5 Things To Know About Trademark Licensing
Trademark licensing is the practice by which a trademark owner permits a third party to use its trademarks.Trademark licensing is the driving force behind the value of many brands. It is attractive to brand owners because it allows owners to extend brand awareness to new products or service categories that may not be feasible for companies to enter and it also quickly enables brands to penetrate new geographic markets. On the other hand, trademark licensing can be a double-edged sword. Here are a few things to consider before entering – and when drafting- a trademark licensing agreement.
1. Opportunity. First of all, carefully consider the opportunity of licensing your trademark. Licensing opportunities must be evaluated in the context of overall marketing strategies. Brand owners need to make sure that the licensed products make sense in terms of the brands’ reputation and positioning in the marketplace. Licensing your trademark to a pet food producer, for instance, may not be the best choice if you produce luxury objects, although licensing to a company that belongs to a different industry sometimes has shown to be the winning choice: think of Caterpillar, the producer of construction equipment, that licensed its brand to clothes and shoe-makers.
2. Quality control. Second, potential licensees need to be evaluated also in terms of product quality and overall health and desirability of the entity as a possible business partner. The owner will need to ensure some kind of control over the quality of the products being distributed with their brand name on them. This is the reason why a trademark licensing contract needs to be carefully drafted to ensure that the market continues to represent the quality that consumers have come to associate with that particular trademark. Make sure the contract determines the quality standards and your rights to approve or reject the product. The way the trademark is integrated into the final product is also relevant. Is the procedure for designing and obtaining approval for the product clearly set forth? Who designs the product? Should licensor be responsible for obtaining labelling and packaging? Mismanaged licensing agreement may result in loss of control over the brand and damage to the company’s reputation. On the other hand, where the licensor maintains an extreme degree of control or involvement in the design, marketing and distribution of a product, licensing could potentially expose him to product liability actions for defective or harmful products.
3. Exclusivity. A trademark license can be exclusive or non-exclusive. A Non-Exclusive Licence grants the licensee the right to use the trademark, but it means that the licensor remains free to allow any number of other licensees to also exploit the same trademark. Licensees would usually require an exclusive license, but the licensor would need to evaluate if the risk connected with “putting all the eggs in one basket” has an adequate pay-off. To outweigh an exclusive license, the licensee can agree with the licensor to pay an annual minimum, irrespective of sales: it would be an incentive to make them focus on the licensor’s product.
4. License limitations. A license can be limited, by territory or industry: in this way, the licensee obtains an exclusive license within its area of operations, while the licensor is still free to license the trademark outside of that area. This is a viable compromise which is often exploited in several trademark licensing agreements.
5. Registration. Finally, a licensing agreement has to comply with some formalities. A licence agreement takes effect between the contracting parties from the moment it is executed. However, Under Brazilian IP law (Law 9,279 dated May 14, 1996), trademark licenses must be recorded with the National Institute of Industrial Property to be enforceable against third parties. Moreover, the registration is necessary to claim important tax deductions on the royalties paid by the licensee. In Argentina, while the registration is not required for giving erga omnes validity to the agreement, it is still necessary for claiming the tax benefits.