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Key Issues

Although there will be other issues specific to your brand, some of the key considerations applicable to most licence agreements are set out below.

Scope

The scope of a trade mark licence is usually the grant by the trade mark owner (the licensor) to a third party (the licensee) of the right to use certain defined trade marks (which can include both registered and unregistered trade marks) on specific products within a particular territory. Since the scope of the licence is extremely important each of these aspects is considered in more detail together with the other key aspects of any licence.

Exclusivity

Is the licensee being granted a licence on an exclusive, non-exclusive or sole basis? An exclusive licence means that only the licensee may use the trade marks. A nonexclusive licence means that you as trade mark owner may also use the trade marks and may grant the right to use the trade marks to as many others as you wish. A sole licence means that you as trade mark owner and the licensee (but no one else) may use the trade marks.

Most licensors immediately jump to the conclusion that granting an exclusive licence is an absolute no-no since it prevents them using the mark themselves and granting other licences. Licensees on the other hand consider nothing less than an exclusive licence will do. Licensors ought to consider carefully whether granting an exclusive licence really is a concern. Trade mark licences are usually only granted as a means to expand brand exposure in product sectors or territories where the licensor has no capability to exploit the brand itself. For example, a sportswear manufacturer which only manufactures and sells sportswear in the UK may not need to be so concerned about granting an exclusive licence in respect of the manufacture and sale of sportswear in Sweden or a licence to apply the trade marks to pencil cases in the UK.

Territory

It is important to define the territory in respect of which the licence is granted, particularly if the licence is granted on an exclusive basis. Often Licensees request worldwide rights. As licensor you should question whether granting worldwide rights to the Licensee would be appropriate. If the licensee only has a presence in the UK there is unlikely to be any benefit to granting it an exclusive worldwide licence since to do so would effectively prevent you from using the mark on products covered by the licence in those countries in which the licensee is not exploiting it. Even where the licence is granted on a nonexclusive basis (meaning that you could appoint other licensees in countries in which the licensed products are not being exploited) you will only be able to grant other licences on a non-exclusive basis which, as we have already discussed, is not looked upon favourably by potential licensees.

Products

The products to which the licensee may apply the marks must be carefully defined. The agreement ought also to provide for a system of quality control of the products by the licensor and an approval system in respect of promotional materials relating to the products. It could be extremely detrimental to the brand if products which are not up to standard are allowed to be sold under the trade marks or if they are marketed in an inappropriate manner.

Term

Trade mark licences are usually stated to be for a fixed period of time. They may then continue automatically until terminated by either party in accordance with the termination provisions of the agreement. They should not just be allowed to “run on” informally.

Royalty Rate

Royalties can be calculated in various ways. In some cases it is appropriate for the royalty to be a fixed sum in respect of each product sold bearing the trade marks. In other cases the royalty is calculated on a percentage of either the sums received or invoiced sales of the products bearing the trade marks. Basing a percentage royalty on profits as is often suggested is extremely risky since the term “profits” is open to wide interpretation. In both instances it is important that the licensor has a right to audit the accounts of the licensee to ensure that it is receiving the correct amount of royalties.

Where a royalty is to be paid on a sums received or invoiced sales basis, it is vital to ensure that sums received or invoiced sales are well defined and specifically state what deductions the licensee may make from such amounts before the royalty is calculated.

Minimum Guaranteed Royalties or Target Sales

It is not unusual to require the licensee either to achieve minimum target sales or to pay minimum amounts by way of royalty in each year, particularly where an exclusive licence has been granted. Including such provisions encourages the licensee to promote sales of the products bearing the trade marks in order that it may achieve the minimum sales or royalties. The consequences of a licensee failing to hit the targets set may include a requirement that the licensee pays the difference between the royalties actually generated and the minimum requirement or a right of the licensor to revoke the licence granted or make it non-exclusive. This could be dealt with on a country by country basis whereby the licensee is given different minimum targets in respect of each country within its territory so that the failure to reach the target in any particular country only has consequences upon the rights granted to it in respect of that country.

In order to maximise the marketing of the brand and sales of the licensed products the licence agreement may seek to restrict the licensee from selling either competing products or products bearing the brands of direct competitors.

In addition to the rights to terminate for failure to generate minimum guaranteed royalties as discussed above, the licence agreement ought to provide for termination in the event that either party (particularly the licensee) is in material breach of the agreement or fails to remedy a breach within a particular timescale following receipt of a notice served by the other party. There should also be provision for the termination of the agreement in the event that the other party becomes insolvent.

The issue of whether or not the licensee is allowed to appoint sub-licensees ought to be specifically addressed in the agreement. The right to sub-license may be subject to the licensor’s approval of any proposed sub-licensee.

The agreement should also state whether the parties are allowed to assign the agreement to a third party. Where the licensee is permitted to assign the agreement it is usual to make such right either subject to the licensor’s approval of the proposed assignee or conditional upon the proposed assignee not being a competitor of the licensor.

The choice of law which will govern the terms of the licence agreement will depend upon where the parties are based. Generally it is preferable for UK based companies to have the licence agreement governed by English law.

As the licensor, you must ensure that you have protected your core trade marks around which you are building your brand. If not, you may come across problems in the future that impact not only on you but also on your licensees who will look to you for a remedy. Check not only that your core trade marks are registered but that they are registered in all territories in which you or your licensees will conduct business and in respect of all categories of goods/services which will be sold or provided by you or your licensees. As a licensee, it is very important to remember to record the grant of the licence at the Trade Marks Registry. Failure to do so may prevent you from taking infringement action in your own right.

Contact

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