TRADEMARK LICENSING – SPECIAL CONSIDERATIONS
A trademark is a word, logo, symbol, design or other element that is used with goods or services to identify the source of those goods or services to consumers and to distinguish those goods or services from the goods or services of other sources. Character names, names of musical groups, college and professional sports team names and mascots and marks used for products ranging from cars and tractors to cellphones and computer games can all be trademarks.
Trademark owners frequently license their trademarks, either to generate brand recognition and publicity for the primary goods or services represented by those marks or to generate additional revenue, or both. For example, a tractor manufacturer may license its trademarks for use on wall hangings and calendars and a rock band may license its trademarks for use on t-shirts and caps. In each case the licensed product is outside of the scope of the goods or services for which the trademark owner normally uses the mark, but use of the mark on these unrelated products helps promote the trademark owner’s brand and also will usually result in some royalty income.
In many respects, a trademark license is the same as a license for any other type of property. The licensor authorizes the licensee to use the trademark on products to be sold in certain channels of distribution in a defined territory, and the licensee pays a royalty to the trademark owner based on the net amounts charged or received from sales. However, there are some considerations which are unique to trademark licensing, and the licensor and licensee should review these considerations before entering into a trademark license agreement:
- If the trademark is registered, is the registrant the same as the licensor? The trademark owner will be the person or entity currently using the trademark, and this person or entity should be named as the licensor in the license agreement. If the trademark is federally registered, the licensor should be the registrant listed on the registration certificate. In most cases these names will match and this will not be an issue. However, with smaller businesses or new licensors, it may be common for the trademark to have been registered in the name of an individual, but for the business represented by the trademark to have been subsequently transferred to a corporation or limited liability company. If this is the case, an assignment should be recorded with the Trademark Office to show the transferee corporation or LLC as the registrant, and that corporation or LLC should be the licensor on the license agreement.
- Is the trademark registered in the International Class which includes the goods to be produced and sold under the license agreement? In order to register a trademark, the trademark owner must identify the International Class or Classes of goods or services for which the trademark is being used. For example, a trademark used for automobiles would be registered in International Class 12. If the trademark is being licensed for use on other products, the licensee will usually want assurances that the trademark is or will be registered for the International Class which includes the licensed products. For example, a clothing licensee will want the mark to be registered in International Class 25, for clothing. Registration is typically the responsibility of the licensor, but the licensor may be able to negotiate a payment from the licensee to apply toward part of the cost of registration. In any event, registrations should always be made only in the name of the licensor, and the license agreement should prohibit the licensee from obtaining any registrations for the trademark in the licensee’s name.
- Is the mark available to be used for the licensed products? Trademark rights are based on use, not registration. Use of a trademark may convey exclusive rights to that mark for the goods for which the mark is being used, but those rights may not extend to use of the mark for other unrelated products. For example, the use of a trademark by a licensor for video games does not necessarily mean that the same mark is available to be licensed to a licensee for use for pet clothing. It may be that someone else is already using the same mark or a similar mark for pet clothing, and this may prevent a licensee from selling its pet clothing under the licensor’s mark.
- Does the licensor have the right to control the quality of the licensed products sold under its mark? Under trademark law, the quality of goods sold using the trademark has to be consistent; otherwise, consumers may be deceived. The quality can be high or low, but it must be consistent. A trademark license that does not allow for control over the quality of the licensed products sold under the mark is a “naked license,” and a licensor who enters into a naked license risks losing rights in the trademark.
- Is the licensor protected against activity which may harm the trademark? In addition to controlling the quality of the licensed products, the licensor will want to ensure that the licensee is not engaging in activity which might undercut the reputation of the brand – for example, using child labor or prison labor to produce licensed products or engaging in false advertising, price fixing or other unfair practices in marketing the licensed products.
Licensors and licensees should address the above considerations before entering into a trademark license. In some cases the licensor and licensee may need to change the parties to the license agreement, conduct trademark searches before committing to an agreement, or revise the proposed terms of the agreement.