Wednesday, 24. July 2024

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Trademark License Agreements: Making money with your good name

The fashion label that now all of a sudden also makes watches. Or eyeglasses. Or even perfume. Boots that are sold with the name of the producer of bulldozers. And the brand of one or even several sports car manufacturers is apparently also very well suited for the sale of sporty, elegant sunglasses.

1. The Idea: Image Transfer

In all these cases, the positive image of a well-known brand is to be transferred to another product which is not manufactured by the owner of the well-known brand (image transfer). – For more details see section 5 at the end.

2. The Implementation: Trademark Licenses

As a rule, this is based on a trademark license agreement. Because the clothing producer (Hugo Boss, Esprit, s’Oliver and so on) usually knows little about how to produce watches, glasses or even perfume. But he – or she, of course – has made a good name for himself/herself in his/her segment, namely clothing, and he/she is now turning this into money by granting a manufacturer of watches, eyewear or perfume the right to label his/her products (watches, eyewear, perfume) with the famous name of the clothing manufacturer. – (I think you get the idea: Gender is not the topic here).

3. Legal Concerns?

But isn’t this deceiving the consumer? Doesn’t he assume that the clothing producer has also produced the watches, the glasses and the perfume? But no, don’t be so naive!

Trademark license agreements are absolutely legitimate arrangements in which one side contributes the product and the other the famous name.

4. Content and Structure of a Trademark License Agreement

Are you interested in what is covered in such an agreement? Well, let’s take a closer look at the content and structure of a trademark license agreement.

a) The Parties

The licensor is the party that owns the trademark rights to a well-known name (Hugo Boss, Esprit, s’Oliver, to name just a few).

On the other side is the licensee. This is, for example, a manufacturer of watches, glasses or perfume, who usually does not have such a well-known name. But he knows how to produce (high quality) watches, glasses or other products.

b) The Trademarks

The subject of a trademark license agreement is a trademark. This can be, for example, an EU trademark or a German trademark.

It is important that the licensor must actually be entitled to the trademark right. This is because a license is a right, and a right can only be transferred by the person who is actually the right holder. Unlike the acquisition of an object in good faith (§§ 932ff BGB), the acquisition of a right in good faith is not possible.

The licensee is therefore well advised to have the licensor expressly prove and assure the existence of the right. It also does no harm to carry out one’s own searches, for example in the trademark register. If the licensor is not entitled to the trademark, the licensee cannot acquire a license to it. Not even if he has paid all license fees (see below) and has fully trusted the licensor.

c) Exclusive versus non-exclusive License

A license may either be granted to only one licensee. In this case, it is referred to as an exclusive license.

However, it is also possible for the licensor to grant non-exclusive, simple licenses to several licensees in each case.

In the case of an exclusive license, it is advisable to clarify whether the licensor himself may continue to make use of the trademark or not.

d) Territory

Licenses may be granted either for the entire territory where they are valid or for a part thereof. In the case of an EU trademark, for example, a licensee may be granted a license for the entire EU or only for individual countries. In this way, the licensor may grant different territorial licenses, one for example for Germany and/or Austria, another for France and/or Italy and/or Spain and so on. …

e) Products

It is also important to specify for which products (or services) the license is granted. So for example for eyeglasses or watches or perfume.

A licensee who has received a manufacturing and distribution license for eyeglasses may therefore (only) manufacture eyeglasses and affix the licensed trademark to them. However, he may not use the trademark for other products.

f) Term

It is also important to contractually agree on the term of the license. This can be three years, five years or 10 years. An unlimited license is also possible; in this case, however, a period of notice (of termination) sould be agreed upon.

g) License Fees

In return for granting the licensee the right to use its trademark in a certain territory for certain goods or services (subject matter of the agreement), the licensor naturally wants to be remunerated with a license fee.
This can be agreed as a lump sum. However, it is more common to link the license fee to the turnover that the licensee achieves with the licensed products. Or to the number (quantity) of products that the licensee sells (so-called per-unit license).

It is also not uncommon to agree on a certain minimum amount (minimum license). This is because the licensor naturally has an interest in the licensee making every effort to generate sales with the license. This applies particularly if no lump sum has been agreed for the license.

h) Miscellaneous

What else do you agree upon in a license agreement?

Here are a few keywords: quality control, license notice, accounting, taxes, liability, termination, settlement after termination of the contract, non-compete clause, confidentiality, etc.

As with other (international) contracts, it is common to stipulate that the contractual relationship is governed by, for instance, German law (choice of law clause) and that in the event of a dispute, the courts at a certain location (place of jurisdiction) shall have jurisdiction. Alternatively, you can agree to arbitration if you wish.

These are the key points that can be found in a trademark license agreement.

5. Economic Interests of the Parties

Let us return to the economic considerations of the parties involved.

The licensee could, of course, market his products under his own name. But hardly anyone knows this name. Therefore, he looks for someone who has the trademark rights to a well-known name that is well received by consumers.

The licensor, for his part, has an interest in receiving money simply for making his brand name available to another company. Indeed, the licensor does not have to do much more than that. In particular, he does not have to produce eyeglasses, watches or perfume, but it is sufficient that he has a well-known brand name and allows another company to use this brand name for its products.

All right, the licensor still has one interest: It is very important to him that his brand is not damaged by inferior products. That’s why he usually makes a point of only granting a trademark license to companies that, for their part, manufacture products of impeccable quality. Otherwise, this could have negative consequences for the brand’s reputation and thus also for the licensor’s core business.

And so the circle closes: Because the licensor wants to protect his good name, he generally only grants a license to trustworthy licensees who manufacture good products. In this sense, the licensor’s good name indirectly stands for the quality of the products, even if they do not actually come from the licensor’s company.

Dr. Wolfgang Gottwald
Rechtsanwalt/Attorney at Law

Attorney at Law

Leopoldstraße 51
80802 München

Tel.: 089/383 293-10
Fax: 089/383 293-13