What Should a Trademark License Agreement Include?

A trademark is a promise about the source and quality of goods. When you let someone else use your mark, the law expects you to keep that promise on their behalf, by controlling the quality of what they sell under it. A trademark license agreement that skips that control, or includes it on paper and never exercises it, is called a naked license, and courts have treated naked licensing as abandonment of the mark. Everything else in the agreement, the royalty rate included, is secondary to that. Our IP licensing and portfolio management practice drafts licenses from the quality control clause outward, and this is what the rest of the document should contain.

Why quality control is not optional

Under the Lanham Act, use of a mark by a related company, meaning one whose use the owner controls, inures to the benefit of the owner. That is what lets a licensee’s sales count as the licensor’s use for maintenance filings and for priority. The same provision is the reason control must be real. If the licensor does not actually monitor the nature and quality of the licensed goods, the mark stops signaling a consistent source, and a challenger can argue the licensor abandoned it.

Control does not require daily inspection. It requires standards the licensee must meet, a right to inspect or approve, and evidence that the licensor used that right: approved samples, periodic reports, site visits where relevant, and records of any rejected products. Keep that evidence in the portfolio file, because a licensee’s use will support your next Section 8 declaration only if the control behind it can be shown, a point covered in when a Section 8 declaration is due.

Scope: marks, goods, territory, channels and exclusivity

Define the licensed marks by registration number and list the exact goods and services the licensee may sell under them. A license to use a mark on apparel should not become a license for fragrances by silence. Set the territory and address online sales, since a territorial limit that ignores the licensee’s website is a dispute waiting to happen. State whether the license is exclusive, meaning even the licensor cannot use the mark in that field, sole, meaning the licensor may but no other licensee may, or non-exclusive. Decide whether sublicensing is permitted, and if so, on what terms and with what approval.

Money: royalties, minimums, reporting and audit

Most licenses pay a royalty as a percentage of net sales, so the definition of net sales does most of the work: which deductions are allowed, how returns and discounts are treated, whether intercompany sales count. Add a minimum annual royalty or minimum sales requirement if the license is exclusive, so that a licensee who does nothing with the mark cannot block you from using it elsewhere. Require periodic royalty reports with enough detail to verify them, give yourself a right to audit the licensee’s books at reasonable intervals, and provide that the licensee pays for the audit if it reveals an underpayment above a stated threshold. For foreign licensees, address withholding taxes and the currency of payment.

Ownership, goodwill and challenges to the mark

The licensee should acknowledge that the licensor owns the mark, that all use and goodwill inure to the licensor, and that the licensee acquires no rights in the mark beyond the license itself. It should agree not to register the mark, or anything confusingly similar, anywhere in the world, including as a domain name, a company name or a social media handle, and to transfer any such registration on demand. It should agree not to challenge the validity of the mark during the term. Address who owns new marks or logos the licensee develops that incorporate the licensed mark; without a clause, that question has no clean answer. Our post on IP chain of title explains why these ownership acknowledgments matter when the portfolio is later sold or financed.

Term, termination and what happens after

Set a fixed term with any renewal options and the conditions for exercising them. List the events that let the licensor terminate: uncured breach after notice, failure to meet quality standards, failure to pay, insolvency, a change of control of the licensee, or a challenge to the mark. On termination, the licensee must stop using the mark, though a short sell-off period for conforming inventory is common and reasonable. Require return or destruction of marketing materials, transfer of any domains or handles, and continued confidentiality.

One point surprises licensors. If a licensor files for bankruptcy and rejects the license, the Supreme Court held in Mission Product Holdings v. Tempnology that rejection does not strip the licensee of its right to keep using the mark. Licensees take comfort from that; licensors should plan the agreement’s termination provisions with it in mind.

Enforcement, indemnity and the practical file

Decide who may sue infringers in the licensed territory, who controls the litigation, who pays, and how any recovery is split. An exclusive licensee often wants the right to act if the licensor declines, and the licensor usually wants control over any action that could put the registration at risk. Include indemnities running in both directions: the licensee for product liability and its own conduct, the licensor for claims that the mark infringes a third party’s rights in the territory. Require insurance where products are involved. Enforcement questions, including when a licensee’s territory is invaded, run through our trademark enforcement and TTAB team.

Trademark licenses do not need to be recorded with the USPTO to be effective, and most are not. What does need attention is the maintenance calendar: if the licensee is the only party using the mark on certain goods, the licensor’s Section 8 specimens will come from the licensee, so the agreement should obligate the licensee to supply dated specimens and sales evidence on request. Our trademark renewal and maintenance team builds that obligation into the docket.

If you are preparing to license your brand, or have been offered a license to use someone else’s, Capitol Law Partners can draft or review the agreement with the quality control, ownership and termination terms that keep the mark valid. Schedule a consultation.

This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by this communication.

Attorney Cagatay Ersoy. Practical strategy for founders, investors, and growing companies.

Need help with this topic? See our IP licensing and portfolio management page or schedule a consultation.