Trademark licensing can create valuable revenue streams for your business. Licensing has the advantage that your business retains possession of the trademark and can create more than one licensing regime over the life of your business. Licensing is also a method of expanding the reach (and value) of your trademark without the need to invest in new products, services, markets, etc.
But, trademark licensing must be done carefully. As the owner of the trademark, you must demand contractual quality control over the licensee’s use of your trademark and must police that use. At the same time, quality control is a fine line: too much quality control can be just as bad as no quality control.
From the standpoint of no quality control, the highest danger is that your licensee will misuse your trademark to such a degree that the trademark will be so eroded that it loses its function as a trademark. If, for example, your licensee puts your trademark on 100 different products, your trademark will no longer identify a single commercial source for a unique product. Further, if the trademark is placed on low-quality goods, your trademark will lose any association with quality. The trademark is diluted. Another possibility is that your trademark might become generic. Yet additional dangers are that your trademark will be deemed abandoned or become vulnerable to legal challenge by licensees or third parties. Any of these will endanger the registration of the trademark.
From the standpoint of over-policing, the dangers are that your company could be deemed legally to be in a joint venture, partnership, and/or franchise relationship with the licensee. These generate their own sets of legal problems including potential for liability for employee and contractual relationships, product liability, and more.
With this background in mind, here are a few top priorities as you consider entering a trademark licensing agreement:
- Do your due diligence on potential licensees — look to their track records in other licensing arrangements, financial resources, business operations, etc.
- Establish quality control standards clearly in the licensing agreement
- Avoid default provisions that involve anything that would suggest major control over any part of the licensee’s business operations — possibly limit default provisions to cancellation of the license and the ability to sue for money damages not only for the breach of the licensing agreement but also for reputational damage to the trademark
- Include audit and inspection contractual provisions that are limited to what is needed — again, avoid anything that might suggest major control over the licensee’s operations
- Contractually disclaim any intent to create a partnership, joint venture, franchise relationship, or anything similar
- Ensure inclusion of solid and enforceable indemnification, hold-harmless, and insurance coverage provisions
- Consider fee and cost-shifting provisions in the event that litigation must be initiated
- And more
In terms of policing, expect and plan for non-contractual monitoring and policing beyond what is specified in the licensing agreement. This helps defeat any legal argument that the trademark owner is exercising excessive control over the business operations of the licensee but is proof that you ARE policing the use of your trademark. Further, expect and plan for the termination of the license in the event of a violation of the quality control requirements. Finally, expect and plan for litigation where it becomes necessary.
Contact the Trademark Attorneys at Revision Legal