Important Clauses In A Trademark Licensing Agreement
Important Clauses in a Trademark Licensing Agreement
Licensing of trademarks is one of the most common ways of monetising one’s intellectual property. Companies, by licensing trademarks owned by them, grant the licensee the right to use their registered trademark. In 2020, Hero MotoCorp and Harley-Davidson entered into a licensing agreement by which Hero MotoCorp was granted the right to develop and sell premium motorcycles under the Harley-Davidson brand name. Similarly, Walt Disney also licenses its trademark to producers to use the mark on agreed upon products.
More and more brands are choosing to license their trademarks for business expansion as well as, to generate revenue from their brand name. The most important element in such a business arrangement is the license agreement itself. Both the licensor and the licensee must ensure that the license agreement is comprehensive and clearly written to cover all future contingencies. In case the license agreement is not drafted properly it could lead to future litigation and impact the commercial interests of both the licensor and the licensee. Thus, in this article we aim to explain some of the important clauses in a trademark licensing agreement.
Some of the Important Clauses
In every license agreement, there are certain clauses that must be incorporated to ensure that the rights and obligations of each party are clearly laid out.
Preamble- It is important to clearly identify the parties to the agreement i.e. the licensor and licensee and also mention their registered offices and location. It is important to clarify if the agreement will also be binding upon their representatives, successors or assignees.
Grant Clause- This clause in a trademark licensing agreement grants the licensee the right to use the licensor’s trademark. It also must lay down the extent of rights granted to the licensee. This can be with regard to whether the license is granted on an exclusive or non-exclusive basis; or on a transferable or non-transferable basis; the geographical extent within which the licensee is entitled to use the mark; the goods and services upon which the licensee may use the trademark; whether the right to sub-license is granted to the licensee. In case the trademark is licensed on an exclusive basis, the agreement should specify the terms and conditions which if not fulfilled would permit the licensor to cancel the exclusive license. The licensor should also incorporate a clause which states that the agreement is merely a license agreement and by no means would amount to transfer of ownership of the trademark. The licensee therefore, will have no right to promote or imply that it is the owner of the trademark or assign the trademark to a third party. Further, it should clarify that the license is limited to the rights mentioned in the agreement and nothing more, and specify all aspects with respect to how the licensee can use the licensed mark.
The grant clause must also state the term of the license. This is especially important to tackle post-term use of the trademark by the licensee. It would also be prudent to contain clauses in the agreement which restricts the licensee from using the mark post the term of the license agreement. In the case of IEC School of Art & Fashion v. Gursharan Goyal,1the Court made the following observation:
The restriction to the effect that the franchisee shall not at any time during or after the contract period keep or use any name which is in any way identical or deceptively similar to the name or logo of the trade mark proprietor is in accordance with the trade mark law.
There have been cases before the Supreme Court of India where the parties had entered into a trademark license agreement, which was subsequently terminated. The Court in one such case had held that the party who is not the owner of the trademark is not entitled to use the same post the termination.2 Agreements that contain clauses to the effect that the licensor would be entitled to an injunction immediately if the licensee continues to provide the products or services under the trademark post termination, would safeguard the interests of the licensor.
Rights and liabilities- the agreement must contain a clause which clearly lays down the rights and obligations of each of the parties. The licensor’s obligation may involve ensuring that the value of the trademark is maintained, and that adequate marketing and advertising is done to this extent. The licensee’s obligations may extend to ensuring that the quality of the goods and services upon which the licensor’s trademark is used, is maintained. The parties may also lay down the obligations or role of each party in case of third party infringement of the registered trademark.
The parties must also clearly lay down their relationship to limit liability towards third parties. For example, in certain instances, name lending has been held to be sufficient to make a licensor and licensee partners, thereby making the licensor liable for no fault of his own.3
Another very important case where the question of agency arose in a licensor-licensee relationship was that of Poona Bottling Co. Ltd. & Ors. v. UOI & Ors.,4 in a case relating to excise duty. The agreement in this case had clearly stated that no relationship of agency was intended to be created. The Court further held that the mere right granted to the licensee to use the trademarks of the licensor i.e. Parle and the control exercised by the licensor over the quality of products manufactured by the licensee will not create an agent-principal or an employer-employee relationship.
It is also important to limit the liability of the parties by incorporating well drafted limitation of liability and indemnity clauses in the Licensing Agreement.
Royalties- the clause pertaining to royalties in a licensing agreement must clearly lay down the method of calculation of the royalty to be paid by the licensor. It must also state the terms of payment i.e. the manner and timeline for payment of royalties, along with the documentation of the calculation of royalties. It is important that parties also account for late payments and provide a detailed manner in which such a situation will be addressed. The licensor could also be given the right to audit the royalties paid and the agreement could specify the frequency of the audit.
Product and Process Stewardship- The agreement must clearly state the responsibility of both the licensor and the licensee with respect to reducing the safety, environmental, and social impacts of the goods which are being produced under the trademark. It is also important to state that the licensee will be responsible and must follow all state and local safety rules for process, product, employee and customer safety.
Quality Control- being one of the most important aspects of trademark licensing, the agreement must provide for the manner in which the licensor will exercise quality control over the goods of the licensee i.e. complete details of the design, how the trademark will be used and the product will be placed and promoted, whether there will be frequent inspections by the licensor, etc. The clause must also specify the process for disposing goods that do not meet the requisite standards.
It is important to keep in mind that in case of registered license agreements where the licensee is registered as a registered user of the trademark, the quality control clauses assume more importance. This is because, the Registrar has been given the power to cancel the registration of a registered user in case the terms of quality control as mentioned in the agreement between the parties, is not enforced or complied with.5
Termination- this clause must lay down the conditions when a party may terminate the agreement. It can be either on completion of the term of the license, or on breach of obligations by either party, prior to the expiry of the term. If the party is to be awarded an opportunity to rectify the breach, the same shall be stated and the time period within which the rectification is made, must also be mentioned.
In the case of M/s Amoha Education (P) Ltd. v. G. Sathish Kumar,6 the Plaintiff had agreed to license its trademark to the defendant, on the terms that royalty would be paid by the respondent. The defendant defaulted in payment of royalty due to which the plaintiff terminated the contract. The defendant however, continued to use the trademark, even after the agreement was terminated. The Madras High Court granted an injunction in favour of the plaintiff in this case.
It is crucial that parties agree upon the conditions or breaches that could be a ground for termination of the agreement. Certain conditions for termination could be misuse of trademarks, poor product quality, poor customer service, non-payment of royalties etc.
Governing law- the agreement must specify the law that will govern the agreement. This is of particular significance when parties are from different jurisdictions. The governing law will be instrumental in determining the rights and liabilities of the parties, the remedies available to them in case of breach, and so on. We must keep in mind that the legal systems of Civil law countries and Common law countries can have significant differences, thereby, making the choice of law crucial. The governing law is also significant with respect to interpretation of clauses contained in the agreement. The governing law must preferably be of a jurisdiction that is connected with the transaction entered into between the licensor and licensee depending upon the principles of private international law.
Dispute Resolution- Disputes relating to the agreement could arise at any juncture. Therefore, it is important that the agreement provides for a clause that determines the resolution mechanism in the event any dispute arises between the parties. Parties usually prefer arbitration due to the neutral nature of such proceedings, especially in cross border licensing agreements. Party autonomy is another feature of arbitration that makes it the preferred mode of dispute resolution amongst parties to a licensing agreement. It is essential to clearly specify all the important ingredients of an arbitration clause such as governing law, procedural rules, and number of arbitrators, seat, venue and language of the arbitration. However parties can also choose a hybrid dispute resolution mechanism where the senior management of the parties could try resolving the dispute through mediation and thereafter resort to arbitration. Litigation is often chosen as a last resort by parties.
Insurance – License agreements usually contain insurance clauses that aim to protect the licensor from third-party claims arising against the licensee. This can be to the extent of losses or damages, or even the fee and expenses incurred by them due to such third party claims.
Confidentiality Clauses-In a license agreement, it is common that both parties would have confidential information pertaining to the other party. It would be prudent to contain clauses relating to confidentiality. The parties are entitled to use the confidential information during the course of the agreement; however such information must not be disclosed to third parties. The agreement must provide for return of the confidential information immediately after termination of the agreement. It is also important to mention which information will be considered ‘confidential’ and under what circumstances they could be disclosed. For e.g. when the information may have to be disclosed under law.
It is important that the trademark licensing agreement is well drafted and comprehensive as it can avoid potential disputes between the parties. Further, it is important to keep in mind that each licensing agreement will be different based on the commercial arrangement between the parties. Thus, it is important to be clear of the commercial interests of both parties and draft the licensing agreements accordingly. Parties should seek assistance of experienced attorneys to ensure that the agreement is drafted in such a manner that the rights of each party are accurately reflected in the trademark license agreement and the interests of both parties to a license agreement are safeguarded.
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