead of payment of royalties based on the licensee’s sales of licensed products or services. If the parties agree to these fixed fees, the parties should ensure that the agreementincludes a payment schedule setting out the payments and corresponding due dates.Earned royalties are ongoing royalties the licensee pays to the licensor calculated against an agreed royalty base. The method parties use to calculate earned royalties depends on a variety of factors. The most conventional approach is a royalty paid on a recurring basis calculated as a percentage of the net sales price of the licensed products.The royalty rate itself depends on many factors, such as the value and strength of the licensed trademark, territory, degree of exclusivity, etc. It is not uncommon for trademark licensors to set minimum sales objectives or expectations in the licensing agreement.A well-drafted trademark licensing agreement will also be specific when it comes to how the licensor is to be paid, how often payments may be made, and what consequences there will be if payment is late.
Geographical Scope of Trademark License
The geographical scope of a trademark licensing agreement is another important element of a trademark licensing agreement Because a licensor may license the trademark to multiple licensees, it is important for the licensing agreement to clearly address the geographical areas that the licensee may use the trademark. For instance, a licensor may grant trademark rights to different licensees based on the continent, state, or city they are in.
License Duration – Term and Termination
The duration and right to terminate provisions of a trademark licensing agreement are also important because it gives the licensor the ability to license the trademark for a short amount of time in order to see whether business relationship is profitable enough to renew for another term.
Similarly, the right to terminate the agreement is important for the licensor because it allows the licensor to terminate the agreement immediately upon the licensee’s misuse of the mark or for other breaches of the agreement. This way, the brand owner of the mark can stop the erosion of the goodwill associated with the mark if a licensee fails to meet the standards of quality that consumers have come to expect in relation to the original provider of the goods or services associated with the mark.
The parties to a trademark license agreement typically allocate risks in the trademark license agreement through indemnification, limitation of liability, representations and warranties, and insurance provisions.Trademark license agreements typically include basic representations and warranties concerning each party’s corporate authority to enter and be bound by the agreement, and the licensor’s ownership interest in or other basis for its control of the licensed trademark and ability to grant the license set out in the agreement.Licensors are also typically unwilling to represent and warrant that use of the licensed mark as permitted by the agreement does not infringe a third-party’s trademark rights.A trademark license agreement often includes an indemnity provision that requires each party to be liable and indemnify the other party for certain claims, for example, third-party claims resulting from the other party’s breach of the agreement. A licensee generally seeks to have the licensor indemnify the licensee for any third-party intellectual property infringement claims asserted against the licensee for using the licensed trademark. A licensor often seeks to have the licensee indemnify the licensor for third-party product liability claims relating to the licensee’s use of the licensed trademark.To back up the indemnity, the licensor may want to include a provision requiring the licensee to maintain insurance policies to cover third-party claims arising from defective licensed products the licensee distributed, and the licensee’s indemnity obligations regarding any product liability claim.
Definitions Section of Agreement
Definitions, common to most business contracts, are also an important part of especially more complicated trademark licensing agreements. In order to avoid confusion between the parties, it is important for the licensor to clearly set forth what specific words or terms used in the agreement mean so that there is no confusion between the parties and to avoid potential conflict if litigation happens to arise.
Trademark license agreements often include other provisions. We list here some typical ones without further explaining: sublicensing, subcontracting, license recordation, trademark enforcement, most favourable licensee, licensor audit rights, taxes, sell-off period, condifentiality, assignment, marketing and advertising requirements.
General Contractual Terms
Trademark license agreements will have the same general provisions that appear in business contracts, which include but are not limited to: description of the parties; governing law; jurisdiction; severability; entire agreement.
How can Vedinor help you?
There isn’t one type of trademark license agreement that would fit all purposes and businesses. You should discuss with an experienced intellectual property counsel about your situation and what is the best solution for you.
We here at Vedinor often draft international trademark license agreements on a cost efficient flat fee. Email us at firstname.lastname@example.org for a quote or schedule a free consultation to get your trademarks in order.