Owners of trademarks can allow others to use those trademarks. This is done through the preparation and execution of a trademark license. This is a type of agreement or contract between the owner of the trademark (the “licensor”) and the person or company who will be allowed full or partial use of the relevant trademark or trademarks (the “licensee”). It is probably more common for an owner to grant a partial license limiting the use of the trademark to specific goods or services, areas, channels of commerce, and subject to other limitations. A commonly known example of trademark licensing is franchise-franchisee relationships, as many restaurants have.

For trademark owners, there are many advantages of trademark licensing. These include:

• Creating new revenue streams since the licensee will pay royalties for the use of the trademark
• Opening new market and sales options for the trademark owner independent of markets being exploited by the licensee
• Expanding the trademark to new products/services without the risk of capital investments
• Expanding reach and fame of the trademark, enhancing the commercial value of the trademark
• Allowing for commercial exploitation of a trademark that may not be fully exploited for lack of capital or other reasons
• Creating brand “synergies” where a licensee has its own trademarks which are being combined with the licensed trademark

For licensees, the advantages of licensing include the use of an established trademark with a loyal customer base that mitigates start-up risks, the ability to expand existing products/services to a new customer base, and the creation of brand synergies if trademarks are being combined with a product or service.

A typical Trademark Licensing Agreement will have the following types of provisions:

• Scope, terms, and limitations — all trademarks that are being licensed will be clearly defined along with the scope of us,e including terms and limitations (such as “internet only” or only for X type of products); terms may also include the requirement that the licensee purchase certain products from the licensor (or that are approved by the licensor); this is part of quality control and, often, generates additional revenue for the trademark owner
• Term and length — the agreement will set forth the temporal duration of the license and any renewal conditions
• Default and termination provisions — license agreements will contain provisions that allow the trademark owner to terminate the license for breach of the license or other reasons; related provisions will govern what happens if the license is breached and what remedies are available to each party
• Payment terms — the licensee pays royalties and fees for being allowed to use the owner’s trademark(s); there may be up-front fees and ongoing royalties
• Quality control — by law, a trademark owner must police how its trademarks are used; otherwise, the owner can risk the loss of the trademark either as a functioning trademark or through dilution or tarnishment; thus, all license agreements will contain provisions requiring the licensee to meet quality standards, to maintain the goodwill associated with the trademark and to not allow use of the trademark by others
• And more

Quality Control: The Legal Obligation Every Trademark Licensor Must Understand

Of all the provisions in a trademark license agreement, quality control is the one with the most significant legal consequences if it is missing or inadequately drafted. A trademark owner who licenses its mark without maintaining genuine quality control over the licensee’s use of the mark risks what trademark law calls a “naked license” — a license that can result in the loss of the trademark itself.

The Naked License Doctrine

Under U.S. trademark law, a trademark serves as a source identifier — it tells consumers that goods or services bearing the mark come from a particular, consistent source and meet the quality standards associated with that source. When a trademark owner licenses its mark without exercising quality control over the licensee’s use, the mark can no longer perform this function. The public sees the mark on goods or services of varying or unknown quality and origin, and the mark becomes deceptive rather than informative.

Courts have held that an uncontrolled or “naked” license of a trademark can result in forfeiture of the trademark rights entirely. The Ninth Circuit’s decision in Barcamerica International USA Trust v. Tyfield Importers, Inc., 289 F.3d 589 (9th Cir. 2002), is the leading case: there, the court found that a trademark owner who had granted a license without any quality control provisions — and who had not in fact exercised any oversight over the licensee’s products — had abandoned its trademark rights through the naked license. The result was that the trademark became available for use by anyone.

What Adequate Quality Control Looks Like in Practice

The quality control obligation does not require that the licensor exercise an exhausting or bureaucratic level of oversight. It requires genuine, exercised oversight — not merely paper provisions that are never enforced. Courts look at whether the licensor:

• Established quality standards in the license agreement (specification of materials, manufacturing processes, product testing standards, service delivery requirements)
• Actually monitored the licensee’s compliance with those standards through audits, product testing, site visits, or review of representative samples
• Took action when quality standards were not met, including invoking the agreement’s remediation or termination provisions

A licensor who relies on a pre-existing personal relationship with the licensee — familiarity with the licensee’s business — rather than on contractual provisions and documented oversight may still satisfy the quality control requirement, but only if the relationship is close and documented. As the licensee’s business grows, the relationship-based approach becomes legally risky. Documented, systematic quality control is the only reliable protection.

Royalty Structures in Trademark Licenses

Trademark license royalties are typically structured in one of three ways:

• Percentage of net sales. The most common structure. The licensee pays the licensor a percentage of net revenues from sales of licensed products or services. “Net sales” must be defined precisely — what deductions from gross revenue are permitted (returns, shipping, taxes) must be specified to avoid disputes.
• Minimum annual royalty. Many license agreements include a minimum annual royalty that is due regardless of the licensee’s actual sales performance. This protects the licensor from receiving no royalties in a year when the licensee has not prioritized the licensed products. Minimum royalties are also often tied to the licensee’s right to exclusivity: if the minimum is not met, the licensor has the right to convert the exclusive license to a non-exclusive one or to terminate.
• Flat fee. Some licenses, particularly for limited-term or limited-scope uses, simply specify a flat fee per period or per use. This is common in promotional licenses (authorizing a brand’s trademark to be used in connection with a third-party promotional campaign for a defined period).

Sub-Licensing and Transfer Restrictions

Trademark license agreements must address whether the licensee may sub-license the mark to third parties and whether the license is assignable in connection with a sale of the licensee’s business. Both present significant risks from the licensor’s perspective. Sub-licensing creates a chain of quality control obligations that the licensor must oversee — the licensor bears the risk if the sub-licensee uses the mark improperly, even if the licensor has no direct relationship with the sub-licensee. Assignment in a change-of-control context may result in the mark being used by an entity the licensor never approved and whose quality standards are unknown. License agreements should expressly restrict or condition both sub-licensing and assignment on the licensor’s prior written approval.

Whether you are licensing your trademark to a third party or seeking to license an established brand, the legal framework matters enormously. Contact the Trademark attorneys at Revision Legal or visit our trademark practice page to discuss your licensing needs.

Contact the Trademark Attorneys at Revision Legal

For more information, contact the experienced Trademark Lawyers at Revision Legal. You can contact us through the form on this page or call (855) 473-8474.