• From PLI’s Course Handbook

• Handling Intellectual Property Issues
in Business Transactions 2004

•   #G0-01GM



•      16




•      James H. Johnson
Sutherland, Asbill  & Brennan LLP


•   © 2004  Sutherland, Asbill & Brennan

•   All rights reserved.



Trademark Licensing:
The Good, The Bad, and The Ugly

•      By James H. Johnson

•      April 1-2, 2004




•      Trademark licensing is now more than a $100 billion a year business.

•      Too many trademark owners, however, license their trademarks without considering all of the ramifications of that practice and the appropriate safeguards.

•      The basic concept of authorizing another party to use one’s trademarks is simple. The actual reality of licensing is quite complex.

•      Today, we are going to examine the good, the bad, and the ugly aspects of licensing.

•      Moreover, we will discuss some guidelines for running a good, if not great, licensing program.

•      First, let’s look at the good – the benefits of licensing.

The Good: Lot of Dollars

•      Can generate revenue for Licensor through Licensee’s efforts and payment of royalties

•      Thus, trademark can be leveraged for greater profit with less effort and investment

The Good: Brand Promotion

•      Can promote the brand for core products

•      Can also expand the use of the brand to new products and possibly new market channels at a lower cost to the Licensor

•      In this manner, brand awareness, promotion and consumer perceptions can be dramatically increased and improved.

•      This is the very essence of marketing!

The Good: Enforcement

•      Can improve the ability of the Licensor to challenge infringing uses of similar marks for goods of a different character

•      Thus, scope of protection is expanded and value of trademark is increased

The Good: New Products, Old Brands

•      Can allow the Licensee to develop and sell new products using an established brand

•      As a result, reduce the cost of product introduction and the risk of failure

The Bad

•      Licensing has its downsides, too …

The Bad: More Than A Few Dollars

•      Can have considerable upfront costs to establish a licensing program

•      Examples:

–   The need for additional registrations

–   Personnel to oversee the program

•      Licensing program profits may not be seen for years, if ever

The Bad: Negative Impact

•      Can harm the image of the brand for the original product, if the marketing of the licensed products is not carefully controlled and considered

•      For example, the sale of poor quality products under the licensed trademark can only serve to negatively affect consumer perceptions of the core product’s value

The Bad: More Infringements

•      Can considerably increase costs and risks for brand because success of a licensing program is likely to generate more infringements

The Bad: New Partners and Business

•      Your brand names can now legally be used by third parties, so you, in effect, have a partner in your business and a constituency to satisfy

… And The Ugly: Can Lose Trademark

•      Can result in the ultimate tragedy – the permanent loss of the trademark due to a failure to adequately control the quality of the products under license


•      So What Is

•      A Licensor

•      To Do?

Develop A Plan

•      Decide what is the ultimate goal of the licensing program and the impact of that objective on the brand

•      GOAL: To have a large royalty revenue stream from licensing activities

–   May be less selective about the number of Licensees and/or the type of product licensed

–   Keep in mind that consumers of core goods are likely to encounter the licensed items

–   As a result, nature and quality of licensed items will affect consumer image and impression of core brands

–   You want that impact to be a positive       one!

•      GOAL: To strengthen the ability to challenge the use of similar marks beyond the primary product category

–   Focus on products and countries where infringements are problematic or expected

–   May necessitate the filing of numerous applications and the conducting of searches to confirm that brand is actually available for new products in these countries

–   Example – Gun manufacturer may want              to have a line of clothing; likely area for              an infringer to take advantage of your         brand’s reputation


•      GOAL: To enhance brand image

–   Select Licensees with that in mind –                                   presumably, high quality products sold                                      only in restricted marketing channels are order of the day

–   Scrutinize type of product being licensed – licensing of cheap, low quality, pedestrian products will not generally improve core product image, unless core products are cheaper and more pedestrian

•      Often licensing programs have several motives behind them, but primary ones should get careful consideration and direct the structure of the program

Beware “Man With No Name”

•      Select Licensee with great care – by licensing trademark you are, in effect, going into business with this party

–   What is the Licensee’s financial status?

–   Has the Licensee successfully handled other brands?

–   Will the Licensee give you the attention and service you need?

–   Does the Licensee have the resources              to sell and promote your product in the              manner you desire?

Define Brands

•      Carefully define what brands are licensed, for what product categories and territories – the very essence of the licensing arrangement

Retain Rights

•      Make sure you retain the right to approve the context of the usage

–   Don’t want Licensee to use the trademark in connection with other images or wording that may not be appropriate for your brand

–   Agreement needs to describe what venues and media are acceptable

–   Better practice is to require Licensor approval of Licensee’s marketing plan, advertising and marketing venues


•      Sometimes, Licensees attempt to associate their own trademarks with the licensed brand

–   Licensees hope that, over time, the goodwill of the licensed mark will spill over to their mark

–   If this does happen, Licensee will not need your marks any more, and your trademark                  helped establish Licensee’s brand

•      Process must involve a great deal of rigor, but must be flexible enough to enable Licensee to respond quickly to marketing opportunities

Don’t Become A Victim

•      If exclusive license granted, you have to make sure you require “best efforts” for the Licensee

–   If not, Licensee may do little or nothing to license the brand, yet Licensor is not in a position to authorize others in an exclusive arrangement

–   Further, the Licensee could go bankrupt, get acquired or lose key personnel

•      Any agreement should spell out in as much detail as possible the metes and bounds of exclusivity

•      Generally, exclusive arrangements are not good for the Licensor as they tie his/her hands considerably

•      Spell out the limits for the continued use of trademark once the agreement terminates

•      Licensee will want to sell off existing inventory, so Licensor needs to be able to object to amount of inventory that can be sold and when it can be sold

•      Particularly true if reason for termination is lack of quality of licensed merchandise

–   Remember, poor quality of licensed        product could affect consumer’s         perception of brand for core products

•      Require Licensee to comply with all laws and administrative regulations

•      In the event of non-compliance, Licensee should agree to indemnify Licensor of any costs, judgments, fines, or recalls

•      An insurance policy protecting Licensor from product liability is in order

•      Licensee must also notify Licensor immediately of any communications, from a governmental authority or otherwise, alleging the violation of any law or regulation or the infringement of any third party’s rights

•      Prohibit the assignment or sub-licensing of brands without prior written approval of Licensor

•      Licensor must retain control over use of brand; therefore, cannot permit Licensee to authorize parties that may be unknown or even unacceptable to Licensor

•      Better practice is to set up a direct agreement between Licensor and proposed sub-Licensee to retain as much          control as possible over use of             brand

Keep Position As The Enforcer

•      Set forth responsibilities for enforcement of the brand

•      Licensor should retain all rights to sue and threaten suit over third party use of the licensed brands

•      Licensee must be obligated to report any instances of infringement to Licensor, usually within a few business days

•      Licensee is to provide any assistance to Licensor requested by Licensor in the enforcement of the brand

–   Otherwise, the Licensee may take positions and undertake litigations or settlements which may ultimately hurt the core brand

Must Exercise Control

•      Licensor must control the quality of the products in order to protect not only the image of the brand but also the very existence of the brand

•      Licensing is a permitted practice because the Licensor is required to ensure the quality of the products or services


•      Licensor’s failure to exercise such control is known as “naked” licensing

–   Major consequence of naked licensing is extinguishing of trademark

–   Trademarks involved are considered abandoned for the goods and services                 subject to licensing

•      Ways for Licensor to control product quality:

–   Set product or service specifications

–   Have right to inspect representative product samples

–   Have right to inspect places where they are manufactured, or the services are rendered and to approve or disapprove such places.

•      On the other hand, too much control over Licensee’s activities could trigger  franchising law requirements – a                   burdensome and unfortunate result


•      Licensing has the potential to hurt or help a brand – one cannot simply license a brand and count the money.

•      The success of a licensing program depends on the diligence the Licensor exercises in authorizing the use of the trademark.

•      The Licensor/Licensee relationship can be mutually beneficial.

•      However, they are built in tensions!

–   The Licensor needs to retain a great deal of control to protect his interests in the mark.

–   The Licensee wants the freedom to run his business and recoup his investment.

–   However, the Licensor’s failure to exercise the requisite quality control can result in               the destruction of the brand as a               source identifier.

–   No one wins in this scenario.


•      Do you

•      feel lucky?