Once a trademark is registered with the U.S. Patent and Trademark Office (USPTO), the owner has many ways they can expand their business. One of the ways to do this is trademark licensing. By licensing their trademark to others, trademark owners can grow their business through third parties while retaining ownership of the trademark.
When entering into these agreements, though, entrepreneurs may encounter certain risks. Everything from the trademark’s reputation to the viability of the trademark itself can be affected. The necessary licensing documents are also very important. One mistake can doom a trademark.
What is Trademark Licensing?
Trademark owners have exclusive rights over the trademark in question, and this includes the ability to license the trademark for use by a third party. The owner of a trademark (i.e. “licensor”) can set specific constraints on the third party (i.e. “licensee”) regarding the use of the trademark. This includes which products ir services the trademark can be used on, specific marketing instructions, vendors that must be used and other essential aspects of controlling the brand including quality control.
Trademark licensing is more widespread than most realize. There are over 900,000 franchise businesses in the U.S. Consider the following examples:
- Characters from popular television shows licensed to toy makers.
- Sports teams, musicians, and festivals license their name and logos to merchandise producers.
- Taco Bell® licenses use of its trademark to their independent franchisees.
In each of these instances, the owner of the trademark in question retains their rights. Nothing is sold other than the ability to use the licensor’s trademark. When entering into this agreement, the licensee may pay a one-time fee, an advance on sales, and an amount or percentage of their future sales in the form of a royalty. The trademark licensing agreement can be prepared by either party but is usually prepared by the licensor.
A trademark license should always be in writing. This will make any potential future disagreements – including those that lead to trademark infringement – simpler and less costly to conclude.
There are three types of trademark licenses:
- Exclusive License: The licensee’s rights are exclusive so there are no other licensees. Neither additional parties nor the licensor themselves can exercise any commercial rights. Exclusive use can be limited to a certain geographic area or to certain products or services.
- Sole License: Similar to an exclusive trademark licensing agreement, but the licensor can continue using the brand identifier. They cannot license it to additional third parties.
- Non-exclusive: The licensor retains the right to use their trademark and license it to as many third parties as they wish.
The licensee gains no ownership over a trademark in any of these agreement types but this must be made clear in the written license. If the licensee fails to abide by the terms of the contract, the licensor could revoke any agreed-upon rights granted to them.
Benefits of Trademark Licensing
Some believe that the goal of trademark registration is to prevent others from using their brand identifiers. In reality, it’s to ensure you control how your trademark is used. Licensing agreements allow you to do this while garnering significant benefits. The following are just a small sampling of trademark licensing advantages:
- Added assistance: Owning a trademark doesn’t mean you have the time, resources or experience to fully capitalize on its use. When you bring in a professional partner, they can help shoulder some of the burden and provide the time or expertise you may not have.
- Reaching into new markets: Licensing agreements give brand owners access to the distribution channels and marketing resources of their licensees. Additionally, having even one out-of-state licensee can reach an otherwise untapped market.
- Increased brand recognition: Licensing a trademark is one way to ramp up the use and recognition of a trademark very quickly.
- Relatively passive revenue: While it’s important for a licensor to ensure their licensees are staying within the confines of the agreement, the revenue they collect remains overwhelmingly passive. Trademark owners will begin seeing profits from the work of others.
If you craft an agreement that covers all potential outcomes, the benefits of trademark licensing can be numerous. Once this is signed, however, the contract is legally-binding. This makes it important to have a trademark attorney prepare the agreement.
Potential Issues with Trademark Licensing
Trademark assignment is considered less risky than licensing. This is because the transferring of rights is a one-time event, and from that point forward, the original owner usually has no further connection with the brand. Licensing creates an ongoing relationship between the involved parties, and this can create potential hardships or legal issues the parties did not envision.
Consider the following potentialities when contemplating trademark licensing:
- Compromised quality: Licensees may not live up to the quality standards you’ve set for your brand. This can affect your overall reputation among consumers.
- Misuse: If your licensees use your trademark in a way you did not envision, this could be viewed as proof that you’re not in control of your trademark. This can lead to trademark cancellation.
- Low sales: If your licensee’s products/services lack quality, their sales numbers will suffer. Even if this doesn’t directly affect your reputation, the license may not be worth your time and may only prevent other licensing opportunities.
- Liability disputes: When liability isn’t expressly outlined in a licensing agreement, disputes commonly arise. Even if a licensor isn’t liable, though, litigation against their licensee can still lead to litigation or cause damage to the brand.
- Royalty litigation: If a licensee refuses to validate royalty statements, it’s hard to know if you’re being paid fairly. This can lead to litigation.
Trademark licensing can be very profitable for all parties involved, but it’s important to avoid potential issues.
How to License a Trademark
Regardless of your specific situation, any agreement should specify the following:
- The licensor’s and licensee’s legal names.
- Type of business structure used by both parties.
- The beginning and end dates (if known) that license is in effect.
- Type of trademark license (i.e. exclusive, non-exclusive, sole).
- The brand identifier being licensed and a confirmation that the trademark rights and goodwill will remain with the licensor.
- The goods or services covered by the agreement.
- Geographic limitations, if applicable.
- Provisions for quality control.
- How and when the licensor will be paid.
- The licensor’s ability to audit the licensee’s use.
Any contract that doesn’t include at least each of the elements listed above will leave major issues unaddressed, and depending on the circumstances there could be other major issues other than those listed here. Failing to properly consider all potential issues and address them in writing could eventually lead to trademark litigation or other contractual disputes.
In addition to the necessities in an agreement, it’s also advisable to include sections on insurance, warranties, license termination, litigation, maintenance and indemnification. It’s the complexities of these issues that make a written agreement so imporant. When finalizing arrangements, remember the following:
- The law requires trademark owners to exercise control over the quality and nature of goods/services bearing the trademark.
- If a trademark owner exercises too little control, a trademark owner could unknowingly assign permanent rights to the trademark.
- If a trademark owner exercises too much control, courts may view your agreement as a franchising contract which can lead to significant legal issues.
- If you’re considering becoming a licensee, perform due diligence before signing a contract. This should include a thorough trademark search and background check of the company that you are dealing with.
- Licensors should also perform a trademark search to limit their own exposure.
- Both parties should thoroughly consider all consequences before signing any agreement. Never assume something is implied by a contract. Assume that it must be explicitly stated.
- Having this document notarized isn’t required, but it can reduce the likelihood of disputes involving validity.
- Each party should have their own signed copy of the agreement.
A licensing agreement grants a licensee permission to utilize a trademark in some manner. If a trademark owner wants to completely hand over ownership of their trademark to a third party, though, they’ll need to perform a trademark assignment. This will transfer all the rights, title and interest of a brand identifier to the recipient.
Among all trademarks registered with the USPTO, about 20 percent are transferred in this manner at least once during their lifetime. There are many reasons that a trademark owner may choose assign a trademark. Some of the most common include retirement, moving on to a new business, or the costs of manufacturing, marketing and defending against third-party claims.
The USPTO requires the following if an assignment is to be filed:
- Contract must be in writing.
- The assignor and assignee must both be identified.
- The trademark in question along with relevant registrations/applications must be included.
- Consideration must be given (i.e. what’s being exchanged).
- Assignment’s effective date.
- Must be signed.
- Transfer of goodwill must be specified.
Trademark assignments are also common when a business is dissolved or a new entity for the business is formed. In these situations, you wouldn’t actually transfer ownership to a third party. This would essentially only notify the USPTO of the new owner.
For full protection the assignment should be filed no longer than three months after the date of assignment. Submitting this information constitutes prima facie evidence that the execution has occurred. An Asset Purchase Agreement is typically used to transfer rights to a trademark and it alone is not sufficient to fully transfer ownership. The USPTO also will not verify an assignment agreement’s validity, so make sure it’s solid legally before filing.
You can check the status of any assignment through the following steps:
- Visit the Trademark Status and Document Retrieval (TSDR)
Input the identifier’s registration or serial number.
- Click “Status.”
- Scroll down to view the current owner’s information.
- Check status under Prosecution History if name has not updated.
The USPTO currently receives over 75,000 intent-to-use applications yearly. These can also be assigned. For this to occur, an Amendment to Allege Use or a verified Statement of Use must be submitted. If these requirements have not been met, assignments of Intent-to-Use Trademarks can only occur if the assignor’s ongoing business is transferred as well.
If you are considering trademark licensing and would like our assistance, please contact us today.