You sip your favorite Nestle-brand Starbucks coffee, ready to tackle the day at your manufacturing plant. A thought suddenly comes: If Starbucks can let Nestle sell their products in stores, why can’t you let another company do the same? You can with a trademark license agreement.
Starbucks in 2018 entered into a trademark licensing agreement where Nestle allowed Nestle to distribute, sell, and market Starbucks products outside of their coffee shops worldwide. This nearly $7.2 billion deal expanded both companies’ businesses.
A trademark license agreement grants an unaffiliated party access to the use of registered or unregistered trademarks. Let’s explore how these agreements work and why you may want to enter into one.
What Are Trademarks?
Trademarks are symbols or words representing products or companies. They may be established through use or legally registered. Here are a few well-known trademarks and their companies:
- Nike’s swoosh
- Apple’s bitten apple
- Facebook’s “F”
These marks help differentiate companies from their competitors. Your trademark also protects your right to use your slogan, logo, or name exclusively. You may sue someone who tries to misuse or copy your trademark.
Trademark License Agreement Benefits
A trademark licensing agreement permits another party (the licensee) to use your trademark. They’ll pay you (the licensor) for this privilege. These payments are called royalties.
Licensing agreements can positively affect companies’ finances by generating revenue. It’s perfect for producing a steady income stream.
Another reason to create a license agreement is that it may help expand your company’s customer base and market reach. That’s because your licensee can use your trademark on the different products they manufacture in various regions.
You won’t have to pay to maintain and enforce your trademark in these other regions. This will be your licensee’s job per your licensing agreement’s terms.
Trademark licensing agreements can benefit licensees, too. Licensees can save money and time on legal fees, branding, and marketing. Entering agreements with reputable licensors can also boost their sales and customer loyalty.
Remember that your licensee may use your trademark on agreed-on services or products but won’t own your trademark. You’ll remain the owner. Let’s examine what to include in a trademark agreement.
What to Include in Your Agreement
What information should your manufacturing license agreement contain? Here are key details to add to your document.
Licensee and Licensor Identification
Clearly identify the licensee and licensor in your licensing agreement. Licensees may be businesses or individuals. Some agreements feature sublicensees.
Suppose you give Business A the right to use your trademark. Business A then permits Business B to use it. Business B would be your sublicensee.
Clarify whether your trademark is registered or unregistered (more on this later). Let’s say your trademark isn’t registered, but you plan to complete the trademark application soon. State this in your agreement.
Another important detail to include is how your licensee can use your trademark. Some licensees might use the trademark on their product packaging. Others may use it in their commercials or on their menus or signs.
Scope of Use
Outline your contract terms and the territories where your licensee may use your trademark. Clarify the sectors, too. This will help ensure your trademark isn’t used in a manner that will reflect poorly on your brand.
Perhaps your licensee manufactures alcoholic and non-alcoholic beverages. Your licensing agreement may permit them to include your trademark on their non-alcoholic drinks but not their alcoholic ones.
Maintaining Quality of Control
How can you ensure your licensee uses your trademark properly? State in your agreement that you will audit your licensee’s use of your trademark to protect it. This is called quality control.
Audits are important because your trademark represents your company. It’s part of your identity. Regular audits will help ensure your trademark maintains its goodwill (value not associated with your company’s financial or physical assets) long-term.
Mention how much your licensee must compensate you to use your trademark. Some licensors charge 20% of the profits their licensees earn from using their trademarks. Others require advance payments or minimum guaranteed amounts.
What happens if you and your licensee experience a dispute? Include a clause in your trademark agreement explaining what both parties’ liabilities and rights are.
Let’s say your licensee defaults on your agreement’s obligations. Explain that this breach of contract will lead you to terminate the agreement.
What to Do When Creating an Agreement
Research potential licensees before entering agreements with them. This will help you choose third parties that will help your company grow.
Gather information about prospective licensees’ business reputations and positions. Other details to collect include their product scopes and portfolios. Explore a prospect’s scale of distribution and production, too (more on vetting potential licensees later).
Have you found the perfect licensee? Create an agreement that meets both parties’ needs. You both should review this agreement to ensure all essential deal points are included.
It’s better to include too many details than not enough in a licensing agreement. Don’t assume that specific terms or expectations have been agreed upon if they’re not expressly stated in your document.
Sign two agreement copies. Save one for yourself, and give the other to your licensee.
Consider also having your document notarized. Notarization will help limit legal challenges to your document’s signatures.
Hire an attorney to create your licensing agreement if you don’t feel comfortable handling this. A lawyer can create a contract that will satisfy your needs and comply with applicable laws.
Record your licensing agreement with the United States Trademark and Patent Office. Do this after negotiating and signing the contract with your licensee.
This isn’t legally required, but it lets others know you’ve given the licensee permission to use your mark. This might protect you against claims that you’ve abandoned the mark and don’t have the right to use it anymore.
Have you considered selling your trademark instead of entering a licensing agreement? Selling your mark outright will give you guaranteed payment. You’ll receive the amount that you and your buyer have negotiated.
The drawback of selling a trademark is you’ll receive payment for the mark only one time. You also can’t control what the buyer does with your creation.
Creating a licensing agreement will give you passive income as mentioned earlier. Another benefit of this approach is that you’ll retain control of how your trademark is used.
What Not to Do When Creating an Agreement
Licensors’ agreements should dictate what their licensees do with their trademarks. Avoid being overly controlling in your licensing agreement, though.
Excessive control might cause a court to view your arrangement as a franchising one, not a licensing one. Controlling your licensee’s business too much may force you to comply with federal and state franchise laws instead of contract law.
Franchise arrangements involve transferring not just trademarks but entire business systems. These systems include products. They also include the following:
Trademark licensing arrangements involve transferring only trademarks. Licensees have more flexibility and freedom when using trademarks.
You’ll have less stringent laws to comply with if you choose a licensing arrangement. That’s because contract law respects parties’ autonomy, intervening only to invalidate or enforce a contract. This may happen if fraud, a breach, or a mistake happens.
Franchise law is stricter since it’s designed to protect franchisees from exploitation or abuse. It aims to ensure just disclosure and dealings between parties.
Speak with an attorney regarding these two arrangements. They’ll help you determine the best option for your business’s needs and goals.
Key Tip for Licensees
Are you a potential licensee seeking an agreement with a licensor? Prospective licensees shouldn’t enter into agreements before doing their due diligence. Look for information about your target licensor via the following:
- The United States trademark and patent office
- “Doing business as” filings
- Online business directories
- State and local government agencies
Your findings may reveal critical details about the breadth and value of your target licensor’s mark. This may help you choose a mark that will most benefit your company.
License Agreement Rights
Not all trademark agreements give licensees the same rights. Your licensee’s rights will depend on how they intend to use your trademark.
Trademark agreements generally grant three kinds of rights. Let’s review them.
You may give your licensee the exclusive right to use your trademark. Nobody else can use this mark during your licensing period, not even you. Some licensors limit exclusive rights to particular areas or geographical regions.
A major benefit of this arrangement is that it eliminates competition for your licensee. This may increase their market share and profitability. It may incentivize your licensee to aggressively promote your trademark, benefiting your bottom line.
A non-exclusive right will let multiple licensees use your trademark simultaneously. Licensors can use their trademarks, too.
This option may help you expand your company’s reach. The increased market exposure might lead to fresh revenue streams.
Use this option to test various licensee partnerships without tying yourself to a single business. It’s perfect for exploring multiple market segments or rapidly expanding your brand.
Just one licensee may be allowed to use your trademark with this arrangement. You may also use the trademark but can’t sell it to someone else. Sole rights may help prevent or minimize trademark misuse or infringement (breaking the law).
Choosing a Licensee
Your trademark reflects your service and product quality, so only reliable licensees should be allowed to use it. A bad licensee may tarnish your business’s reputation. That’s why vetting prospective licensees is so crucial.
Look for a licensee who hasn’t been sued recently or earned negative reviews on sites like Google Reviews. The best licensees also have a strong market presence. Search for ones with positive press coverage, which may help boost your brand’s image.
Dependable licensees will respect your licensing agreement’s conditions and terms, complying with them consistently. They’ll also pay their agreed fees or royalties on time.
Licensees should be willing to cooperate with you to protect and enforce your trademark rights. This will help prevent misuse by another party.
Choose a licensee who’s willing to seek your approval to modify or expand your trademark scope. You don’t want your trademark used in a manner that will dilute or damage your brand.
Registering Your Trademark
You may enter into trademark licensing agreements even if you haven’t registered your mark. This applies to marks in the process of being registered.
Is your trademark unregistered? Give your licensees details about why you own the mark. Claiming your trademark ownership is possible by providing the following information:
- Date when you first used the trademark
- Description of services and goods used with the mark
- Trademark description
Registering your mark is ideal for claiming your trademark ownership and ensuring trademark protection. That’s because unregistered trademarks don’t receive the protections given to registered marks. Unregistered marks are also enforceable only in certain geographic regions.
Let’s say someone uses your trademark illegally. Sueing them for infringement may be more difficult than it would be with a registered mark.
How Do You Know You Own Your Unregistered Mark?
Suppose you’ve created a logo that you consider to be your trademark. You may not have the legal right to use this mark.
Another company might have been using this mark long before you did. This means they have the right to use it. Thoroughly search the trademark and patent office and the internet to see if your trademark is already being used before trying to use it.
How We Can Help Your Business
A trademark license agreement gives another party the right to use your business’s trademark on their products or services. This arrangement may benefit you and the other party.
The party using your mark (the licensee) may boost their sales if customers recognize your brand’s (the licensor) name on their products. You might increase your revenue if the licensee exposes your trademark to new markets.
Shield Works Precision Manufacturing can help you further boost your revenue with our assembly, warehousing, and China manufacturing services. We also advise on intellectual property rights. Partner with us today!