Trademark Ownership Dangers with Foreign Distributors and Affiliates: Steps to Reduce IP Risks

Trademark Ownership Dangers: How to Reduce Dangers Posed by Foreign Distributors

Over the years, a number of our clients doing business with companies in foreign countries have run into trouble policing their trademark rights and in some cases, lost ownership to a key trademark. Generally, this happens in countries that follow the “first to file” trademark law without a requirement of actual use in commerce as is required by US trademark law. In these instances, the foreign distributor or business partner can file a trademark application and obtain a trademark registration without the knowledge — or permission — of the US company. If the business relationship sours, the foreign distributor may exercise considerable leverage over the US company and even potentially sue the US company for trademark infringement of its own mark. When this involves a house mark for the US company, this can be particularly troublesome. We have seen foreign distributors also obtain domain name registrations incorporating the trademark or US company name and essentially set up shop as a competing entity. From there, the distributor can run keyword advertising, create websites, and block future trademark applications in the jurisdiction by the US company.

So what can be done? While not a guarantee of success, the following steps reduce the trademark ownership risk when conducting business internationally.

Step 1: Protect Trademark Rights with Comprehensive Distributor Agreements

The most obvious, yet overlooked step, in our experience to reduce trademark ownership risk is to prepare comprehensive agreements with third-party distributors, which include a trademark license provision. These agreements should address all the key risk points, should be standard across all distributors, and should be updated periodically based on new developments in the law or distributors-behaving-badly experiences.

Here are a few terms that bear directly on trademark risks:

Ownership of Trademarks and Other IP — Ownership of the trademarks and any other IP relevant to the deal is owned solely and completely by the Licensor.
Prohibitions on Filing Trademark Applications — A provision that prohibits the filing of trademark applications in foreign jurisdictions eliminates some of the risk of a vindictive ex-distributor.
Prohibitions on Registering Domain Names — This is an important term for the same reasons as the trademark filing prohibition.
Use of Trademarks Inures to Licensor — You want to ensure in most cases that any use by the licensee distributor is to the benefit of the Licensor.
Forum Selection/Choice of Law — Best to avoid litigating in foreign jurisdictions using their law.
Termination Provision — If the above provisions are included in the distributor agreement, a clear termination provision is very effective in protecting trademark and other intellectual property rights.
Requirement of US Assets as Security — This last one is on the wish list. Having an asset in the US or another friendly jurisdiction that can be seized in the event of a breach of the license agreement is a powerful deterrent to bad distributor behavior.

These are just a few key provisions that help to mitigate damages and risks to trademarks and other forms of IP. Each country is different so agreements may need to be modified based on the law of a jurisdiction.

Step 2: Protect Trademark Rights Through Proactive Foreign Filing

Before engaging in negotiations with a potential distributor or business partner in a foreign jurisdiction, filing an application to register the trademark is an excellent step. As mentioned above, some jurisdictions require use in commerce before a trademark may be registered; other jurisdictions only require an intent to use. Regardless, having clear ownership rights in the foreign jurisdiction eliminates the chances of a disgruntled distributor later filing its own application and generally being a thorn in the US company’s side. Ownership of the trademark rights also gives the US company leverage in any separation agreement in the future and the ability to use those rights to police the marketplace outside of the US. This protection likely extends to domain name registrations as well as a tool to use for takedowns of websites that infringe the mark or are engaging in unfair competition.

You can find out more about foreign trademark protection in our blog post, “Tips for Protecting Trademarks Internationally”.

Step 3: Address Risks to Trademarks Through Active Monitoring

At this point, we have begun with a comprehensive agreement that addresses the risks of licensing a trademark to a foreign distributor or third party and we have secured all the necessary trademark registrations — foreign and domestic. The final step is to employ a trademark monitoring system sometimes referred to as a “trademark protection service” to ensure that foreign distributors are abiding by the terms of the agreement and to ensure that no third parties are infringing on the trademark rights. The advances of technology have led to an increasing number of trademark monitoring services that are relatively inexpensive and effective at uncovering infringements. For companies that have a multi-distributor model or franchise model, monitoring is particularly important because proactive measures will likely uncover and resolve problems before franchisees and other distributors report what they think are infringements while becoming increasingly upset.

You can find out more about proactive enforcement steps on our online brand protection page.

Trademark Ownership Dangers with Foreign Distributors and Affiliates: Steps to Reduce IP Risks

Trademark Ownership Dangers: How to Reduce Dangers Posed by Foreign Distributors

Step 1: Protect Trademark Rights with Comprehensive Distributor Agreements

Step 2: Protect Trademark Rights Through Proactive Foreign Filing

Step 3: Address Risks to Trademarks Through Active Monitoring

Intellectual Property Attorneys

Phone - 214.367.6000