• From PLI’s Course Handbook

• Handling Intellectual Property Issues
in Business Transactions 2004

• #G0-01GM

• 16

• TRADMARK LICENSING:
THE GOOD, THE BAD, AND
THE UGLY

• 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

Overview

• 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

Conclusion

• 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?