This article is written by Aditya Rastogi, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.
Trademark licensing is one of the most common methods of monetising the intellectual property of individuals. Organisations, by licensing the trademarks which are owned by them, grant the licensee with the right to use their respective registered trademark. In the year 2020, Hero MotoCorp and Harley-Davidson entered into a licensing agreement through which Hero MotoCorp was granted the exclusive right to develop and sell premium motorcycles under the Harley-Davidson brand name. Similarly, Walt Disney also licensed its relative trademark to its producers so that they could use the mark on agreed products.
A huge number of brands are choosing to license their respective trademarks in order to expand their businesses as well as to generate greater revenue from their own brand name. The most common and important factor in a business arrangement is the licensing agreement. Both the parties i.e. the licensor and the licensee should necessarily ensure that the signed license agreement is comprehensive and clear in nature and covers all future possibilities. In the cases where the license agreement is not properly drafted, it could result in future litigation and could also impact the commercial interests of both parties. This article aims to explain some of the important clauses in a trademark licensing agreement.
Important clauses in trademark licensing agreement
In every licensing agreement, there are some clauses that should compulsorily be incorporated in order to ensure that the rights and obligations of each and every party are clearly laid down.
It plays a very important role in clearly identifying the parties to the agreement i.e., the licensor and licensee, and also states the other details of the parties, like their registered offices and their location. It clarifies if the agreement is binding upon the representatives, successors, or assignees of the parties to the agreement.
This clause is again a very important clause in a trademark licensing agreement because it grants the licensee the right to use the licensor’s trademark. It must clearly lay down the extent to which the rights are granted to the licensee. The granted right can be with respect to exclusive or of the non-exclusive type; or kind of a transferable or the non-transferable one; the geographical limit within which one of the parties that is the licensee is provided the right to use the given mark; all the goods and services on which the licensee can use the relevant trademark; whether the given right to sub-license will be granted to the party which is the licensee. In the cases where the trademark is licensed on an exclusive basis, the agreement should necessarily specify or state all the relative terms and conditions which if not fulfilled will permit the licensor to cancel the entire exclusively given license.
Rights and liabilities
The agreement should necessarily contain a clause that is clearly indicative of the rights and obligations of each of the parties. The licensor’s obligation must involve the fact ensuring the value with regard to the trademark is purely maintained, and adequate technique of marketing and advertising is done in conformity to the relevant extent. The licensee’s obligations must extend into ensuring the quality of goods and all the services upon which a licensor’s trademark is mentioned and used, and is also maintained. Both the parties must also lay down all the obligations or the roles of each of the parties in cases where there is a third-party infringement of the registered trademark.
All the clauses pertaining to the royalties with regard to a licensing agreement must specifically lay down all the methods of calculation of the relevant royalty which is to be paid by the licensor to the licensee. It should also state all the terms related to the payment i.e., the manner inclusive of the timeline for all payments of royalties, including the documentation mentioning the calculation of royalties.
It is extremely important that both the parties are made accountable for the late payments and also, provide a detailed description of the manner in which such a situation shall be addressed. The licensor should also be provided with the right to audit all the royalties which are paid and the agreement should necessarily specify the kind of frequency of all the audits.
Product and process stewardship clause
The particular clause in the agreement must specifically state all the responsibilities of both the parties with respect to safety, including the environmental, and all possible kinds of social impacts, on the goods which are produced under the relative trademark. It must further be mentioned that the licensee in the future is also responsible and must adhere to all the state and local safety rules prevalent with reference to the process, product, employee, and customer safety.
Quality control clause
Since it is one of the most important aspects of trademark licensing, the agreement should necessarily provide for the provision where the licensor shall exercise the quality control practice over the goods given to the licensee i.e., should provide all the complete details of the respective design, as to how the trademark should be used and all the different types of products which should be placed and promoted in future, whether in future there will be inspections by the licensor and their frequency, etc. The clause must also clearly specify the process for disposing of all the kinds of goods that do not meet the required standards.
This clause must clearly lay down all the conditions as to when a party may possibly terminate the signed agreement. It can be either terminated on completion of the term of the license agreement, or on the breach of obligations in the agreement by either of the parties, prior to the expiry of the term of the agreement. If the party is to be awarded an opportunity to rectify the breach, the same shall be clearly stated and the time period within which the rectification is to be made, must also be specifically mentioned.
Governing law clause
It is another important clause in the agreement which specifies the law that will govern the agreement during its effectiveness. This clause has its own particular significance in the cases where the parties belong to different jurisdictions. The governing law clause is instrumental when it comes to determining the rights and liabilities of the parties to the agreement and also the remedies which are available to them in case of a breach, and so on and so forth.
The governing law clause is extremely significant when it comes to the interpretation of clauses that are contained in this agreement. The governing law clause must include jurisdiction that is well connected in regard to the transaction which is entered into between the parties depending upon the principles that govern the private international law.
Dispute resolution clause
The disputes related to the agreement can arise at any point of time. Therefore, it is very important that the drafted agreement includes a clause that is relevant to determining the resolution mechanism in the case where any dispute arises between the parties. Parties often choose arbitration as it is neutral in nature with regard to proceedings, especially in the cases of cross-border licensing agreements. Parties’ right to choose is another characteristic of arbitration that makes it one of the most preferred modes for dispute resolution amongst parties where there is licensing agreement.
The licensing agreement generally contains the insurance clauses that are included in order to protect the licensor from any kind of future third-party claims which might arise against the licensee. This can include the extent of loss or damages, or the fee and expenses to be incurred by them due to such future third-party claims.
In a licensing agreement, it is very common that both parties have their own confidential information with regard to the other party. It would be quite prudent to have clauses related to confidentiality. Both the parties should be entitled to utilize the confidential information throughout the duration of the agreement, however, such information should not be disclosed to any third party.
The licensing agreement must have a provision for the return of the exchanged confidential information made between the parties as soon as the agreement is terminated. It is extremely essential to clearly mention to which information will be considered as ‘confidential’ in nature and under what situations such information could be expected to be disclosed.
It is extremely important that the trademark licensing agreement is perfectly drafted and is comprehensive so that it eliminates potential disputes which might arise in the future between the parties. Further, it is also very important to remember that every licensing agreement which is drafted is different because it is based on the kind of commercial arrangement between the parties. Thus, it is important to be clear with regard to the interests of both parties to the agreement and then draft the respective agreement accordingly. Parties should seek the assistance of attorneys who are experienced, in order to ensure that the relative agreement is well-drafted and inclusive of all the accurate rights of each party reflected in the trademark license agreement ensuring that the interests of both parties to the agreement are considerably safeguarded.
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