Licensing your trademark can be extremely profitable; think Apple and its wide portfolio of trademarks being used by licensees that develop applications and compatible products. With proper management of your mark and a carefully written licensing agreement, you can license your trademark, increase its value, and expand your brand significantly.
Under U.S. trademark law, a trademark is a word, phrase, symbol or design that uniquely identifies a product and its source. In the United States, when you use your mark in commerce and consumers identify the mark with you and your products, your trademark ownership rights exist. No one else can use the mark without your permission. If you want to give permission, a trademark license allows a third party to use your mark in exchange for a fee, but ownership remains with you.
Before entering into a licensing arrangement, do some homework: First, make sure you own the trademark, free and clear. You should conduct a registered trademark search through the United States Patent and Trademark Office, or USPTO. You should also conduct a “use” search through a trademark search company. If someone else has used the mark before you, he may have a claim of ownership even if he never applied to register the trademark. Second, investigate your potential licensee’s business history, reputation, and products to ensure that their use will not harm your trademark and brand reputation.
License Agreement Basics
Your license agreement should be in writing. It should identify your legal name as the licensor, as well as the legal name of the person, business or organization to whom you are licensing the trademark, as the licensee. It should also specifically identify the trademark being licensed, the products that will bear the trademark, the geographic territory in which the mark may be used, the duration of the license, the rights being granted with the trademark, and the allowable use of the trademark. Your agreement should also specify whether the license agreement is exclusive or nonexclusive, the process for termination, payment terms, and breach consequences.
You may grant exclusive or non-exclusive rights to use your trademark. Non-exclusive license grants, the more common trademark licensing arrangement, allow you to grant similar licenses to other parties. Exclusive licenses grant exclusive rights to use the trademark during the term of the license. This is almost a transfer of ownership and should rarely be used.
Royalties with an initial up-front payment represent the most common payment arrangement with trademark licenses. Royalties are typically calculated as a percentage of net wholesale sales. Royalties are generally better than a one-time fee because as the licensee’s product sales increase, so do your earnings; your potential income is not capped. You can also negotiate “minimum guaranteed royalties,” which means that the licensee will pay you a certain minimum amount of royalties regardless of the actual amount of sales. Minimum guaranteed royalties can significantly reduce the risk of loss on your license arrangement.
A trademark represents a consistency in quality upon which consumers rely. As a licensor, you must monitor and control the quality and reputation of the licensee's products because they represent your trademark. Your agreement must include quality control standards for the licensed products, as well as related packaging, advertising and marketing materials. Your agreement should also include provisions for monitoring the licensee’s compliance. Without established monitoring, you risk having a “naked license” that could result in the loss of your trademark rights.
Recording Your License
You can record your license agreement with the USPTO, but recording is not required. If you choose to record, be mindful of disclosing any confidential, proprietary information that your agreement may contain.