While a business owner certainly won’t receive a citation for failure to properly police its trademark rights, the ramifications can be far more costly. In other words, you can “lose your shirt.” A trademark is essentially what tells consumers where a particular product or service comes from, or its source. The legal definition provides that a trademark is any word, color, symbol, device, or any combination thereof, used by a person to identify and distinguish that person’s goods from those of others, and to indicate the source of the goods.
Trademarks serve to let consumers know that each time they partake in a particular product or service, they can come to expect a certain level of quality, and therefore be happy to pay the asking price. For example, every time you drink a Coca-Cola®, you know exactly what taste to expect. If consumers are happy with the quality of a company’s goods and services, they will become repeat customers and share their positive experiences with their friends. The result is that the reputation of the trademark owner, i.e., the business goodwill, steadily improves, as does the value of the brand. For example, the Coca-Cola brand has been valued at just under $72 billion dollars. So building and protecting the goodwill associated with that brand name of yours is something not to be overlooked.
In a license situation, a trademark owner agrees to allow a third party to offer a product or service under the trademark owner’s brand, typically in exchange for a fee. For example, as a trademark lawyer in Las Vegas, it is particularly common to review licensing opportunities for casino and gaming companies, such as a slot manufacturer seeking permission to license a popular movie for a new game or a casino seeking to license its name on a beverage. A license agreement is an opportunity for a trademark owner to expand the market able to access its branded products or services and to increase its business goodwill, as well as an opportunity to be very profitable. However, it is important to make sure not to allow your company’s trademark to be used indiscriminately by a third party, even if your company stands to make a healthy profit. Why? It’s all about controlling the quality of your goods to ensure the care and keeping of your company’s good name. Failure to maintain quality control can result in the loss of trademark rights altogether.
Following are the key elements to a good trademark license, as well as what can happen if the rights granted are not properly enumerated and policed.
The Trademark Being Licensed
Identify the exact trademarks that are subject to the license. If your company uses a word mark but also uses a logo that combines those words with a design component, or a special stylized font that consumers recognize as being associated with your brand, it is critical to specify whether one or both versions are contemplated in the agreement. In other words, you would not want the licensee to use a version of the mark that you did not intend to permit.
Identify the geographic territory in which the licensed marks are going to be used. Otherwise, there is a risk that the licensee could cannibalize your already-established marketing channels.
Scope of Rights
Identify whether the license is exclusive or non-exclusive, as well as the specific rights being granted. In an exclusive license, even the trademark owner may be prevented from using its own trademark on the particular products or services contemplated in the license. Non-exclusive licenses allow more than one licensee to offer the trademark owner’s products and services under the same mark. While this can breed healthy competition between the licensees, the downside is that it may make it more difficult for the trademark owner to control the quality of what is being marketed and sold under its brand.
It is also imperative to define the exact type of products or services that will be produced and sold under the trademark in question. Failure to provide specific parameters could result in the sale of a product or service that your company would never have dreamed of offering.
A trademark owner must set forth its expected compensation in exchange for permitting the licensee to benefit from using the licensed trademark instead of coming up with its own and putting forth the time and effort to establish goodwill. License fees can take on many forms, such as a one-time fee, an ongoing royalty driven by sales, a combination of both, or perhaps a guaranteed upfront royalty, supplemented by payments made according to the achievement of predetermined revenue milestones, among many other fee options. The payment scheme depends on the individual facts of the matter, but additional factors to consider include ensuring the right of the trademark owner to independently audit the licensee’s books, providing for periodic statements from the licensee to confirm the level of sales and inventory, and determining how to settle things if an issue arises with respect to payment or an alleged discrepancy in the numbers.
Identify the duration of the license, whether perpetual (indefinite) or fixed. The term can take on may iterations, including an initial length of time with an option to extend if certain conditions are met.
Termination, a.k.a. the Great Escape Clause
Identify specific conduct or events that warrant termination of the license. Termination can be predetermined to end within a certain time frame, or it can be immediate based on a particular act or event. Some situations may warrant a period of time that allows the licensee to “cure” (correct) an act that would normally constitute a terminating event. Another key consideration is addressing the return of unsold merchandise, the handling of proprietary materials and a time frame for phasing out use of signage, marketing materials, etc. A termination clause is one of the most important provisions of a license. It is best to contemplate a possible breakup while the licensor and licensee are still on friendly terms.
Quality Control: The Must-Have Clause
A trademark owner is required to establish a means by which quality control will be exercised over the goods or services that will bear the trademark in question. This element is by far one of the most important to include in the license. A trademark owner has a duty to control the quality of the licensed goods and services, or in other words, the means through which a trademark owner establishes goodwill in its business via the brand.
A license lacking such quality control language would be considered a “naked license,” which is actually not a good thing, and which can have several detrimental effects, including:
(a) total abandonment of the trademark owner’s rights in the mark, i.e., the trademark owner can be prevented from complaining about infringement of its rights by others;
(b) treatment of the license agreement as void, permitting uncontrolled use of the trademark by the licensee; or
(c) a gap in the continuous use of the mark that may be necessary to prove senior use over the subsequent use of the mark by another.
To avoid these potentially brand-killing outcomes, every trademark license should contain quality control provisions that apply to the goods and services being licensed, packaging (if applicable), and even marketing materials that incorporate the trademark.
In addition to the key elements of a solid license agreement, there are additional considerations that should be included, including confidentiality, indemnifications, warranties and representations, as well as the parties’ responsibilities in the event a third party trademark infringement is discovered, payment of attorney fees, and who gets to determine the course of action to be taken.
There is one last thing to consider when a trademark license is being contemplated. It is always recommended to engage knowledgeable legal counsel who can walk you through the process and ensure that your good name is being protected. Otherwise, it is simply not worth the gamble.