01 Apr Trademark Licensing: Is it Right for Your Brand?

If you are a business owner with a registered trademark, you know that your mark is one of your business’ greatest assets. Last week, we talked a bit about how to build upon that asset by increasing your brand’s value. This week, I’d like to dive a little deeper into one of those ways that your trademark can be working for you. Trademark licensing is potentially a very lucrative area for you to explore, but it does come with it’s share of risks and challenges. Let’s take a look.

Trademark Licensing Basics 

Trademark licensing is basically the mechanism by which you can “lend” your trademark to others in exchange for some financial benefit. You, the trademark owner, are the licensor. The company that borrows your mark from you is the licensee. The license agreement grants the licensee permission to use your trademark under mutually agreed terms and conditions.

Different Kinds of Trademark Licenses

Before we explore the challenges and benefits of trademark licensing for your business, let’s talk about the different kinds of trademark licenses out there. You will likely be familiar with at least a few:

Franchising

This is a specialized license that allows the licensee (in this case, called a franchisee) to use a trademark owned by the licensor/franchisor in exchange for a fee. Unlike other license agreements, franchise agreements generally include a bundle of intellectual property rights that include the trademarks, as well as training, technical support, and mentorship. Think about any of the chain restaurants you visit. These are likely franchises.

Merchandising

Under a merchandising license, the licensee uses another company’s trademarks to enhance the value of ordinary consumer goods by adding to their visual appeal. Think of sports teams, universities, or film production companies. They license the use of their trademarks (logos, characters, slogans, etc.) for use on plates, hats, mugs, curtains, pretty much anything you can imagine.

Brand Extension

Brand extension is when two companies join forces through a trademark licensing agreement to extend a brand’s reputation outside of its core competencies. Here’s an example: a car manufacturer joins with a boat manufacturer to develop a line of boats branded under the car company’s trademark. This encourages the car manufacturer’s loyal customers to purchase a boat.

Co-Branding

This kind of licensing is slightly different from brand extension in that both companies’ brands are featured in the final product. In a co-branding relationship, two or more companies with trademarks join to create one product or service that features both brands. Consider this scenario: a luxury car manufacturer co-brands a line of vehicles with a fashion house known for high-quality leather that designs the specialty interior. Both trademarks are used in the marketing of the top-of-the-line cars subject to a co-branding license agreement.

Component Branding

Sometimes called “ingredient branding,” this kind of license allows a company that uses a trademarked ingredient or component in its finished product to use the mark in its own branding. A laptop that uses well-known processing software or an ice cream that contains a popular cookie are good examples.

Quality Control is the Essence of Trademark Licensing

You may remember from past articles the primary purpose of a trademark: trademarks are the symbols that communicate to the consumer the origin of a particular good or service. The main function of a trademark is to help consumers know where a particular product or service comes from and to know where to go to continue to purchase this good or receive this service.

Some of you may already see where this is going:

How will consumers be able to know where a good or service is coming from if trademarks can be used by companies other than the trademark owner?

Think of it this way: you own a trademark for the logo of your company that sells super-absorbent kitchen towels. Then, you license the use of that logo to a licensee, another company that makes towels. Now, it’s unclear to consumers whether they are buying towels from you (a company they love and trust) or a licensee (whose towels may be much less absorbent, or smell funny, or break down over time). See the issue?

Trademark law adjusts for this potential problem by adding this requirement to trademark licensing: the only way that a trademark can be licensed is if the licensor (owner of the trademark) remains in control of the nature and quality of the goods or services sold in association with the trademark.

Quality control is the essence of trademark licensing. It provides the means to ensure that the licensee’s use of the mark is consistent with the licensor’s interest in the mark, and it protects consumers by controlling for quality of goods or services, no matter where they are purchased.

Be Wary of a “Naked” License

When licensing your trademark, there is a real risk that comes alongside the possibility for serious financial benefit. A failure to adequately control the quality of the goods or services sold using your trademark can result in what’s known as a “naked license.” A naked license is a licensed trademark over which the licensor does not exercise adequate control. What is adequate control?

If a trademark licensor does not adequately control its trademark, it is possible that trademark registration protection can be terminated. In a trademark infringement lawsuit, naked licensing is a defense that an infringer can claim against the trademark owner. Basically, the infringer can say, “you don’t actually own that trademark anymore because you abandoned it when you failed to adequately control for quality.” Don’t let this happen to you!

Don’t License on Your Own 

If you do decide to license your trademarks as a way to build value into your brand, go for it! But don’t do it alone. It is highly recommended to get some legal expertise on your side as you are negotiating license agreements and determining how to exercise quality control. At The Brand Protected ®, our experienced trademark attorney help throughout the licensing process to ensure you get paid while protecting your valuable trademark. Click here to schedule an appointment.