A trademark license is a contractual arrangement whereby a trademark owner permits another to use the owner’s trademark under circumstances where, but for the license; the other would be a trademark infringer. However, such a license is unnecessary where the use of the mark would not infringe, such as where the other user is merely a re-seller of the trademarked product.
Franchising and Increased Trademark Protection
A trademark may be licensed to a single licensee or to multiple licensees. Trademark licensing activity has increased in the United States mainly because of franchising and increased trademark protection. Franchising links groups of businesses together into systems identified by eye-catching, distinctive trademarks. At the same time, the courts have extended the scope of protection to prevent infringements on an ever-widening variety of products they have stimulated licensing activities. The trademark is usually the single most dominant unifying element in a franchise system. It identifies the particular product or service to the purchasing public and guarantees a uniform standard of quality.
Licensor Required to Exercise Control Over Nature and Quality of Goods or Services
Authorized third-party uses of a mark should be licensed, and all licensing agreements should be written carefully, signed, and enforced. The agreement must set standards concerning the licensee’s use of the mark and the quality of products or services with which the mark will be used. Some trademark owners omit these formalities due to the nature of their relationship with a particular licensee. If the parent company or franchise owner engages in conduct that makes confusion likely, trademark rights may be abandoned because trademark law is designed to protect consumers from confusion regarding the source or origin of products and services. If control is not adequately maintained, the license is a ”bare” or ”naked” license and the trademark owner faces possible abandonment of his trademark rights.
“Naked licensing” occurs when third-parties are allowed to use a trademark without restriction; when the quality of goods or services provided under a mark by third parties is not controlled; or when rights in a mark are assigned, in whole or part, without the goodwill of the business symbolized by the mark. Naked licensing severs a mark from its source-identifying function, and thus results in the loss of trademark rights through abandonment. Naked licenses deceive customers, who are entitled to rely on the mark as signifying consistency and predictability. If the licensor does not hold its licensees to a certain standard, the public will be misled by the use of the mark, whether or not the products are in fact of good quality.
The Related Companies Doctrine
The Lanham Act does not expressly require a trademark licensor to exercise quality control. Nor does it establish a principal-agent relationship. Instead, it operates through the ”related companies” doctrine on a reward-punishment incentive system. If the licensor controls quality adequately, the licensee becomes a ”related company” and the licensor obtains the relevant benefits. If he or she does not, and the mark thereby ceases to function as an identification of source, trademark rights are lost through abandonment.
Provisions Essential to Trademark License
A trademark license should identify the following:
• the trademark
• the licensor and the licensee
• the trademark right(s) to be licensed, and
• the nature and quality of the goods and services that the licensee will offer under the trademark.
Other Issues to Address in Trademark License
• Royalty. When a licensor grants a trademark license in return for a royalty payment from its licensee, a royalty amount is usually set forth in the license.
• Trademark Usage. The licensor may specify the manner in which the trademark will be used on or in connection with the goods and services of the licensee and on advertising and promotional materials. The licensee may be required to obtain the licensor’s permission before using any new presentation of the trademark.
• Quality Control Monitoring. A licensor may require access to a licensee’s facilities, raw materials, finished products, personnel, and records to monitor the licensee’s adherence to the licensor’s quality standards.
• License Term. A trademark license usually states a fixed term for the license and the conditions under which the license may be renewed.
• Exclusivity. A trademark may be licensed exclusively to a single licensee or licensed non-exclusively to one or more licensees. In a non-exclusive licensing arrangement, the licensor may retain rights to use the trademark.
Recording of Trademark License
In some countries, including the United States, there is no legal requirement that trademark licenses be recorded with the Trademark Office. Such recording simply provides notice to the public of the existence of the license agreement. In other countries, however, a license must be recorded to be effective against third parties.