What Is Trademark Licensing?

Trademark licensing is the process by which a registered trademark owner, called a licensor or proprietor, allows another party, called a licensee, to make and distribute specific products or services under the licensor's trademark agreement. Trademark licensing is a type of merchandise agreement.

The licensor receives a certain amount of money or royalties, a percentage of all sales, in exchange for sharing the trademark. This compensation is also called consideration. Fashion and consumer products concerned with sports and entertainment are often sold under a trademark licensing agreement.

The licensee usually creates a trademark licensing agreement, but a licensor can also create this document. Both parties usually agree upon the terms before creating a trademark licensing agreement.

To be eligible for legal enforcement, a trademark license agreement doesn't need to appear in writing. However, legal cases about written trademark license agreements are easier to resolve, less time consuming, and costly. Legal experts strongly recommend that all trademark licensing agreements get documented in writing and become signed and dated by both the licensor and licensee.

Types of Trade Licenses

  • Exclusive License: The licensee gains sole commercial rights to the trademark. The licensor has no commercial rights, but gains a sum of money for entering the agreement. The licensee also receives future profits or incurs losses that come from commercialization. Exclusive licenses may have limits on the products and location.
  • Sole license: The licensee and licensor can use the trademark. The licensor cannot license the trademark to a third party.
  • Non-exclusive license: The licensee, licensor, and any outside individuals the licensor also assigns a license to can use the trademark.

Parts of a Trade License Agreement

While individual trade license agreements vary, they should always include:

  • The legal names of the licensor and licensee
  • The business structures of the licensor and licensee
  • Type of license (exclusive, sole, or non-exclusive; see above)
  • The trademark(s) included in the licensing agreement
  • The products and services concerned with the agreement
  • The geographic territory where the licensee may operate and sell the products or services
  • Quality control provisions define clear standards about the nature and quality of the licensed products or services. This area is the most important part of a trademark licensing agreement for licensors. Promises, warranties, or both that the licensor makes are representations.
  • Payment details, such as whether the licensor will get royalties or a lump sum, how much these payments amount to, and when the licensor will get paid
  • The date the license will start and its expiration date, if known

Some added provisions can help improve the agreement for both parties. These include provisions that:

  • The licensor will approve all advertising and promotional materials before any marketing content gets distributed.
  • The license can be renewed.
  • Specific conditions apply for renewal.
  • The license will not be shared with an outside individual or sold to an assignee, either in the United States or internationally.
  • The license will last for a set amount of time.
  • The licensor and licensee have specific responsibilities when the license ends.
  • Penalties will apply if either party breaches the license.
  • Any breach must be remedied in a specific time frame

A trademark license can become a very complex and long document, easily reaching 100 pages, if it has multiple marks, products, geographic locations, and financial provisions. UpCounsel provides a sample trademark licensing agreement.

Why Is Trademark Licensing Important?

Trademarks must be protected. Under the Trade Marks Act 1995, licensors must keep control over the authorized use of their trademarks. If they don't maintain financial control over trading activities and quality control over the products and services associated with trademarks, they could lose the rights to them in the future. Being proactive is important; unfortunately, enforcing trademarks can be difficult.

Major brands can afford to pay lawyers to constantly look online and offline for people using branded trademarks in illegal ways. For example, MGM (Metro-Goldwyn-Mayer) would likely find and send a cease-and-desist letter to a community magazine using a logo that is like or copies MGM and the lion in a full-page advertisement for a Main Street jewelry store.

Small companies without these resources can find enforcing their trademark more challenging. While enforcement is vital for maintaining a trademark, small businesses can damage customer goodwill if they handle this issue carelessly. Proposing a trademark licensing agreement, rather than threatening to sue, is a good way to support goodwill.

Reasons to Consider Using Trademark Licensing

  • Reach new markets. You can expand your business through your partner's marketing and distribution channels.
  • Increase brand recognition. Licensing improves visibility among both brands by giving them a fresh look, putting them on new products and in new channels. As a result, licensing agreements can raise awareness among consumers.
  • Distribute workload. When you sign a trademark licensing agreement, you gain a professional partner who can take some of the pressure off you. For example, when a licensor signs a trademark licensing agreement, the licensee becomes responsible for quality of goods and services it creates using the trademark.
  • Improve your business. Your licensing agreement forges a partnership which can benefit both parties in the long term. For example, licensees can leverage the emotions generated by the trademark, such as pride in a sports team's logo or the trust embodied by a well-known brand.

Requirements for Trademark Licensing

Businesses screen potential licensees to make sure they are financially secure and well run enough to use their trademark. That's why most licensors create requirements that new licensees must meet.

Harvard University is one example of an entity that regularly enters into trademark licensing agreements.

Harvard's Trademark Program governs licensing of the university's trademarks on products sold domestically. These products typically include apparel, stationery, bags, and novelty items. Harvard will not license the university's trademarks on the following products:

  • Alcohol and tobacco products
  • Drug equipment
  • Certain adult forms of entertainment
  • Guns and other weapons
  • Products promoting gambling, betting, or lotteries

The program gets coordinated using in-house resources, with staff responsible for managing the process, from identifying prospective licensees to contract negotiations. Managing the program with in-house resources helps protect the university's name, values, and reputation.

Generally, companies must fulfill a stringent set of requirements to get a standard trademark license from another business entity:

  • Produce products following the entity's licensing standards. Licensed products must meet certain class and quality standards.
  • Correctly represent the business entity's trademarks
  • Provide product samples for quality assurance and correct trademark usage
  • Keep commercial general liability insurance
  • Support Fair Labor Association (FLA) membership and abide by the FLA Code of Conduct
  • Provide artwork for review and approval before any material is produced
  • Pay any licensing fees (such as administration fees)
  • Submit royalty reports and, if necessary, royalty payments

Examples: What Could Happen When You Sell or License Your Trademark?

Example 1: Sally's registered mark "Sally's Samplers" for chocolate has boosted the sale of her boxed chocolates. When a large candy maker decides it wants to use the mark, the company offers to buy it from Sally. If Sally sells the mark to the candy maker, she can no longer use it and the candy maker can use her mark however it chooses to do so.

Example 2: After selling "Sally's Samplers" for a big sum, Sally decides to step away from her business to do some sewing and gardening. When she moves into her rustic mountain retreat, she discovers a heart-shaped hoe in the garden shed. Her Aunt Lucy had made the hoe many years ago. Sally begins selling "Aunt Lucy's Heart-Shaped Hoe" and uses the marketing experience she gained selling "Sally's Samplers." The Heart-Shaped Hoe skyrockets in popularity, and now a major garden tools manufacturer wants to buy the mark and mass-produce the hoe.

Sally has witnessed how this business situation works. "Sally's Samplers" is now used not only for candy, but also on a chewing tobacco label. She wants to prevent her Aunt Lucy's good name from being treated in this way.

She agrees to sell the rights to the mark, but not the right to create derivative marks. Since Sally is not familiar with trademark law, she doesn't realize her decision won't protect her against others who want to use "Aunt Lucy" in connection with products or services that meet Sally's disapproval.

Example 3: After the heart-shaped hoe incident, Sally promises herself that she won't make the same decision again. She develops a new invention called "Cat Call," a device that allows a cat owner to call a cat back indoors after it takes an outdoor bathroom break. The new invention skyrockets and Sally again gets offers from other brands.

She decides to license the mark to a manufacturer that specializes in items for pets. The license restricts the mark's use to the specific product. Drawings and diagrams attached as an appendix in the license agreement make the product itself clear. The agreement also limits the way the mark can be used to promote the product and the geographic area where the mark gets used.

The license agreement runs only five years. At this time, Sally and this manufacturer can decide whether to renew the license. This decision gives Sally the control she wants, but it also reduces the mark's value for the entity that buys the mark.

Frequently Asked Questions

  • What is trademark law's purpose?

Trademark law prevents unfair industry competition by making sure intellectual property remains distinctive so that consumers don't become confused among brands. This law makes sure customers know what they're buying when they choose their favorite products. They should feel confident that products and services with a familiar trademark are of an expected quality.

Trademark law also gives trademark holders exclusive rights to their intellectual property and legal solutions if those rights get breached. Except when a license agreement is involved, other businesses should not be able to profit from someone else's trademark.

  • What are the differences between copyrights and trademarks?

Trademarks protect the attributes that promote commercial goods or services, such as product names and logos. Copyrights protect individual and original artistic works, such as novels or songs. If a logo is artistic, the logo could be protected by a trademark and copyright.

Trademarks prevent businesses from creating the same or similar elements to promote their own goods and services that could confuse or mislead the public. A similar or even the same artistic work may be permitted under copyright law if the work created did not get influenced by an original work.

The first person to use a mark in commerce owns the trademark. Copyrights don't rely on publication. The creator of the artistic work or a person or entity the creator names owns the copyright.

Trademarks can stay valid so long as they're used regularly in commerce and protected. Copyrights have a term of 50, 75, or 100 years, depending on who owns them.

People can enter copyright licensing agreements, just as they do trademark licensing agreements. These agreements allow paintings to appear on T-shirts. A copyright agreement isn't needed for many old paintings which are now in the public domain. Similarly, you don't need record company permission or a copyright agreement to use music in merchandise if the music is not copied from the original recording. If lyrics are reproduced, a licensee would arrange that reproduction with the music publisher, not the record company.

  • What do trademarks protect?

Trademark law offers the most protection to marks of distinction. These types of marks include:

  • Distinctive logos
  • Fictional words
  • Fictional characters
  • Decorative marks or words that suggest something from the imagination (for example, Neighaway for horse trailers)
  • Arbitrary marks, or words that are surprising or unexpected (for example, Pineapple for a brand of virtual reality headsets)
  • Suggestive marks, or words that describe a product or service's qualities (SureStick for poster putty)
  • Slogans (for example, "There's Room for You," for a hotel chain)

Commonly used words receive less protection unless they have developed public recognition during a long market history. These types of marks hold a secondary meaning.

Generic marks are common words that describe a product. These words can't be protected by trademark laws. For example, the words gnocchi and tomato sauce could not be protected by trademark for a food product cooked in the microwave.

  • Could I create a family of trademarks?

Creating a family of trademarks, with common elements uniting the marks, can be to your advantage. The public should learn to recognize the common elements when they see them and link them back to you. This effort can give you greater protection for future trademarks incorporating those familiar elements.

  • How are trademarks protected?
  • Federal and state registration. While trademark registration isn't required, registration provides greater protection and legal advantages (such as recovery of damages and profits). A common law trademark is only protected within a business's local area. State registration offers statewide protection, while federal registration protects the mark across the United States. Registered trademarks feature in searchable trademark databases so other businesses can easily find them and avoid a breach.
  • Notices. The recognized trademark symbols TM, SM, and registered trademark (®) tell the public of a trademark's status. It is illegal to use the registered trademark symbol before receiving registered trademark approval. You can use the TM and SM freely on any non-infringing trademark.
  • Trademark licenses. This license formalizes an agreement between a licensor and licensee, protecting the way a trademark can be used.
  • Enforcement of infringement. Stopping infringement prevents people from unlawfully using the trademark and diluting the brand. If trademark holders don't act against infringers, they can lose their trademark altogether.
  • Could I license my trademark to a blogger or fan community infringing on my intellectual property?

Proposing a licensing agreement may be a better way to handle a blogger or fan community infringing on copyright than a cease-and-desist letter or lawsuit. The license can help you control the use of your trademark, create a revenue stream for you, and help you support good relationships with the people who are already supportive of your brand.

  • Are licensed products simply promotional materials?

Licensed products are items that people would pay money for. Therefore, they must meet high quality standards. Promotional materials are not held to this same standard as they're usually given away to promote a business or brand.

  • Do I need to sell my licensed product at retail stores?

While retail stores can give licensed products great exposure, many businesses have found success online. You can sell directly to consumers using your own e-commerce website.

  • How do royalties work?

The licensor usually receives an advance royalty and ongoing royalties as part of a licensing agreement.

The advance royalty is a flat sum paid at the start of the agreement. This money makes sure the licensor receives something for sharing trademark rights, even if the product doesn't sell.

Ongoing royalties earn the licensor a percentage of every sale. Typical royalty amounts vary depending on the product and trademark.

  • Greeting cards and gift wrap: 2 to 5 percent
  • Household items (cups, sheets, towels): 3 to 8 percent
  • Fabrics, apparel (T-shirts, or caps) decals, bumper stickers: 5 to 10 percent
  • Posters and prints: 10 percent or more

The licensor usually sets the royalty amounts, but may be willing to negotiate. Once agreed upon, the royalty amounts and payment frequency should be detailed in the licensing agreement.

  • Should I hire a licensing agent?

Licensing agents aren't necessary, but they can be helpful when entering a trademark licensing agreement. These professionals can manage everything from contract negotiations and product development to the product packaging and merchandising. Research licensing agents carefully to make sure you pick a qualified professional. The International Licensing Industry Merchandiser's Association and License magazine are both resources you can use.

You should also learn as much as you can about your target market. Read newspapers, magazines, blogs, and websites. Observe people in your target demographic. Note what they're wearing, how they spend their leisure time, and what their purchase decisions involve.

Strike up conversations with them to get to know them better. When you understand your target market, you'll be better equipped to find a licensee and license agent that match your goals.

  • I thought about becoming a licensee, but I'm not sure. Is there another alternative to licensing someone else's trademark?

You could hire someone to create your own materials under a work-for-hire agreement. Rather than using trademark logos, you could hire an artist or photographer to create images for your merchandise.

  • Is trademark licensing the same as trademark assigning?

Trademark licensing should not be confused with trademark assigning, which sees a total change in a trademark's ownership. Trademark assigning is much simpler than trademark licensing. When a trademark is assigned, the licensor typically transfers all aspects of the trademark:

  • The registration rights
  • The right to create derivative works
  • Income, royalties, and claims linked to the mark due or payable on or after the assignment's completion
  • Goodwill linked to the mark. This goodwill is the strength of the association between a brand and its source (manufacturer, store, or source of sponsorship) and must be included in any valid trademark assignment.

A trademark's new owner must file paperwork with the United States Patent and Trademark Office (USPTO) within three months of the trademark assignment's completion.

Trademark licensing is riskier than trademark assigning for the licensor, because this individual retains a stake in the trademarked goods or services. It also forms a continuing relationship between the licensor and licensee, which has the potential to sour.

  • What dilutes a trademark?

A trademark is diluted when similar trademarks get used in any context. Similar trademarks leverage off the original trademark's reputation. They may confuse consumers who are unsure which brand is the one they prefer, blur the distinctiveness of the original mark, or tarnish the mark's reputation. Trademark holders should act quickly to stop dilution, which is a type of trademark infringement.

  • Can you register a trademark license agreement?

Any trademark license agreement about a trademark registered with the USPTO can be registered. The license can be recorded with the USPTO's Assignment Services Division. This record makes the licensee's right to use the trademark public record.

Some licensors and licensees are reluctant to share the confidential information in their trademark license agreement with the public. In these cases, a redacted agreement or separate document referring to the license may be filed.

Steps to File

Below is a general outline of steps for filing a trademark license agreement.

  • Submit a written request to a business entity for review and evaluation of the trademark license requestor's product or service offerings.
  • If invited, the trademark license requestor can apply for a license.
  • Submit a license request proposal and license request application. The license request proposal should contain:
  1. An intention statement explaining the individual's reasons for pursuing the license
  2. A company background summary with mission statement, business goals, and history
  3. A detailed list of any proposed products or services to be licensed
  4. A product catalog, if available
  5. A list of any business affiliations the requestor uses to maintain its licenses
  6. A product line history
  7. A detailed business plan outlining proposed strategy for production, distribution, and sale products and identifying target audience

In addition, the proposal and application must be accompanied by:

  1. A copy of certification of membership with the Fair Labor Association (FLA)
  2. Written confirmation of commercial general liability insurance
  3. Product samples

The business entity reviews all documents to determine whether the requestor meets the business's licensing criteria. If approval is granted, the company will be given a standard trademark license and documented license agreements.

  • Complete and return the license agreements for the business entity's review.
  • If everything is in order, the company will be granted a standard trademark license. The requestor will receive written notification and an executed original license agreement, a royalty reporting form, and digital files of the business entity's primary trademarks.

Contact a Trademark Attorney

A trademark licensing agreement can boost your business, but it shouldn't be entered into lightly or without legal representation. Post your legal need through UpCounsel and receive custom quotes from experienced trademark lawyers. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies such as Google, Stripe, and Twilio.