Crash Course on Trademark License Agreements

Properly thought out and managed trademark license arrangements can be win-win opportunities for all parties, including the public. The document that goes a long way toward realizing this opportunity is the trademark license agreement. This agreement is a written contract in which the holder of a trademark (licensor) grants the revocable right to a second party (licensee) to use the holder's trademark in exchange for royalty fees. Without the license, the licensee could not legally use the trademark.

Trademarks are a type of intellectual property. Trademarks are distinctive signs or indicators-usually phrases, logos, slogans, designs, images, or combinations thereof-that identify a specific company or organization to the public. Protected marks are accompanied by the superscript "TM" for trademark, "SM" for service mark, or the encircled "R." They are similar to copyrights and patents but also have distinct differences. One of them is the protection they receive. Copyright protection spans the length of the author's lifetime plus another 70 years; however, trademark protection is usually only five years, and it must be attentively guarded.

Similarly, trademark license agreements are also of limited duration. While a trademark owner may license the mark, knowing full well that the ownership does not pass to the licensee, the owner may also go one step further and sell the mark to a buyer. A sale, however, must include the underlying goodwill or assets that make the mark what it is. Without such goodwill or assets, courts have determined that such a sale is a fraud on the public, similar to selling a brand new car that lacks an engine.

Trademark license agreements should contain a handful of essential clauses for everyone's protection, including the public. First, the trademark must remain somewhat exclusive. A licensor would be foolish to dilute the mark by licensing it to every maker of ball caps in the market. Such a scenario might seem like a bonanza for the licensor, but it would soon become absurd as trademarked caps flooded the market. Second, the licensor must make certain that the licensee adheres to the licensor's preexisting quality control standards. To license the mark and then to discover that it is to be placed on substandard licensee products would be disastrous for all parties. Next, it is up to the licensor to provide examples of the mark, in various media forms if need be. If the licensor leaves it to the licensee to try to copy the mark as best it can, then surely trouble will result. Instead, the licensor should provide exemplars and hold the licensee to them-no slight modifications of font or color or spacing; no additions of phrases or images; nothing to alter the mark in public's eye.

Fourth, the licensor must have veto power over the use-not merely the design-of the trademark. The licensee should not be permitted to use the mark in connection with the licensee's political or philanthropic causes (even if they are good causes), if the agreement was for use of the mark only on the licensee's ball caps. If the licensor does not want the mark used with political or religious organizations, or hawked to promote alcohol, the agreement must give the licensor this veto power. Lastly, the license agreement must tie these protections together under a monitoring and inspection provision. Here, the licensor can pre-approve licensee samples, so that problems do not arise later. Monitoring may seem like a luxury, but it is a necessity, for a licensor that does not monitor the quality of its products and does not safeguard its mark can be deemed to have abandoned the mark-akin to commercial suicide for many companies.

While these provisions might seem to protect only the licensor, in reality, they protect everyone. For a diluted or abandoned trademark hurts the licensor, the licensee, and even consumers.