Brian Casper on Trademark Licensing
While most people lump trademarks in with patents and copyrights when thinking about intellectual property in a general sense, when it comes to licensing, there are some fundamental differences that make licensing trademarks more challenging.
Unlike patents and copyrights, which can be bought and sold like commodities, trademarks have a much more personal relationship with the goods and services they are associated with.
This paper offers some general background and guidance for both prospective licensors and licensees, along with some sample language that should be included in any comprehensive license agreement.
Why Trademarks are Different
Trademark rights stem from the use of the trademark rather than the registration or creation of the mark. This contrasts with patents and copyrights. For example, a copyright is created automatically the moment the creative idea is expressed in some tangible form—i.e. written down, painted, recorded, etc., and can be enforced once the registration issues from the Copyright Office. Likewise, a patent is not enforceable until the registration issues from the USPTO. And both patent rights and copyrights can be assigned before the underlying ideas are even formulated. It is not unusual for employment contracts to specify that the employee (as inventor or author) assigns their patentable inventions and copyrights to their employer. When inventive or creative tasks are part of the job responsibilities of the employee, such assignment to the employer can even happen automatically as a matter of law. Inventors and authors also enjoy the right to sell or license the applications for patents and copyright prior to the registrations issuing.
In contrast, a trademark application cannot even be issued until there is proof that the trademark or service mark is being used in interstate commerce. But trademarks are enforceable even without a registration. The connection between to trademark and the goods associated with them is so important that ownership of a registered trademark that has not been used in commerce for three consecutive years will be presumed abandoned in spite of any remaining term of the registration.
The History of IP Rights
To understand this contrast, it is useful to look at the historical roots of each form of protection and the way each form of intellectual property functions in society. The societal advantage of granting limited monopoly rights to authors and inventors over their creations has long been understood to promote the common good. This acts as an incentive for invention and the creation of new works—or in constitutional parlance: “To promote the Progress of Science and useful Arts.” This was the phrase used by the drafters of the U.S. Constitution. In the 18th Century vernacular, “science” referred to the writings that would be protected by copyrights and “useful arts” to the machines and discoveries that would be protectable by patents.
On the other hand, while the concept of marking your goods to distinguish them from the goods of others is quite ancient, the current legal regime governing trademark protection in the U.S. only dates back to 1946 with the introduction of the Lanham Act. There were federal legal trademark protections throughout the early history of the U.S., but it was the Lanham Act of 1946 that created the legal framework for today’s law. There is also a patchwork of state laws that work in conjunction with the federal law.
The authority for the Lanham Act was not an explicit power granted by the Constitution, but rather stemmed from Congress’ general authority to regulate interstate commerce. One of the primary concerns with trademark law that distinguishes it from other intellectual property rights is its roll in consumer protection.
Trademark Law for Consumer Protection
Protection against counterfeiting and false advertising are two of the ways trademark law protects consumers. At its most basic level, trademark laws provide consumers with the right to get what they pay for and to have reasonable expectations of consistent quality based on past experience purchasing goods and services.
Whether or not you like eating at McDonald’s®, you know exactly what it is going to taste like no matter where you are in the country. If you are on a road trip hundreds of miles from home, and you see those golden arches, you don’t need to read customer reviews to know what to expect. You’ve had those fries before, and they are going to taste just like they did the last time you ate at your local franchise. Similarly, you know that ring from Tiffany & Co.® is not going to turn your finger green and that a bottle of Diet Coke® will taste just like the last, no matter where you are. When you see these labels, you know where the goods came from—or at least who is responsible for them—and you can expect that the quality will be consistent.
Protecting Trademark Rights
The source identification power of a trademark comes with a responsibility. Trademark owners need to police their marks or risk diminishing their power or even losing them.
Trademark Abandonment
There are four primary ways trademark owners can lose the right to their trademarks. The first way is by abandonment. A trademark is presumed to be abandoned after three years of nonuse. Therefore, if the licensee ever stops selling the products sold under the trademark, the license needs to allow the licensor to revoke the license so it can keep the products on the market and not abandon the trademarks by nonuse.
Genericide of Trademarks
The next way to lose a trademark is for it to become associated with the generic goods themselves rather than the particular brand. This is referred to as “genericide.” Many well-know names for things we encounter everyday were once brand names. Names such as Aspirin, Dry Ice, Kerosene, and Trampoline were all once very successful brand names, but through acquiescence, these names became the generic names for the products behind the brand. Brands such as Xerox and Velcro are currently running public relations campaigns to remind consumers that they represent band names for copy machines and hook and loop fasteners. Once the public stops associating a name for a particular brand of that product and associates it with the product itself, the trademark ceases to perform its source identifying function.
Naked Licenses
Another way to lose a trademark is from failing to control the quality of the goods or services that the trademark is applied to. More often than not, the owner of the brand does not actually own the factory that manufactures its products. Companies routinely work with the manufacturers to assure a consistent level of quality to make sure every widget they sell is just like the others and will be for years to come. But what happens when a company licenses its trademarks to other companies to handle manufacturing and sales of products carrying its brand name? Since it is now one step further removed from the products, it no longer has the same control over the manufacturing and sales. The term “naked license” refers to a trademark license without adequate controls over the quality of the goods. The rationale for this policy is that the public will be misled if a trademark owner allows licensees to change the quality of the goods sold under the trademark. A trademark owner who allows that to occur loses its right to keep others from using the mark. This is where the important details of the trademark license come into play.
Trademark Assignment Without Goodwill
Finally, in similar fashion to naked licensing, if a trademark owner assigns the rights to a trademark without the “goodwill” associated with that trademark, the new owner may not have an exclusive right to the trademark. Courts have held that recipient of the assignment needs to produce goods or provide services of the same quality and nature previously associated with the mark.
Trademark License Essentials
The most important thing a licensor should do to prevent genericide and naked licensing is to specify exactly how the trademark will be used both in advertising and on the product packaging. This includes both how the trademark is used in print and in conversation and provide numerous details about how the trademark must be displayed on the goods as well as on its packaging. Additionally, there must be some control over how the products are manufactured.
Proper TM Use Requirements
First, the license should specify how the trademark can be used. The license should require that the trademark only be used as a proper adjective and never as a noun or verb. The trademark should always be followed by the noun that is the product, such as a Xerox copy machine or a Band-Aid® bandage. Note that in the case of Band-Aid®, when that trademark is displayed on the packaging, it mentions that it is a brand for a particular and specific product category—as in: “BAND-AID® BRAND ADHESIVE BANDAGES.” No doubt because this trademark is borderline generic in the eyes of the public.
Proper Marking of Trademark Rights
The license agreement should also require the use of the ® or ™ symbols as appropriate every time the trademark is depicted graphically or in print. If the trademark is registered, always indicate so with the “®” symbol. But even if it is not registered, if you are using a word or symbol as a trademark make sure it is always accompanied by the TM designation. Kerosene was once a popular brand name for a petroleum derived fuel, but the trademark was lost because people referred to the fuel itself as kerosene rather than Kerosene brand fuel. People will naturally do this, so trademark owners must be vigilant and never do it themselves. A current example of this natural but sloppy trademark usage is how people often refer to using the Google® brand Internet search engine. Googling is commonly used as a generic verb meaning to search for something on the Internet. People say they “google answers” to their questions even if they use the Bing® search engine. If that sloppy usage keeps up, Google® could lose its trademark. Thus, any trademark license should include a section on usage.
Trademark Usage Guide
When I’m drafting license agreements, I prefer to attach a Usage Guide after specifically listing the licensed trademarks and permitted products in an Appendix, also attached to the license agreement. A major advantage of having certain items in appendices is that you can agree in advance that these are subject to change without having to renegotiate the terms of the agreement. For example, the language introducing the Licensed Trademarks and Permitted Goods would look like this:
Licensor permits Licensee to use only those trademarks and logos listed in the attached Appendix I “Licensed Trademarks” and only on the authorized products “Permitted Goods” set forth in Appendix II. The Licensor may make adjustments to the information contained in the appendices from time to time in its sole discretion and Licensor agrees to abide by those changes as if they made part of this Agreement.
The Usage Guide should also specify how the trademark can be displayed and include all of the important details regarding color, size, and placement of the trademark on the goods. Here is an example of language introducing the Usage Guide:
Licensee hereby agrees to abide by the terms of the Usage Guide attached hereto as Appendix III, and any subsequent amendments thereto, which Licensor may make from time to time in its sole discretion.
NOTE: the above examples are general reference examples only and do not constitute legal advice. The appropriate control provisions to be used in a license agreement will vary based on the specific circumstances.
Trademark Control Provisions
The license agreement should also include some control over how the products that will be sold under the licensed trademark are manufactured. This can include strict products specifications, quality control measures, and the right to inspect or audit the factory. It is a good practice to require the licensee to provide samples for evaluation and testing on an annual basis—or even better, reimburse you for samples you buy yourself through normal supply channels. If the licensee will not be manufacturing the products itself, the licensor should have some control over who does. This can be in the form of specifying the approved factories or at least maintaining a veto over any change in factories. For an example of control provisions in a trademark license agreement, click here.
All Good Things Must Come to an End: The TM License Term
Trademark licenses are generally for a limited term. But what happens when the term is over? If the licensee was manufacturing and selling millions of widgets a year at the end of the term, the licensor might lose that momentum if it had no way to transfer the manufacturing of the product or had no access the distribution chain. It is essential that the license not only state that the goodwill associated with the trademark belongs exclusively to licensor, but also specify how that goodwill will be transferred at the end of the term. On the other hand, the licensee needs some protection from having large quantities of products on hand that it cannot sell when the license ends. These are issues that should be addressed when negotiating the end of the license term.
Conclusion: Proper Trademark Licensing Requires Special Knowledge
Trademark licensing offers some additional challenges not found in other license agreements. Without careful attention, licensing mistakes can weaken or even destroy the enforceability and exclusivity that trademark law provides. You should always consult an experienced trademark attorney before licensing others to use your trademarks. If your existing trademark license does not offer usage guidelines and quality controls, you should consider consulting with an experienced attorney to discuss your options.