A company wants to use your brand. You are interested in the opportunity, the proposed royalty sounds promising, and both sides agree on the general idea. The next question is how the details of that relationship will be established.
That is where a trademark licensing agreement becomes important.
A licensing deal is not simply an agreement about how much someone will pay to use your brand. It establishes the boundaries of the commercial relationship between the trademark owner, known as the licensor, and the person or company receiving permission to use the trademark, known as the licensee.
Those boundaries can determine which trademarks the licensee can use, what products or services can carry the brand, where those products can be sold, whether the deal is exclusive, how the trademark owner gets paid, and how much control the owner retains over the quality and presentation of the brand.
The International Trademark Association identifies many of these issues as common considerations in trademark licensing, including the duration of the license, territory, royalties, covered goods and services, transferability, sublicensing, exclusivity, and quality control.
For a brand owner, understanding the individual parts of a licensing deal can make it easier to evaluate what another company is actually asking for before agreeing to let that company operate under the brand.
What Is a Trademark Licensing Agreement?
A trademark licensing agreement is an agreement that gives another party permission to use a trademark according to defined terms while the trademark owner generally retains ownership of the mark.
This differs from a trademark assignment, which generally transfers ownership of trademark rights to another party. Licensing instead creates a relationship in which the licensee receives permission to use the trademark within the boundaries established by the agreement.
As discussed in our companion article, Trademark Licensing: How to License Your Brand and Protect Your Trademark, those boundaries matter because a trademark represents more than a name or logo. Trademarks help consumers identify the source of goods or services and distinguish them from those offered by competitors.
When a licensee begins selling products or providing services under your trademark, consumers encounter that business through a brand associated with you. A licensing agreement therefore needs to address both the commercial deal and the protection of the trademark itself.
What Should Be Included in a Trademark Licensing Agreement?
There is no single licensing agreement that works for every brand or transaction. A company licensing its name for a line of merchandise may have different concerns from a business licensing its trademark to a distributor entering a new geographic market.
However, trademark licensing agreements commonly address several fundamental questions. The parties need to determine what is being licensed, who can use it, what the licensee can do with it, where those rights apply, how long the relationship will last, how the trademark owner will be compensated, and how the brand will be controlled.
Each of these issues represents a different part of the licensing deal.
1. Identify the Trademark and Other Brand Assets Being Licensed
One of the first parts of a licensing agreement should establish exactly what the licensee has permission to use.
A company may own or use several trademarks, including its business name, logos, slogans, product names, and other brand identifiers. A licensing deal involving one trademark should not unnecessarily create ambiguity about whether the licensee also has permission to use other intellectual property belonging to the brand owner.
The agreement can therefore identify the specific trademarks covered by the license. Depending on the transaction, the parties may also need to address other intellectual property, such as copyrighted artwork, packaging designs, photographs, or other creative assets.
This is where conversational business language such as “you can use my brand” needs to become more precise legal language. The agreement should establish exactly what “my brand” means for purposes of the transaction.
Before entering an agreement, the licensor should also understand the rights it actually owns and the jurisdictions in which those rights exist. A trademark search and clearance review can help establish that foundation. The International Trademark Association also provides intellectual property resources for small and medium-sized businesses.
2. Define the Licensed Products or Services
The agreement should establish which products or services can be offered under the licensed trademark.
A company licensing its trademark for hats, for example, does not necessarily have to give the licensee permission to put the brand on shirts, shoes, bags, watches, or unrelated merchandise.
This distinction can become commercially significant as a brand grows. A broad grant of rights could affect the trademark owner's ability to enter another product category itself or negotiate a separate deal with another licensing partner.
The agreement can therefore define the licensed products or licensed services covered by the transaction.
This concept also reflects a basic principle of trademark law. Trademark rights are generally connected to particular goods or services rather than providing unlimited rights over a word, phrase, symbol, or design in every commercial context.
The USPTO provides additional information about the scope of trademark protection.
3. Establish the Territory
The territory defines where the licensee has permission to exercise its licensing rights.
Depending on the deal, the territory could include the entire United States, particular states, specific countries, or another defined geographic market.
Territory matters because granting rights in one market can affect the trademark owner's ability to make other deals there. A company that gives one licensee exclusive rights throughout the United States, for example, may significantly limit its ability to grant overlapping rights to another company.
For brands pursuing international expansion, territory can become even more important because trademark rights are generally territorial. A brand owner considering an international licensing relationship should understand what trademark rights it possesses in each jurisdiction covered by the proposed agreement.
4. Define Where the Licensee Can Sell
A modern licensing agreement may need to address more than geography. It may also need to establish the sales channels through which licensed products can be sold.
For example, a licensee might receive permission to sell through brick-and-mortar retailers, wholesale distributors, its own website, or particular online marketplaces. Depending on the deal, the trademark owner may want to distinguish among Amazon, Walmart Marketplace, direct-to-consumer websites, social commerce platforms, and other channels.
This can be particularly important for brands that already have established distribution strategies or marketplace relationships. A licensee entering an unauthorized sales channel could create pricing conflicts, compete with existing distributors, or change how the brand appears in the marketplace.
As a result, the question of where a licensee can sell products can involve both geographic territory and distribution channels.
5. Decide Whether the License Is Exclusive or Non-Exclusive
One of the most commercially significant provisions in a licensing deal is whether the licensee receives exclusive or non-exclusive rights.
A non-exclusive license generally allows the trademark owner to grant similar rights to multiple licensees. An exclusive arrangement may restrict the licensor's ability to grant competing rights within the scope of the exclusivity.
However, exclusivity does not necessarily have to apply to the entire brand. A deal could provide exclusivity for a particular product category, territory, sales channel, customer segment, or period of time.
For example, a licensee might receive exclusive rights to manufacture and sell a particular category of branded merchandise within a specific territory while the trademark owner retains the ability to license other product categories or territories.
The International Trademark Association discusses exclusivity and territorial scope as considerations in trademark licensing arrangements.
For that reason, a business owner evaluating an “exclusive licensing deal” should determine exactly which rights are exclusive and which commercial opportunities the owner may be giving up in exchange.
6. Establish the Length of the Deal and Renewal Terms
The term establishes how long the licensing agreement remains in effect.
Some agreements may run for a fixed number of years, while others may include renewal options or extensions tied to particular conditions. The parties may also negotiate performance requirements that affect whether the licensee can maintain or renew its rights.
A longer licensing term can provide stability for both parties, but it can also commit the trademark owner to a relationship that becomes less attractive as the brand grows.
The agreement should therefore establish when the license begins, when it expires, whether renewal is automatic or optional, and what conditions must be satisfied for the relationship to continue.
7. Determine How the Trademark Owner Gets Paid
For many brand owners, compensation is one of the first questions that arises during a licensing negotiation. A trademark licensing agreement may use several forms of compensation depending on the structure of the deal.
One common arrangement involves a royalty, under which the licensee pays the trademark owner an agreed percentage based on sales. Other licensing arrangements may involve an upfront licensing fee, minimum guaranteed payments, advances, or a combination of several payment structures.
A percentage alone, however, does not fully explain the economics of the deal. If the parties agree to a royalty based on sales, the agreement should define how those sales are calculated and which deductions, if any, are permitted.
Terms such as gross sales, net sales, royalty rate, advance, and minimum guarantee can therefore become important components of the financial provisions.
The appropriate royalty structure deserves its own analysis. A brand owner should ultimately understand not only the percentage being offered, but also what that percentage is calculated against and what other financial obligations form part of the deal.
8. Include Sales Reporting and Audit Rights
If the trademark owner's compensation depends on sales, the owner needs a reliable way to determine what the licensee actually sold.
A licensing agreement may require the licensee to provide periodic royalty reports or sales statements showing the amount of licensed product sold and the royalties owed.
The agreement may also establish recordkeeping requirements and audit rights, which can allow the licensor to examine relevant books and records under defined circumstances.
These provisions turn the payment structure from a promise into a system that can be monitored. A royalty rate may look attractive on paper, but its value depends on accurate reporting, clearly defined calculations, and a practical mechanism for verifying the amounts owed.
9. Address Minimum Guarantees and Performance Requirements
Some licensing deals include a minimum guarantee, sometimes referred to as a guaranteed minimum royalty.
Under this type of arrangement, the licensee may agree to pay the trademark owner a minimum amount even if actual sales do not generate that amount in royalties.
Other deals may establish minimum sales requirements, product-launch deadlines, marketing commitments, or other performance obligations.
These provisions can be particularly relevant when a licensee receives valuable exclusive rights. A trademark owner may not want to give one company exclusive control over a product category or territory only to discover that the licensee is doing very little with those rights.
Performance provisions can therefore connect the rights granted to the commercial activity expected in return.
10. Establish Quality Control Standards
Quality control is not merely another business term in a trademark licensing agreement. It has particular significance under trademark law.
Federal trademark law recognizes use of a trademark by a related company where the trademark owner controls the nature and quality of the goods or services associated with the mark. The relevant statutory provision, 15 U.S.C. § 1055, is available through Cornell Law School's Legal Information Institute.
The International Trademark Association also identifies quality control as an important consideration in trademark licensing arrangements.
A licensing agreement may establish standards concerning manufacturing, materials, product safety, packaging, customer service, advertising, or other characteristics associated with the licensed products or services.
The agreement may also give the licensor the ability to request product samples, review materials, conduct inspections, or otherwise monitor whether agreed-upon standards are being followed.
For the trademark owner, the practical concern is whether another company's products or services will continue to represent the brand appropriately. Quality-control provisions help translate that business concern into contractual obligations.
11. Establish Brand Approval Rights
Quality control and brand approvals are related concepts, but they do not necessarily address the same concerns.
A product may satisfy technical quality standards while still being marketed in a way that the trademark owner does not want associated with the brand.
For example, the licensee may develop new packaging, change the placement of the logo, create advertisements, use the trademark in a social media campaign, or develop online marketplace listings.
A licensing agreement can establish which materials require approval before they are released. Depending on the deal, approval rights may apply to product designs, packaging, advertising, marketing claims, promotional materials, product photography, marketplace listings, or modifications to brand assets.
These provisions can help the trademark owner maintain brand consistency while allowing the licensee enough flexibility to market and sell the licensed products.
12. Decide Whether Sublicensing or Transfers Are Allowed
A sublicense generally involves the licensee granting another party rights derived from the original license.
This creates an important issue for the trademark owner. If the owner approves Company A to use the brand, the owner may not necessarily want Company A to have unrestricted authority to give Company B similar rights.
The parties may prohibit sublicensing entirely, permit it under specified conditions, or require the trademark owner's prior written approval.
The International Trademark Association identifies transferability and sublicensing among the matters that may be addressed in trademark licensing agreements.
The agreement may also address assignments or transfers resulting from a sale of the licensee's business, merger, restructuring, or another corporate transaction.
These provisions can help the licensor maintain visibility over which businesses actually have permission to operate under the brand.
13. Determine Who Handles Trademark Enforcement
Licensing does not eliminate the possibility that someone outside the agreement may infringe the trademark.
If a third party begins selling counterfeit or otherwise unauthorized products, the licensor and licensee may need to determine who is responsible for responding. Our guide on what to do when someone uses your trademark explains the enforcement side in more detail.
A licensing agreement can address who monitors potential infringement, who must notify the other party, who decides whether enforcement action will be taken, and how enforcement expenses or recoveries will be handled.
These provisions can become particularly important when a licensee operates in a market or territory where it may discover potential infringement before the trademark owner does.
Establishing these responsibilities in advance can reduce uncertainty when an enforcement issue arises.
14. Address Representations, Warranties, and Indemnification
A licensing agreement may also allocate responsibility for particular risks through representations, warranties, and indemnification provisions.
For example, the licensor may make certain representations concerning its rights in the licensed trademark, while the licensee may make commitments concerning its products, legal compliance, advertising, manufacturing practices, or use of the licensed mark.
An indemnification provision can address circumstances in which one party may be responsible for particular claims, losses, liabilities, or expenses arising from the relationship.
These provisions can depend heavily on the transaction. A company manufacturing physical consumer products may create different risks from a business providing services under a licensed trademark.
The agreement should therefore reflect the actual commercial relationship rather than treating indemnification as generic contract language.
15. Establish How the Agreement Can Be Terminated
A licensing agreement should establish not only how the relationship begins, but also how it can end.
The agreement may identify circumstances allowing termination, such as failure to pay royalties, failure to maintain required quality standards, unauthorized trademark use, insolvency, failure to satisfy performance requirements, or another material breach.
Some agreements may provide a cure period, which gives a party an opportunity to correct certain breaches before termination becomes effective.
The parties should also consider what happens to exclusive rights after termination and when those rights return to the trademark owner.
16. Decide What Happens to Inventory and Brand Use After Termination
Ending the contract does not automatically make every branded product disappear.
The licensee may still have inventory in warehouses, packaging bearing the trademark, online product listings, advertisements, social media content, promotional materials, or outstanding customer orders.
A licensing agreement can establish how these materials will be handled after expiration or termination.
In some arrangements, the licensee may receive a limited sell-off period during which remaining inventory can be sold. In other circumstances, the agreement may require use of the trademark to stop immediately.
The agreement may also require the licensee to remove the trademark from websites, marketplace listings, advertisements, packaging, domains, social media accounts, or other materials.
Addressing these issues in advance can make the end of the licensing relationship considerably clearer.
A Licensing Deal Is More Than a Royalty Percentage
It is easy for a licensing negotiation to become centered on one number. A brand owner may focus on whether the proposed royalty is 5 percent, 10 percent, or another amount.
However, the value of a licensing deal cannot necessarily be understood from the royalty rate alone.
A higher royalty may come with broad exclusivity. A lower royalty may preserve the owner's ability to work with multiple licensees. A deal may include valuable minimum guarantees, or it may provide an attractive percentage without meaningful sales obligations. The licensee may receive rights in one narrow product category, or it may be asking for access to a much larger portion of the brand.
The commercial meaning of the deal therefore comes from the interaction of its terms.
A trademark owner should understand what is being licensed, what the licensee receives, what the owner retains, how the brand will be controlled, how compensation will be calculated, and what happens if the relationship does not work.
Before You Sign a Trademark Licensing Agreement
A proposed licensing deal can be exciting, particularly when another company sees enough value in your brand to pay for the right to use it. However, the agreement determines much more than whether the licensee can put your logo on a product.
The agreement establishes the boundaries of the commercial relationship. Those boundaries can include the licensed trademarks, products and services, territory, sales channels, exclusivity, term, royalties, minimum guarantees, reporting obligations, quality control, approval rights, sublicensing, enforcement, risk allocation, termination, and post-termination obligations.
Understanding those provisions can help a brand owner evaluate the entire deal rather than focusing only on its most visible terms. If your trademark is not yet registered, our guide on how long trademark registration takes explains the process and timeline.
Considering a Trademark Licensing Deal?
If another company has approached you about licensing your brand, or if you are preparing to offer trademark rights to a potential licensing partner, the terms of the agreement can affect your revenue, future licensing opportunities, and control over the brand.
Stockman & Poropat, PLLC assists businesses and entrepreneurs with trademark protection, intellectual property agreements, and licensing matters. Our firm can assist with reviewing, structuring, and negotiating trademark licensing agreements, including provisions addressing royalties, exclusivity, territory, quality control, sublicensing, enforcement, and termination. For help with the underlying contract drafting and review, our attorneys can guide you through each provision.
Contact Stockman & Poropat, PLLC to discuss a proposed trademark licensing agreement.
This article is provided for general informational purposes only and does not constitute legal advice.
Have a question about your matter?
Schedule a free consultation with Stockman & Poropat, PLLC.
Contact the firm
