2.5 Trademark licence agreement

Main idea: A trademark licence agreement is for the licensing of a trademark used in connection with certain products. A trademark may be any distinctive, identifying wordmark, symbol, logo or other indicator of a product or service.

As with most ITC Model Contracts, the Model Contract trademark licence agreement provides a series or “menu” of possibilities depending on the background and nature of the trademark licence. Many provisions may not be relevant to a particular contract and should therefore not be included.

Scope of the licence. The trademark licence agreement grants the licensee a right to use the trademark on certain products and to manufacture, promote, import, distribute and sell such products in an agreed territory or market segment (or a market segment within an agreed territory).

  • Sub-licences and exhaustion. Although the licence may exclude the right to grant sub-licences, if the licensee is the seller of the products carrying the trademark, a right to sub-license for such purpose is unnecessary: upon the sale and delivery of the product, the trademark protection is ‘exhausted’. This means that further resale of the products is not considered infringements on the trademark. It is therefore important to be clear, precise and specific about the scope of sub-licensing rights.
  • Sub-licences to affiliates and sub-contractors. The licence may be extended to companies affiliated with the licensee, as well as suppliers (of components or spare parts) of the product, or sub-contractors (e.g. responsible for assembling the product for the licensee). The Model Contract contains a number of options to ensure that the scope of sub-licences is not unnecessarily broad.
  • Exclusivity. The granted licence can be non-exclusive, sole or exclusive (as regards the territory and market segment). Non-exclusivity means that other persons may be granted a licence as well. A sole licence is where the licensor itself is entitled to use the trademark within the agreed territory or market, next to the licensee. Exclusivity means that also the licensor is not entitled to use the trademark for the agreed products in the agreed territory and market segment.

Trademarked products vs. services. The trademark licence agreement is aimed at a trademark used in relation to a product. For services provided under a trademark, in the Model Contract, references to the “Product” must be replaced by the “Service”. Certain provisions typically related to products, product manufacturing, testing or product modifications may be redundant. Instead, it would be desirable to specify the quality level and the way in which licensed services are to be performed.

Royalties. Although the Model Contract may be royalty-free or fully paid-up (in which case the articles on royalties and payment can be limited or deleted altogether), most licences provide for a recurring licence fee in the form of a royalty. The Model Contract contains a framework for this.

Usually, the royalty (or licence fee) is linked to the volume of products sold after deducting certain costs which are unrelated to the relevant sale. Sales to affiliated companies, so-called ‘captive sales’, should be excluded (but the sales by those affiliated companies to third parties must be included). Also, the effect of taxes, import duties and other levies should be excluded.

Brand manual and trademark use guidelines. It is important that a trademark owner continuously uses the trademark and is vigilant concerning possible infringements, misuse or genericising signals. One powerful instrument to achieve this is by adopting the trademark owner’s brand manual or trademark use guidelines: a set of detailed instructions as to how and where on the product the trademark must be printed or presented; what type of (advertisement) materials are permissible; which photographs must be used; what the surrounding style, class or ambience any communication must include; which particular colours, typefaces (fonts) and shapes must be used; and which quality requirements apply to packaging materials or materials on which the trademark is permitted to be printed.

A trademark licence agreement should include the requirement of strict compliance with the brand manual or trademark use guidelines. The agreement could attach the manual or guidelines as of the date of the agreement as an annex (and permit updates from time to time), refer to a website from which the manual or guidelines can be retrieved, or require the licensor’s approval of any product or material before it is produced.

The licensee should comply with future changes of the manual or guidelines, at least within a reasonably short period of time. Obviously, as long as the trademark is being ‘developed’, requiring prior approval for any type of use (i.e. design of merchandising, advertising materials and other communication means) is probably the only practicable way to ascertain a consistent, distinctive trademark development.

Benefit. A trademark licensor should ensure that ‘use’ of the trademark inures to the benefit of the owner. If that would not be the case, a licensee who is the only party using the licensed trademark in a territory would (e.g. after five years of being licensed) be able to terminate the licence agreement and prohibit the licensor to use the trademark because it had not used the trademark for five years and that conversely, the licensee should be treated as the trademark owner in that territory because it had used it. Although this seems absurd, the general principle is that the party claiming the infringement should use the trademark. Therefore, in many countries, including all EU member states, use of the trademark by a licensee (or with the consent of the trademark owner) is deemed to constitute ‘use’ by the trademark owner. It is helpful to express this in the trademark licence agreement.

The designations TM and ®. Generally, it is not necessary to highlight a trademark by the superscripted letters TM (for non-registered trademarks) or the sign ® (for registered trademarks). The background of this is that some jurisdictions used to distinguish between intentional (or wilful) and unconscious use of a trademark. In those jurisdictions, if the copied trademark is marked by a designation TM or ®, intent on the part of the infringer would be presumed. In that case, the trademark owner would not need to give a prior warning or notice of infringement before it takes action against the infringement. Case law has developed in a less formalistic and a more internationally uniform direction, such that a court will decide on intent with regard to infringement on the basis of the factual circumstances.

Antitrust considerations. Competition (antitrust) laws may considerably restrict a licensor’s freedom to control or influence a licensee. Such restrictions apply in particular to the pricing of the products sold under the trademark. Furthermore, competition law may set aside a contractual limitation of the licensee’s freedom to challenge the validity of the trademark or nullify a contractual prohibition of the licensee’s ability to market, sell and deliver products to customers (immediately) outside the agreed territory.

Infringement of trademarks. A party using a trademark without a licence might well infringe the trademark. Whether or not there is an infringement, however, is not always clear. The allegedly infringing products may be sold in a different (or merely adjacent) market or the allegedly infringing products might be remotely similar. Relevant criterion is whether the allegedly infringing product or service causes confusion of the targeted buyers.

In assessing an alleged infringement, a court will consider:

  • the strength of the trademark;
  • proximity of the products or services;
  • whether the trademark is not identical or the further similarity of the trademarks;
  • evidence of actual confusion;
  • product markets and marketing channels used;
  • type of products and the degree of care likely to be exercised by the consumer (or professional buyer): ‘purchaser sophistication’;
  • the (alleged) infringer’s intent in selecting the mark;
  • likelihood of expansion of either party’s product line.

Licences and infringement. A trademark licensor will typically require that the licensee promptly notifies it of any infringement which comes to its attention. The reasons for this include that (a) the licensor might not immediately be aware of infringements in various places or countries, (b) once the infringing mark is established, the original trademark may lose its distinctiveness (i.e. become genericised and therefore lose protection), (c) the licensor may prefer to act itself and not leave the legal case to be dealt with by the licensee (who might choose a less informed lawyer or make an undesirable argument), (d) taking prompt action increases the chance to win the case.

Conversely, also a licensee of a trademark will typically require that the licensor take prompt action against any infringement. If the licensor would not act (promptly or adequately), the trademark may lose its distinctiveness or goodwill in the market, and the customer might lose its willingness to pay a higher price.

Act promptly vs. defence of laches. It is important to act promptly against any infringement. Prompt action improves the possibility to prevent sales of infringing products, reduces damages to the goodwill in the trademark, limits the risk of price erosion in the market, and may facilitate the recoverability of damages. More importantly, if the action for trademark infringement is started only after an unreasonable (unnecessary) delay, the trademark owner (or licensee) may have lost all its rights to stop the infringement (based on ‘laches’). Such a defence of laches may be successful in case of a delay of even a few days. In many legal systems, a court will balance the interests of the trademark owner against those of the alleged infringer. If the trademark owner failed to respond promptly against an infringement and the alleged infringer has (in good faith) invested in its mark, many courts will reject a claim to prohibit use of an ‘infringing’ mark. The law tends to protect the vigilant, rather than the sleeping party.

Counterfeit products. Counterfeit consumer products (informally also known as knock-offs) are products that inherently infringe the rights of a trademark owner by displaying a trademark which is either identical to a protected trademark or by using an identification mark which cannot be distinguished in its essential aspects from the trademark. Producing, importing or selling counterfeit products is illegal and countries impose increasingly high penalties on such criminal activities. Countries have become increasingly active in fighting counterfeit trade.

Clauses from other ITC Model Contracts. The Model Contract can be expanded with provisions from other ITC Model Contracts. For example, if a licensor intends to provide training (e.g. on marketing and sales), or customer support related to the products (see Article 8 of the ITC Model Contract for the International Distribution of Goods).

  • If a licensor wishes to ensure that the quality of a product is sufficiently high and adequately controlled, or if extensive provisions regarding changes of the product specifications are desired, examples can be found in Sections 1.2 and 1.3 of the ITC Model International contract for the long-term supply of goods or Section 1.6 of the ITC Model International contract manufacture agreement.
  • If a licensor wishes to be more closely involved in the promotion, marketing and sales, specific obligations can be included (see Section 7.3 ITC Model Contract for the International Distribution of Goods).
  • If the development of the trademark and products is undertaken in collaboration with a licensee, a provision addressing implementation of improvements and modifications can be desirable (see Article6 of the ITC Model International contract manufacture agreement).
  • If the trademark is (or will become) part of a larger framework resembling a franchising network, the Model Contract and the ITC Model Contract International contractual alliance could be combined. Also, relevant provisions from the ITC Model Contract can be inserted in the Model Contract. This might apply, for example, to Articles 1 (Objectives and key principles), 2 (Management Committee), 3 (Contributions of the Parties), 4 (Joint Projects), 5 (Alliance costs), 7 (Preferred supplier/distributor), 8 (Secondments and personnel) and 10 (Restrictions on the Parties) of the ITC Model Contract International Contractual Alliance.