With a trademark licensing agreement, a registered trademark owner (the licensor) receives a negotiated royalty in exchange for allowing another party (the licensee) to use the licensor’s trademark.
The licensor receives revenue for the use of their mark without the expenses and risks of product manufacturing, marketing, and sales. The licensee, in turn, has an opportunity to use the trademark without the expenses and risks of research and development.
When employed properly, a trademark license agreement can be a cost-effective way to reduce the price of entry into the marketplace for both parties. However, there are pros and cons to consider first.
The Advantages of Trademark Licensing
PRO: Share Instead of Shoulder
Running a business means a lot rests on your shoulders. If you are a small business owner, you are likely shouldering the brunt alone. With a trademark licensing agreement, you may gain a professional partner who can take some of that pressure off.
There are new pressures added, such as monitoring the use of your trademark and complianc with the agreement. But with someone in your corner with the same goals as you, it becomes easier to level the distribution of responsibility.
PRO: Access Experience
Owning a trademark does not necessarily mean you have the skills, capital, or commitment to commercially exploit it yourself. You may have expertise in a few areas, but chances are you are not an expert in all things.
Hopefully, this is part of the reason you select the appropriate licensee. This type of agreement can offer a partnership with experience in the areas that you still need to spend time with and learn from.
PRO: Reach New Markets
Consumers often base their purchasing decisions upon either
- brand reputation or
- personal experience with a brand.
Newer licensors have an opportunity to forge partnerships that can leverage an existing reputation.
Your business should expand through your licensee’s existing marketing and distribution channels, increasing awareness for you, and automatically boosting trust in your mark due to the association with the better-known brand. This can benefit both parties in the long term.
PRO: Collect (Relatively) Passive Revenue
Each of the previous advantages is ultimately an effort to increase financial returns for the trademark owner. Regardless of where you are in the branding process, a licensing agreement may allow you a relatively passive income without losing any ownership rights.
On one end, manufacturers are often willing to pay significant royalty rates for the right to identify their goods with an established and widely recognized trademark. On the other, increasing awareness of your brand by associating with another well-known brand brings additional revenue to you as well.
PRO: Effective Mitigation Tool
Seeing your trademark infringed upon can be a shock. Often, the first reaction is “lawsuit,” but for small companies without extensive legal resources, legal trademark enforcement can be a huge challenge.
Sometimes a better solution is to mitigate the damage – and quite possibly improve business greatly, too – by proposing a trademark licensing agreement to the infringer rather than threatening to sue. This approach is a great way to build relationships, support goodwill, and foster consumer confidence.
The Downsides of Trademark Licensing
CON: Compromised Quality.
Depending on the terms of your agreement, you may end up giving up control over any number of elements, including packaging, distribution, cost, sales, marketing, or even how the product is produced. All of these issues should be addressed in the licensing agreement to the satisfaction of both the licensor and licensee.
Your brand equity could take a huge hit should the licensee not meet the quality currently expected of your brand by your customer base. It is important to understand what rights you are giving up in your agreement.
CON: Liability Disputes
Part of agreeing to license your trademark is accepting the risk and responsibility of possible product liability disputes. Even when liability is carefully outlined within your agreement, ultimately you would want to be involved in all efforts to rectify any situation that arises.
Regardless of what the paperwork says you are never one hundred percent off the hook when you care about your trademark.
CON: Poor Sales
Decreased product quality, unsuccessful marketing efforts, or lack of trademark use are just a few issues that can lead to poor sales.
No sales equals no royalties. Depending on how you initially set up your licensing agreement, you may end up having to pay if or when a product is returned or damaged or goes on markdown. Many of these potential issues can be addressed in your agreement, but you need to make sure they are handled properly.
CON: Risking Trademark Loss
Trademark licensing is not something you just set and forget. You must be careful in
- selecting a trustworthy partner,
- outlining terms to protect yourself, and
- policing your licensee’s use of your trademark.
Otherwise, you may be leaving yourself open to piracy or other situations in which your “partner” makes a profit they never pay royalties on.
CON: The Waiting Game
Even when you have chosen an excellent partner and all is going according to plan, often licensees pay out quarterly… and one quarter behind. This means it may be six months before the first royalty check is issued and that is only if the products sell.
The Bottom Line
As with every business decision you make, there are risks involved with licensing your trademark. However, there are also huge potential advantages if you do your due diligence in selecting a partner and have a strong trademark licensing agreement in place.
No matter who your partner is, you should work with an experienced trademark attorney to ensure your rights and interests are protected. If you have any questions or concerns regarding trademark licensing, you can reach out to the Marks Gray intellectual property law team at [email protected] or 904-807-2180.