From PLI�s Course Handbook

Handling Intellectual Property Issues
in Business Transactions 2004








      James H. Johnson
Sutherland, Asbill& Brennan LLP


   � 2004Sutherland, 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


   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 products 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 brands 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 Licensees 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

   Dont 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 Licensees 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 Licensees brand

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

Dont 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 consumers 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 partys 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


      Licensors 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 Licensees 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 Licensors 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?