Trademark licensing can be a lucrative business, if effectively managed. Product manufacturers are often more than willing to pay meaningful royalty rates for the right to identify their goods with an established, widely recognized trademark. The actual manufacturer of a product is sometimes of no consequence to the consumer, when the product carries a known brand name. As a result, trademark licensing arrangements can allow trademark owners to expand their existing markets, or even create new markets, with little additional investment and minimal risk on their part.
Although licensing opportunities can be a win-win proposition, it is important that the trademark owner develop a strategic plan for such arrangements. First and foremost, the licensing arrangement must be designed to maintain the value and integrity of the trademark and allow for licensed products or services that maintain the uniform, consistent quality expected by consumers of the brand. Further, the licensor must be certain to select a manufacturer that has similar goals, effective support teams and management infrastructure, financial stability and distribution channels that are commensurate with the brand. Clearly, it is not a good idea for a trademark owner to license its brand to a manufacturer whose products directly compete with those of the trademark owner, as this would reduce the market shares of both the trademark owner and the manufacturer.
The Importance Of Quality Controls
Quality control provisions are foundational in any trademark license agreement. Quality controls protect the trademark owner's reputation by specifying certain minimum quality standards must be met by the licensee; standards that consumers rely on in making their purchasing decisions. If a licensor does not exercise sufficient control over the quality of the goods and/or services offered by the licensee, the trademark may, in some countries, be deemed abandoned (e.g., in the U.S.) or become vulnerable to attack by the licensee or a third party (e.g., in the UK). Conversely, maintaining too much control over the quality of the licensed goods may expose the licensor to unnecessary liability for claims of product liability and negligence and can interfere too much with the licensee's business. Accordingly, special care should be taken to craft quality control provisions that maintain the value of the mark, while allowing the licensee the ability to operate its business as it deems appropriate.
Quality control provisions should be designed to ensure that any products or services offered under the licensed trademark are of a quality that is at least equal to, if not better than, any existing products or services offered by the licensor. Quality control provisions should also include strict guidelines for use of the licensed trademark, which should specifically describe how and where to affix the mark. In addition, quality control provisions should set forth clear and unambiguous product specifications and should describe adequate product inspection and approval procedures. Similarly, quality control provisions should specify that the licensor has the right to routinely inspect the manufacturing facilities to ensure compliance with the license agreement and applicable laws. A licensor should also demand the right to review customer service comments and complaints.
Trademark Usage Guidelines
It is always advisable for the licensor to provide an electronic version of the trademark and any artwork, designs, logos or stylized typography to be used by the licensee, so that the licensee is not creating its own version of the trademark. This is especially important when the mark contains a design element, logo or stylized font, and will ensure that the proper size, spacing, color and typography is used. The license agreement should clearly state that copies of the mark may be made only from the artwork provided by the licensor. Any modifications made to the trademark by the licensee must be approved by the licensor, in advance of any use by the licensee. In the event that sample graphics cannot be provided to the licensee in electronic form, the licensor should furnish the licensee with explicit, detailed instructions on how to create the mark, using the correct size, spacing, color and typography and clarifying that any use of the trademark created by licensee must be approved in writing prior to affixing the recreated trademark to any licensed product.
The license agreement should also specify that the trademark must always be used in its entirety, without any dissection or separation of different portions of the mark or any abbreviations or variations thereof. The trademark should never be confused or blurred by printing the mark over other designs, colors, textures or superimposing the mark over other photographs, material or other matter. Further, to avoid the appearance or creation of a joint logo or trademark, the license agreement should instruct that the trademark not be used or combined with (or even used in close proximity to) any other logo, trademark, trade name or other indicia of any sort. In the event that there is an overriding reason to allow a third party's trademark to appear in close proximity to the licensor's trademark, the license agreement should require that the licensor's trademark appear at least as large and as prominent in size, color and typography.
In addition, the license agreement must require that the licensee use appropriate notice symbols such as ® which indicates that the mark is registered in the country in which the mark will be used; TM which indicates that the word or symbol is being used as a trademark; or SM, which indicates that the word or symbol is being used as a service mark. The licensor should always require that the appropriate notice symbol be used alongside the trademark any time the mark is used, including directly on the product and on packaging, hang tags, advertising, user or instruction manuals, promotional materials and point-of-purchase displays.
Licensor Approval Mechanisms
The license agreement should state that trademark may not be used in a manner or environment that, in the sole discretion of the licensor, disparages or reflects adversely upon the licensor or places the licensor or its reputation and goodwill in a negative light. If the trademark is used in advertisements, packaging or point-of purchase displays, the license agreement should require that the marketing pieces be of the highest quality commensurate with the brand. To protect the quality of the brand further, the license agreement should require that the licensee submit to the licensor samples of proposed uses of the trademark and obtain the licensor's prior written approval to use the trademark as set forth in the samples. A good practice is to state explicitly in the license agreement that the licensor's failure to provide written approval will not be deemed an approval, but rather a disapproval of the submitted samples. Further, any marketing samples disapproved by the licensor must be immediately destroyed.
In terms of the licensed product, the license agreement should describe, with no uncertainty, product specifications for the goods that will bear the licensor's trademark. The agreement should leave no room for ambiguity and all terms of art should be clearly defined. The product specifications will dictate exactly how the licensed goods will appear to the public and the trademark owner will want to ensure that the goods are of the highest quality and are beneficial to the reputation, image and goodwill of the trademark owner's mark. Furthermore, the license agreement should set forth a clear and feasible timetable, well in advance of the production schedule, for the licensee to submit a set number of product samples for the licensor's review and written approval.
In fairness to the licensee, there should be a set time frame for the product review and, at the expiration of such time frame, written approval or disapproval must be given to the licensee. In the event of disapproval, the licensor should provide reasons or suggested improvements, so that the product can be manufactured and brought to market with minimal delay, benefiting both the licensor and licensee. The license agreement should also require that any unapproved product samples be destroyed and that any approved finished product that is deemed inferior, or of a standard below the minimum quality guidelines set forth in the agreement, be disposed of in an appropriate manner. This can include selling the inferior product in a discount outlet or destroying the product. The licensor, however, may want the licensed trademark removed from any inferior product prior to sale in a discount outlet.
Monitoring Licensee's Compliance
In addition to product review and approval, effective quality control by the licensor includes monitoring, or the right to periodic inspections of the licensee's manufacturing facilities. This allows the licensor to examine the facilities, manufacturing process, raw materials, finished products, personnel and company records, to ensure that the licensee is in compliance with the license agreement, including specified quality standards, and is adhering to all local, national and international laws relating to the production of the goods, including labor and employment laws, human rights laws and child labor laws. Of course, any inspection of the facilities needs to take place during normal business hours, with advanced notice to the licensee; and the licensor should ensure that it will not disrupt the licensee's normal business operations during such inspections. It is advisable to conduct such inspections every six months to every quarter.
Another consideration for licensors to ensure adequate quality control is to review customer service comments and complaints on a regular basis. This keeps both the licensor and licensee aware of all issues and shortcomings of the product bearing the licensed trademark. This can be quite beneficial in improving and updating the product, and thus maintaining the trademark owner's reputation and goodwill. With the proliferation of internet websites and interactive electronic communication between consumers and the customer service departments, it can be quite efficient and simple to monitor consumer feedback, both positive and negative.
Published August 1, 2007.