A robust licensing regime can significantly boost a company’s turnover

Although many companies work hard to develop and promote their brands and related proprietary IP rights – including registering the necessary trademarks for their brand names and logos – some fail to take the next obvious step of making their trademarks work for them and fully exploiting them to realise a profit. A robust licensing regime can significantly boost a company’s turnover, simply by giving permission to a third party (the licensee) to use the trademark in a manner which the rights holder (the licensor) could ordinarily prevent on the basis that it constitutes infringement.

Advantages of licensing

One of the main advantages of a well-thought-out licensing programme is the opportunity to carefully select the licensee. Where a rights holder or licensor wants to expand into a new geographical market, identifying a licensee with good local knowledge and connections can help the process to run smoothly and is far more likely to result in success. Other advantages include the possibility of obtaining a cross-licence in respect of intellectual property owned by the licensee and the chance to exploit intellectual property that may otherwise not be used (eg, a trademark for a brand that the licensor is not currently prioritising).

A successful licensing arrangement can benefit the rights holder (and the licensee) through the sharing of costs and risk. It may be possible to enter into an arrangement whereby the division of labour is split between the licensor and the licensee – for example, the licensee manufactures the products, but the labelling and packaging are supplied by the licensor.

The licensor therefore receives revenues from the licensing arrangement without having to shoulder the risk of manufacturing the products. Similarly, the licensee acquires a right to use and commercially exploit trademark rights in which it has not had to invest time and money in researching and developing. This can help it to get products and services to market more quickly than it would otherwise have done.

The arrangement can foster collaboration between parties which may in future lead to a continuing business relationship for the benefit of all involved and continued opportunities through, for example, an ongoing licence arrangement in the form of a franchise. The advantage of a franchise relationship is clear – it allows the franchisee to run its own business, yet benefit from the protection that comes from operating under an established brand and business model. The franchisor, however, retains ultimate control over the way the products are marketed and sold, so can protect its valuable trademark rights.

Possible disadvantages

The main disadvantages of licensing trademarks – especially where the licence is granted on an exclusive basis – are the loss of revenue obtained through commercialisation of the rights and the loss of control over the trademarks themselves. Particularly in the context of trademarks, the licensor should ensure that the licensee will exert a similar level of quality control over the goods being sold and marketed under the licensor’s trademark(s), in order to protect the quality and reputation of the licensor’s brand.

These issues are arguably of less concern where the rights holder grants a non-exclusive licence and thus is still in a position to use its own intellectual property as it wishes. However, they should still be considered carefully when deciding whether to enter into any type of licensing arrangement, as a non-exclusive licensee has a right to use the licensor’s trademark, which may ultimately prove harmful.

Licence or assignment?

When a rights holder has decided to involve a third party in its ongoing strategy, it must decide whether it will license or assign its rights. To do this, it should assess the needs and objectives of the business and determine which model is best suited to fulfil those needs.

A licence is not always the best way to commercialise an IP right. For example, an assignment (an outright transfer of ownership) may be the preferred option where the rights holder wants to withdraw completely from the market and has no interest in retaining any rights to its trademarks for use in the future.

Other advantages of an assignment over a licence arrangement is that the rights holder receives an upfront payment for the mark(s) and is no longer responsible for ensuring that it remains registered (eg, paying renewal fees or dealing with cancellation actions). In return, the assignee gets full control of the mark. The parties should agree as part of the terms of the assignment which of them should bear the cost of recording such an assignment where this is necessary.

However, the advantage of granting a licence over an assignment of the trademark is that it gives the licensor more flexibility and the opportunity to set limits on the time, extent and scope of the licence. A well-thought-out licensing strategy allows the licensor to engage a number of exclusive licensees for different purposes (eg, in different jurisdictions) to fully exploit the trademark at issue.

Further, where the licence agreement is properly drafted, the licensor will be able to terminate the licence if the licensee does not fully maximise the opportunities to exploit the mark, damages the licensor’s brand, becomes insolvent or has a change of control (eg, to a competitor of the original rights holder).

The choice of payment – whether an upfront payment or royalty payments (or a combination of these) – is a key factor for a licensor. Risks may be involved in assigning a trademark and receiving royalty payments; so if the licensor prefers to continue to receive royalties, a licence will probably be more appropriate.

Types of licence

If a licence is deemed to be the best method of allowing a third party to use your mark, the type of licence also needs to be considered. In the United Kingdom, there are three distinct types of licence:

  • An exclusive licence gives the licensee a right to use the trademark to the exclusion of all others. This means that the rights holder agrees not to grant any other licences to the mark in question and, crucially, agrees not to use the mark itself.
  • A sole licence allows the rights holder to use the mark itself, but it cannot grant any other licences.
  • A non-exclusive licence does not restrict the licensor from licensing the trade mark(s) to other third parties or, again, from using it itself.

Practical considerations

Any licence for a UK-registered trademark must be in writing and signed by the licensor in order for it to be legally effective (and recorded at the UK Intellectual Property Office (UKIPO) within six months to ensure that the licensee can recover costs from successful trademark infringement proceedings). Such a recordal will also assist the licensee in requesting the licensor to sue for trademark infringement by an unauthorised third party (if permitted within the terms of the licence agreement), and in some circumstances will allow the licensee to bring proceedings in its own name if the rights holder fails to do so.

By contrast, there is no such requirement in the case of Community trademarks. Although Article 17(3) of the EU Trademark Regulation (207/2009) provides that assignments of Community trademarks must be made in writing, there are no formalities with respect to licences.

To avoid any ambiguity or dispute over the terms, it is always wise to ensure that any licence agreement is in writing and signed by both parties. A licence agreement is a contract like any other; although it can be formed orally, in the course of correspondence or by the conduct of the parties, it will clearly stand up to scrutiny far better when it is properly recorded in writing and signed.

The UKIPO website sets out a helpful checklist of the key issues to be identified before entering into a licence agreement (www.gov.uk/licensing-intellectual-property):

  • Parties – clearly identify which parties are entering into the licence agreement. Will subsidiaries or group companies of the licensee be able to use the mark? If so, will this be permitted in separate licence agreements or as a sub-licence granted by the first licensee?
  • What is being licensed – identify the mark that is the subject of the licence. If it is not already registered, should registrations be put in place first? Can the licensor license the particular mark – that is, is the licensor the correct owner in the first place?
  • Rights granted or restrictions imposed – identify the type and scope of the licence. What are the ‘permitted acts’ that the licensee is allowed to carry out without infringing the licensor’s rights? To what territory or jurisdiction does the licence apply? Can the licensee grant sub-licences or transfer (assign) the licence (with or without permission from the licensor)? What are the licensee’s obligations with regard to manufacture, promotion and sale of products?
  • Fees and payment – is there an initial lump sum or continuing royalty payments and how and when will such payments be calculated and paid? Is the licence part of a wider transaction between the parties or are other licences in place? Must the licensee reach sales or any other targets, and if so, what are the consequences of failing to meet them?
  • IP protection and infringement – who is responsible for and bears the costs of any trademark registrations or renewals? Who is responsible for and bears the costs of taking action against any third-party infringers? Are indemnity provisions in place should the licensee be found to be infringing third-party rights through use of the registered trademark?
  • Warranties and liability – will the licensor give any warranties (linked to the indemnity provisions) to the licensee relating to the validity and status of the IP right at issue?
  • Other issues – these include termination provisions and duration, confidentiality, change of control provisions and competition issues.

These are just some of the key issues to consider when entering into a structured licensing programme, which can assist a company’s strategic growth when used to target particular jurisdictions by engaging a licensee to operate in that territory. Legal advice should be taken at the earliest opportunity to ensure that the licensor is fully protected in respect of the continued ownership and validity of, and goodwill in, the trademarks.

Ellen Hughes-Jones

This article first appeared in World Trademark Review. For further information please visit www.worldtrademarkreview.com.