Essentials of Trademark Licensing Explained | Drishti Law

Discover the ins and outs of trademark licensing agreements with our extensive blog. A trademark application leading to a federal registration begins a brand development journey. A licensing relationship with other industry stakeholders can increase the value and reach of the original trademark, accomplishing business goals for all parties involved.

Understanding the legal issues surrounding licensing standards and trademark licensing in the U.S. is necessary. Expand your knowledge of the benefits, risks, and essential terms to make informed decisions for your brand.

Basics of Trademark Licensing

What is a trademark license?

Trademark licensing is a contractual agreement between two parties, the licensor and the licensee, that allows the licensee to use the licensor’s registered trademark in commerce in exchange for payment or other consideration. The licensor is typically the owner of a federal trademark, such as a company’s logo, brand name, or slogan. The licensee is usually another company that wants to use that trademark on its product or service offerings. 

One of the best ways to utilize the full power of your trademark’s protection is by partnering up with prospective licensees.

Industries for Trademark Licensing

  • Trademark Licensing in the Fashion Industry: In the fashion industry, trademark licensing has become commonplace. Designers can extend their brand into different categories, such as perfumes, handbags, or shoes, by licensing their brand name to specialized manufacturers. This enables them to penetrate markets they might not have been able to access otherwise.
  • Trademark Licensing in Food and Beverage: Similarly, brands in the food and beverage sector often venture into diverse product lines via licensing. For instance, a renowned coffee chain could license its name to a bottled beverage company to create a line of iced coffee drinks.
    • For example, Trader Joe’s famously uses the same suppliers as most major manufacturers but pays a pretty penny to slap their name on the product. This way, Trader Joe’s gets to use different types of trademarks (name/logo/design) or develop new brands in connection with a myriad of products or services that it usually wouldn’t be able to provide.
  • Trademark Licensing in Entertainment (Movies, Music, etc.): Movies and music also employ trademark licensing to monetize their intellectual property. Studios license their characters and stories for use in merchandise, video games, and spin-offs.
  • Trademark Licensing in Sports: Sports teams frequently license their logos and names for various uses—from apparel and equipment to digital platforms like video games, thereby broadening their market reach. There is a lot of licensing overlap between the different industries, such as fashion houses like Balmain, entertainment divisions like Marvel, and athletic companies like Adidas.
  • Trademark Licensing in Technology: Tech firms often use trademark licensing, amongst other types of licensing, to allow others to use their proprietary technology or enter markets where they lack expertise. Video game developers constantly utilize established engines when developing new creations. 

Examples of Trademark Licensing in the U.S.

  1. Sports teams or universities may license their logos to apparel manufacturers.
  2. A restaurant chain may license a prepared-food manufacturer to produce a line of frozen meals, thus entering another product market more quickly.
  3. Co-branding agreements, such as between Supreme and Louis Vuitton, allow mutual benefit, opening up each market to a different consumer market.
  4. Ingredient or component trademark licensing can influence consumer purchase decisions.
  5. In franchising, like a Subway store, the franchisee receives a license to use the franchisor’s trademarks in exchange for fees.

Benefits of Trademark Licensing

  • Benefits for the Trademark Owner:
    • For the licensor, trademark licensing offers significant benefits in the United States. For example, it can generate substantial royalty revenues and position the mark in new markets or on new products. This expands overall brand awareness, opening additional business opportunities.
    • In the U.S., licensing can also facilitate territorial expansion. If the licensee already has a presence in a particular state or region, the licensor can enter that market more efficiently. Moreover, U.S. trademark law requires active use to maintain rights in a trademark, allowing licensors to rely on licensees’ use to register and maintain a mark.
  • Benefits for the Trademark Licensee
    • These agreements can create new revenue streams for licensees, leveraging existing infrastructures and employees. Depending on the contract, a trademark license might offer the chance to associate a less-known brand with a well-established one, thus increasing the licensee’s brand recognition.

Mutual Benefits

Both parties can also resolve infringement disputes through trademark licensing, which is especially advantageous under U.S. law. For instance, the trademark could be assigned to one party and licensed back to another for continued use.

  • Trademark Licensing Facilitates Brand Growth and Monetization
    • Trademark licensing is a strategic tool for growth and monetization. By entering into a licensing agreement, businesses can expand their market presence, add new revenue streams, and leverage existing brand value. This growth and monetization can benefit both the licensor and the licensee. 
  • Brand Exposure and Recognition
    • Licensing your trademark allows it to be used by other companies, providing the brand with additional exposure and potential for recognition in markets it hasn’t yet penetrated.
  • Revenue Stream Diversification
    • Licensing creates new revenue streams with minimal investment, thereby diversifying your portfolio. 
  • Market Expansion
    • Registered trademark owners can utilize a licensing agreement to expand into a new geographic territory while maintaining adequate control over the quality of the deliverables. 

Risks of Trademark Licensing

Trademark licensing is an attractive strategy for brand expansion and revenue generation, but it’s crucial to be aware of the associated risks for both the trademark owner and the licensee. Here, we dive deep into some of the significant risks involved.

  • Jeopardizing Brand Quality and Consistency
    • When a business licenses its trademark to a third party, maintaining the quality and consistency of the products or services associated with that mark is essential. If the licensee offers subpar products, it tarnishes the brand’s reputation. Interestingly, the same risk exists even if the licensee’s offerings surpass the quality of the trademark owner’s goods. Inconsistent quality, whether inferior or superior, can result in consumer confusion, undermining the trademark’s ability to indicate a single source of products or services.
    • Key Tip: Quality control measures in the licensing agreement can mitigate this risk. Establishing precise standards and quality checks, complete with penalties for violations, is highly advisable.
  • Legal Liability Concerns
    • In some instances, trademark owners may be held liable for mishaps related to the licensed products, especially if these products lead to consumer harm. For instance, if a licensee produces a food item under your brand that ends up causing a foodborne illness outbreak, your brand could suffer, and you could face legal implications.
    • Key Tip: Clearly define who bears the liability in the licensing agreement. Include indemnification clauses that protect you from third-party claims resulting from the licensee’s actions.
  • Market Risks: The “Handcuff” Effect
    • Granting exclusive rights to a licensee could backfire if the licensee fails to exploit those rights effectively. This can restrict the trademark owner from seizing better market opportunities with more capable third parties.
    • Key Tip: Incorporate minimum sales thresholds, performance metrics, and termination clauses in the licensing agreement to safeguard against complacency from the licensee.

Risks to the Licensee

  • Failing to Meet Sales Expectations
    • Even after all the market research and efforts, a licensee may find that the licensed products or services are not selling as expected. This situation can become dire if the licensing agreement mandates continuous royalty payments.
    • Key Tip: Be cautious about the contract’s terms and consider negotiating clauses that allow flexibility in royalty payments based on sales performance.
  • Loss of Trademark Rights
    • If the trademark owner loses its trademark rights, this can spell disaster for the licensee, who may need to cease using the trademark immediately, incurring costs for rebranding.
    • Key Tip: Include clauses that provide for an exit strategy if the trademark becomes invalid or if the licensor fails to maintain or enforce the trademark.
  • Bankruptcy Risks: The Unseen Dangers for Both Parties
    • Bankruptcy can complicate the license agreement for both parties, as bankruptcy laws often override contractual clauses regarding termination in such events. Trademark licenses have their own set of complexities in bankruptcy cases, often governed by various legal precedents. Therefore, both licensors and licensees need to be mindful of the implications.
    • Key Tip: Consult legal experts to understand how bankruptcy laws could affect your specific licensing agreement and plan contingencies accordingly.

Key Provisions in a Trademark Licensing Contract

  • Scope of License
  • Quality Control Provisions
  • Financial Terms (Royalties, Fees)
  • Duration and Termination Clauses
  • Exclusive vs. non-exclusive licenses

Pitfalls to Avoidin Trademark Licensing

  • Not Clearly Defining the Scope
  • Ignoring Quality Control
  • Failing to Include Proper Legal Protections
  • Enforcing and terminating a trademark license agreement

Hiring a Trademark Lawyer for assistance with license agreements

When it comes to trademark licensing, there are many important legal considerations that must be taken into account. This is why it is essential for businesses to hire a qualified trademark attorney to assist them with the drafting and negotiation of license agreements. A trademark attorney is knowledgeable about the various laws and regulations governing trademarks, as well as the intricacies of copyright law, so they can offer invaluable guidance when it comes to protecting and enforcing trademark ownership rights.

Conclusion: Harnessing the power of trademark license agreements for your business

Trademark licensing is a potent tool for brand growth and monetization. The type of trademark license depends on the business situation of the licensee and the trademark holder. What works for one partnership might not work with another licensee or licensor. While it comes with its own set of challenges and complexities, proper planning and legal assistance can help you navigate through them, making it a beneficial strategy for many businesses.