Trademark Licensing Agreement Basics

A trademark licensing agreement is a legal contract between a trademark owner and another party that have agreed to use the trademark on preapproved terms decided between the contracting parties.

Elements of Trademark License Agreement

There are several elements to a trademark licensing agreement. The most important part of the agreement is to properly demonstrate that the licensor remains in control of the quality of the goods or services sold in connection with use of the mark. As such, the provision regarding quality control is one of the most important elements integral to trademark licensing agreements. The quality control provision of a trademark licensing agreement must ensure that the licensor of the trademark has set standards to maintain the goodwill attached to the mark that consumers of the goods or services have come to rely upon. Common requirements under the quality control provision of a trademark licensing agreement may include, but are not limited to, the ability to audit the licensee’s accounting records or bookkeeping, inspection of the licensee’s facilities, internal audits of the licensee’s protocols, and review of media use printed in connection with use of the mark.

Definitions Section of Agreement

Definitions, common to most business contracts, are also an important part of more complicated trademark licensing agreements. In order to avoid confusion between the parties, it is important for the licensor to clearly set forth what specific words or terms used in the agreement mean so that there is no confusion between the parties and to avoid potential conflict if litigation happens to arise. Clearly defined terms in an agreement are also important because if there is contention between the parties regarding the agreement, ambiguous terms may ultimately be left up to a court to decide, which can be detrimental to the party bringing the litigation.

Geographical Scope of Trademark License

The geographical scope of a trademark licensing agreement is another important element of a trademark licensing agreement Because a licensor may license the trademark to multiple licensees, it is important for the licensing agreement to clearly demarcate the geographical areas that the licensee may use the trademark. For instance, a licensor may grant trademark rights to different licensees based on the continent, state, or city they are in. This is especially common in franchising agreements as there may be several licensees that overlap in the same area. As such, the trademark licensing agreement must put forth whether the license is exclusive to the licensee or non-exclusive as well as whether the licensee may sub-license any of the rights granted by the licensor.

License Duration

The duration and right to terminate provisions of a trademark licensing agreement are also important because it gives the licensor the ability to license the trademark for a short amount of time in order to gauge whether business relationship is profitable enough to renew for another term. Likewise, the right to terminate the agreement is important for the licensor because it allows the licensor to terminate the agreement immediately upon the licensee’s misuse of the mark or for other breaches of the agreement. This way, the brand owner of the mark can stop the erosion of the goodwill associated with the mark if a licensee fails to meet the standards of quality that consumers have come to expect in relation to the original provider of the goods or services associated with the mark.

Royalty Rate for Trademark Licensing

The royalty rate of the trademark licensing agreement is also another essential element of the trademark licensing agreement. The more valuable the trademark, the higher the royalty rate will be for licensees of the mark. And as such, it is not uncommon for trademark licensors to set minimum sales objectives or expectations in the licensing agreement. A well-drafted trademark licensing agreement will also be specific when it comes to how the licensor is to be paid, how often payments may be made, and what consequences there will be if payment is late.

General Contractual Terms

Lastly, trademark licensing agreements will have the same general provisions that appear in business contracts, which include but are not limited to: description of the parties; the intent of the parties that brought them together in a legally binding contract; whether there are any other business relationships created by the agreement; governing law; and when applicable: indemnity; limitation of liabilities; warranties, etc.

Overall, licensing agreements are very common, but brand owners should seek the help of experienced counsel when it comes to drafting well-defined licensing agreements that will protect both the goodwill of the mark to be used as well as the rights of the licensor.

Key Takeaways for Drafting Trademark Licensing Agreements

The following are key points in drafting a trademark license:

• One of the most important terms is the quality control provision to protect the goodwill of the trademark rights;

• Other key terms include definitions, geographic scope, time limitation/license duration, royalty rate, and general contractual terms; and

• An attorney experienced in trademark law likely can provide helpful insights on trademark license terms.

For more insights on trademark licensing issues, see our Trademark Services Overview page.

Sign up for and explore our content and thought leadership here.

About the Firm:

Klemchuk LLP is a litigation, intellectual property, transactional, and international business law firm dedicated to protecting innovation. The firm provides tailored legal solutions to industries including software, technology, retail, real estate, consumer goods, ecommerce, telecommunications, restaurant, energy, media, and professional services. The firm focuses on serving mid-market companies seeking long-term, value-added relationships with a law firm. Learn more about experiencing law practiced differently and our local counsel practice.

The firm publishes Intellectual Property Trends (latest developments in IP law), Conversations with Innovators (interviews with thought leaders), Leaders in Law (insights from law leaders), Culture Counts (thoughts on law firm culture and business), and Legal Insights (in-depth analysis of IP, litigation, and transactional law).