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As mentioned in Trademark Licensing, a trademark owner may permit another to use his or her trademark through a trademark license agreement for a period of time set out in the agreement between the licensor and the licensee.
First, we will start out with the basics. According to the International Trademark Association, “A trademark license is an agreement between a trademark owner (“licensor”) and another party (“licensee”) in which the licensor permits the licensee to use its trademark in commerce.” In the United States it is not required that the agreement be recorded with the national trademark office in order to be recognized. However, recording the agreement can provide notice to the public and any prospective purchaser of the trademark mentioned in the licensing agreement.
For instance, the Board of Trustees of Michigan State University owns the trademark in Michigan State University when used on goods and services such as t-shirts, jerseys, shorts, and jackets, but the Board may enter into a trademark license agreement with a sports company, like Nike, to produce apparel to sell in the Michigan State University campus clothing stores.
Next, there are some essential elements that each trademark license agreement should include. The International Trademark Association identifies some of these essentials, which include:
A trademark license agreement is one of the most valuable tools in a brand owner’s arsenal. Done correctly, licensing generates revenue, extends market reach, and builds brand recognition. Done poorly, it can result in loss of trademark rights through a legal doctrine called “naked licensing.” Understanding the essential elements of a well-drafted trademark license agreement protects both parties and preserves the trademark’s long-term value.
The most legally significant provision in any trademark license agreement is the quality control clause. Under U.S. trademark law, a trademark owner who licenses its mark without retaining adequate control over the quality of the licensee’s goods or services risks losing the mark entirely through “naked licensing.” The leading case on this doctrine is Barcamerica Int’l USA Trust v. Tyfield Importers, Inc., 289 F.3d 589 (9th Cir. 2002), where the court found that a wine importer had engaged in naked licensing by failing to monitor the quality of wines produced under its licensed mark, resulting in cancellation of the trademark registration.
Quality control provisions should specify:
Critically, quality control provisions are not sufficient on paper alone—the licensor must actually exercise control. Courts have found naked licensing even where written quality control provisions existed when the licensor never exercised its inspection rights or approved samples without review. Real compliance monitoring is as important as the written terms.
The scope of the license must be clearly specified. These three types of licenses are fundamentally different:
Trademark license royalties are typically structured as a percentage of net sales, a fixed fee per unit, or a flat periodic fee. The agreement should clearly define:
The agreement must unambiguously establish that the licensor owns the trademark and that the licensee acquires no ownership rights through use of the mark under the license. Without this provision, a licensee who uses the mark extensively could theoretically claim common law rights in the mark based on its own use. The agreement should also specify who has the obligation—and the right—to enforce the mark against infringers, and how costs and recoveries are allocated between the parties.
For marks registered with the USPTO, the license itself does not need to be recorded, but recording can provide constructive notice to third parties and is often advisable for exclusive licenses.
The agreement should specify the conditions under which either party may terminate, including for breach, bankruptcy, or failure to meet minimum sales thresholds. Post-termination provisions are equally important: the licensee must cease using the mark immediately upon termination, destroy or return materials bearing the mark, and not represent itself as affiliated with the licensor. Transition periods for the licensee to sell off existing inventory are common but should be time-limited and controlled.
Trademark licenses and franchise agreements occupy a continuum. When a trademark license is combined with a comprehensive business format—including operational systems, training, and ongoing support—it may constitute a franchise under the FTC’s Franchise Rule, 16 C.F.R. Part 436, and various state franchise disclosure laws. Franchise arrangements require specific pre-sale disclosures and registration in many states. Brand owners who are licensing their marks along with business systems should have experienced counsel evaluate whether franchise law applies to their arrangements, as failure to comply can expose the licensor to significant liability.
Before either party signs a trademark license agreement, thorough due diligence is essential. Licensees should verify that the licensor actually owns the trademark it is purporting to license—a trademark search and a review of USPTO records is the starting point. The licensor should have a valid, subsisting registration (or documented common law rights) covering the goods and services that will be produced under the license. A licensee who discovers after signing that the licensor’s trademark registration was cancelled, or that a senior user has rights that predate the licensed mark, is in a difficult commercial and legal position.
Licensors, in turn, should conduct due diligence on prospective licensees: financial stability, quality reputation, operational capacity, and any prior litigation or regulatory history. A licensee who produces substandard goods under your trademark damages your brand regardless of what the license agreement says.
Trademark license agreements in connection with business acquisitions, mergers, or financing transactions may also require careful integration with representations, warranties, and indemnification provisions in the broader deal documents. In these contexts, the trademark license is one piece of a larger legal and commercial structure, and the parties’ respective IP counsel should coordinate with transaction counsel to ensure consistency.
If you have questions about drafting or reviewing a trademark license agreement, contact Revision Legal’s trademark attorneys at 855-473-8474.
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