Trademark Licensing: 
Key Considerations and Best Practices

What is a Trademark License?

Trademark licenses transfer the use of a trademark or service mark from its owner (the licensor) to another party (the licensee).Trademark licensing is a strategic tool that allows trademark owners (licensors) to expand their brand's reach without directly engaging in new markets or product lines. This legal arrangement involves the owner of a mark granting another party (licensee) the right to use the mark under specific conditions. While licensing can be a lucrative opportunity for both licensors and licensees, it comes with a set of complex legal and business considerations that must be carefully managed to avoid potential pitfalls.

This article explores the fundamental aspects of licensing, including the essential elements of a trademark license, the rights and obligations of the parties involved, and the best practices to ensure a successful and legally sound licensing relationship.

Benefits and Best Practices of Trademark Licensing

A trademark license offers a valuable opportunity for an entrepreneur to generate revenue by allowing others to use their trademarks in exchange for trademark royalties. This can be a lucrative stream of passive income, providing financial benefits without the need for ongoing active involvement.

Licensing is also a fundamental aspect of franchise agreements, allowing franchisees to use the franchisor's trademarks, brand, and business model in exchange for fees or trademark royalties. This arrangement enables the franchisor to expand their brand's reach without directly managing new locations. Through licensing, franchisees gain access to established brand recognition, operational systems, and marketing strategies, which can significantly enhance their chances of success.

Beyond the financial rewards, licensing can significantly boost brand awareness by expanding the presence of the licensor's mark in new markets and with new consumers. However, licensors must also be aware of the potential risks associated with licensing. One major concern is the possibility that the licensee may fail to adequately protect the mark, which could lead to its eventual genericization or other loss of rights. Trademark use must be policed by the licensing company or owner in order to maintain the quality and identity of the goods or services provided under the mark. This risk underscores the importance of a well-drafted licensing agreement that clearly outlines the responsibilities of the licensee in maintaining the trademark’s integrity.

To maximize the benefits of a license and mitigate the associated risks, licensors should ensure that the licensing agreement is carefully crafted, addressing potential issues such as quality control, usage guidelines, and enforcement rights. A robust agreement can help prevent the adverse consequences of improper use, including the risk of the mark becoming generic.

Trademarks should be Registered with the United States Patent and Trademark Office

Having a registration is highly beneficial when licensing trademarks and establishing franchise agreements because it provides enhances the enforceability of the mark on behalf of the licensee or franchisee and provides a level certainty as to the strength of the rights being licensed. A registered mark offers presumed ownership and exclusive rights in the mark, reducing the risk of disputes with licensees or franchisees. It also strengthens the brand's credibility and value, making the trademark more attractive to potential partners. Moreover, registration allows the trademark owner to take legal action in federal court with a presumption of trademark rights, enhancing the owner's ability to prevent unauthorized use of the same or similar trademarks.

Essential Elements of a Trademark License Agreement

A well-drafted license agreement is the cornerstone of any licensing relationship. The agreement outlines the rights and obligations of both the licensor and the licensee, ensuring that the use of the trademark aligns with the brand’s standards and objectives. Below are the critical elements that should be addressed in any trademark license agreement:

a. Identification of the Trademark

The agreement must clearly identify the mark being licensed, including its registration number, description, and any associated logo marks. This ensures there is no ambiguity about what intellectual property is being licensed. The licensor should provide copies of the registration certificates and samples of the logo marks to the licensee.

b. Scope of the License

The scope of the license expressly defines the licensee’s rights to use the mark. This includes specifying the products or services that can bear the trademark, the geographic territory of use, and whether the license is exclusive or non-exclusive. For example, a licensor might grant a licensee the exclusive right to use the mark on a specific product line within a certain country.

c. Quality Control Provisions

One of the licensor's primary concerns in any licensing agreement is maintaining the quality of the goods or services associated with their trademark. The agreement should include detailed quality control provisions requiring the licensee to adhere to specific standards. This may involve regular inspections, approval of prototypes, and submission of samples for review. The licensor has the right to disapprove any product that does not meet the agreed-upon standards, thereby protecting the integrity of the brand.

d. Consideration: Fees and Trademark Royalties

In exchange for the right to use the trademark, the licensee typically agrees to pay the licensor a fee, which may include an upfront licensing fee and ongoing royalties based on the sales of the licensed products. The agreement should specify the trademark royalty rates for each transaction or some other metric (e.g., a per month fee, etc.), the method of calculation (e.g., based on the net selling price), and any minimum royalty payments. These financial terms are crucial as they ensure the licensor is fairly compensated for the use of their intellectual property.

e. Maintenance of Records and Audit Rights

The licensee is obligated to maintain accurate records of all transactions related to the licensed trademark, including sales and royalty payments. The licensor should have the right to audit these records to verify the accuracy of the royalties paid. This ensures transparency and helps prevent disputes over financial obligations.

f. Assignment and Sublicensing

The agreement should address whether the licensee has the right to assign the license or sublicense the trademark to third parties. Typically, licensors prefer to restrict these rights to maintain control over who uses their trademark. Any assignment or sublicense without the licensor’s prior written consent is usually deemed invalid.

g. Infringement and Enforcement

Both parties have an interest in protecting the trademark from infringement by third parties. The agreement should outline the procedures for handling potential trademark infringements, including who has the right to initiate legal action and how any recoveries will be distributed. It’s common for the licensor to retain primary control over enforcement actions to ensure that the trademark's integrity is upheld.

h. Representations and Warranties

The licensor should warrant that they have the legal right to grant the license and that the trademark is free from encumbrances. They should also confirm that there are no existing claims or pending litigation that could affect the licensee’s use of the trademark. Similarly, the licensee should represent that they will not use the trademark in a manner that infringes on third-party rights.

i. Enforcement

If it is discovered that a third party is using an infringing mark, the parties to the license need to understand who has the authority to send a cease and desist letter and bring a lawsuit. The agreement should clearly define what rights the parties have in the case of a trademark infringement dispute. It is typically the owner of the mark and licensor that has the authority to bring a suit. Courts typically require that the license provide an express right to bring a suit in order to provide the licensee with standing to bring suit for trademark infringement and unfair competition claims under the Lanham Act.

j. Indemnification Provisions

Indemnification clauses are critical in allocating the risks associated with the use of the trademark. Typically, the licensee agrees to indemnify the licensor against claims arising from the licensee’s use of the trademark, such as product liability claims or allegations of infringement. Conversely, the licensor might indemnify the licensee against claims that challenge the validity of the trademark or the licensor's ownership.

k. Term and Termination

The term of the license, including any renewal options, should be clearly defined in the agreement. Additionally, the agreement should specify the circumstances under which either party can terminate the license, such as breach of contract, bankruptcy, or failure to meet sales targets. Upon termination, the licensee is usually required to cease using the trademark and return any materials bearing the trademark to the licensor.

l. Governing Law and Jurisdiction

The agreement should specify the governing law and the jurisdiction where any disputes will be resolved, optionally defining the federal and/or state court in which the a suit can be filed. In addition, it might include provisions for alternative dispute resolution methods, such as arbitration or mediation, to avoid lengthy and costly litigation.

Best Practices in Trademark Licensing

While a comprehensive agreement is essential, the success of a trademark licensing relationship also depends on the practices adopted by both the licensor and the licensee. Here are some best practices to ensure a smooth and mutually beneficial licensing arrangement:

a. Due Diligence

Before entering into a licensing agreement, both parties should conduct thorough due diligence. The licensor should investigate the licensee’s business history, financial stability, and reputation to ensure they can meet the obligations of the agreement. Similarly, the licensee should verify the licensor's ownership of the mark and its enforceability.

b. Clear Communication and Ongoing Collaboration

Open and clear communication between the licensor and licensee is key to a successful relationship. Regular meetings, progress reports, and updates can help address issues early and keep the relationship on track. Collaboration should extend to marketing efforts, where both parties can work together to promote the licensed products.

c. Monitoring and Compliance

The licensor should actively monitor the licensee’s use of the trademark to ensure compliance with the quality standards and other provisions of the agreement. This might include periodic inspections, mystery shopping, or customer feedback. Non-compliance should be addressed promptly to prevent damage to the brand.

d. Flexibility and Adaptability

Market conditions and business environments can change, requiring adjustments to the licensing arrangement. Both parties should be open to renegotiating terms or adapting their strategies to meet new challenges, such as changes in consumer demand, legal requirements, or competitive pressures.

e. Protecting Confidential Information

During the licensing relationship, both parties may exchange confidential information, such as business plans, marketing strategies, and product specifications. The agreement should include confidentiality provisions that protect this information from unauthorized disclosure or use.

Seek the Assistance of a Trademark Attorney

Trademark licensing offers significant opportunities for brand expansion and revenue generation, but it also requires careful planning, clear agreements, and diligent management. By understanding the key elements of a trademark license agreement and adhering to best practices, both licensors and licensees can create a successful and sustainable licensing partnership that benefits both parties while protecting the integrity of the trademark.  Given the complexities involved in trademark licensing, it is advisable for trademark owners to seek the advice of an experienced trademark attorney. An attorney can provide guidance on navigating trademark law, negotiating favorable terms, and ensuring that the licensing agreement aligns with both legal requirements and business goals.