March 15, 2023
Creative trade mark licensing can greatly increase a company’s revenues, as well as expand its brand identification and sales reach into territories that otherwise would fall outside of its manufacturing and distribution capacity.
Licenses can be granted for a particular country or for a particular product. For example, an Irish company may hold a registered trade mark for “Kennedy’s Chocolates” that covers both a line of hard chocolate products and a line of soft drinks. If the company has also registered the trade mark in the United States, for example, but does not have the capacity to sell its products in that market, it may want to license the trade mark, manufacturing and distribution rights for its hard chocolates to one company and the soft drink line to another. This would allow it to find the best possible manufacturer and distributor for each particular product.
In addition to determining which products will be covered by a trade mark license, the licensor needs to decide whether to grant an exclusive or non-exclusive license. An exclusive license will receive a much higher royalty rate and will typically motivate a licensee to invest more in terms of advertising and sales support for the licensed product. However, it will preclude the licensor from exploiting its own products in the territory, and if the licensee does not perform up to expectations, the company will lose potential revenue and the damage to its brand may be irreparable.
It is therefore very important when licensing a trade mark to choose a licensee that will enhance the value of the brand and give it adequate support, because the ripple effect of the licensee’s efforts may extend beyond the territory and the term of the license.
As a result, many of the terms included in a Trade Mark License Agreement are intended to ensure that the licensee performs up to expectations and maximizes the value of the trade mark in the licensed territory. The provisions included in most Trade Mark License Agreements include:
The licensed products are those that can be manufactured and sold using the licensed trade marks. The use of the trade marks to sell any other product, or for any other commercial purpose, will fall outside of the scope of the license and constitute infringement.
Royalties can be calculated in many ways, but the two most common are a percentage of net sales or a set amount per unit sold. In the case of an exclusive license, it is common to have a minimum royalty amount payable on a monthly or quarterly basis in order to make sure that the licensee is using its best efforts to exploit the trade mark. The licensor may also specify minimum sales targets, minimum amounts to be spent on promoting the products within the territory, and other mandatory marketing and distribution activities of the licensee.
The provisions that cover protection and use of the trade mark, as well as quality control of the underlying products, are vital for several reasons. The most obvious is that the improper use of the trade mark and/or failure to meet the trade mark owner’s quality control standards will diminish the value of the brand and thereby decrease the goodwill underlying the trade mark. In addition, if the trade mark owner does not closely monitor the manner in which the trade mark is used and the quality of the products and materials to which it is applied, the trade mark registration may actually be revoked on the grounds that it is likely to mislead the public by not representing a product of consistent quality.
This means that the licensor must include provisions in the Trade Mark License Agreement that specify how the trade mark will be used with respect to all licensed products, packaging and marketing material, and give the licensor the right to closely inspect such use and remedy any misuse. One method of setting the appropriate standard for a licensee’s use of a trade mark is to attach detailed requirements in the form of an appendix to the Trade mark License Agreement.
There is one area of caution in drafting the exclusivity, territory, royalty, and quality control provisions of a Trade Mark License Agreement. These terms must be seen to reasonably protect the reputation and value of the trade mark. If they go beyond that, they may fall foul of competition law. In particular, the Trade Mark License Agreement should not include resale price maintenance provisions (i.e. try to set the sale price for products). In addition, the implications of competition law should be carefully analysed when granting exclusive rights to territories within the EU, which is sceptical of licenses that appear to partition the market and therefore run counter to its single-market policy.
Another important question that should be addressed in a Trade Mark License Agreement is who should be responsible for policing and enforcing the trade mark, and to what extent. This will often depend on the relative size and capabilities of the licensor and licensee, but in any event the licensor will want to maintain a degree of control because the failure to enforce the trade mark will have an adverse effect on the value of its brand as a whole.
However, the licensee also has a strong interest in seeing the trade marks it has licensed enforced, and therefore may demand the right to prosecute infringement claims if the trade mark owner fails to do so. In any event, both parties should agree to promptly notify the other if potential infringement is discovered, and cooperate in enforcing the trademark rights against the infringer.
Licensing is normally the preferred method of maximizing the value of a trade mark because it allows the holder to retain ownership for future use while also receiving current revenues. However, there are instances where it is either optimal or necessary to sell a registered trade mark as well.
Consistently recognised by the Legal 500, Martin is a solicitor with over 20 years' of business law experience.
CEO, DocuDraft
Consistently recognised by the Legal 500, Martin is a solicitor with over 20 years' of business law experience.
