A trademark is a distinctive mark that identifies goods or services that are provided by an individual or corporation, and forms an important aspect of commercial activities.
In this regard, it is important for businesses to have exclusive rights in their trademarks, for a variety of reasons, including:
● to have the exclusive right to use that trademark to identify its goods or services, so that third parties are restricted from using that trademark to pass off their own goods and/or services as the business’; and
● to prevent third parties from using the business’ trademarks in a derogatory manner.
There may, however, be times where a business may wish to provide third parties with a licence to use its trademarks. This may be done for a host of purposes, including:
● in order to obtain revenue through a franchise or a white labelling arrangement – the licensing of one’s trademarks to third parties in return for a monetary fee can form a substantial source of revenue for businesses; and
● in order to provide a separate corporate vehicle with an asset on its books, for the purposes of account keeping.
The terms of the licensing of one’s trademarks are typically set out in a trademark licence agreement. However, have you ever wondered why it is important to have a trademark licence agreement?
In this article, we examine 5 key reasons why a company wishing to licence its trademarks should enter into a trademark licence agreement.
Reason 1: Set out restrictions with respect to the use of trademarks
While a business may wish to provide a third party with a licence to use its trademarks, it will certainly not be wise to provide such third party with an unbridled right to its these trademarks, especially if the business wishes to ensure that it retains a competitive advantage over its rivals and preserve its good reputation.
A trademark licence agreement could (and should) set out certain restrictions with respect to the third party’s right to use the trademarks. Restrictions may include:
● restrictions on the purposes for which the third party may use the trademark – it may be solely in relation to certain products, or for certain territories;
● prohibitions against sub-licensing;
● time restrictions with respect to the use of such trademarks; and
● restrictions on the persons within the organisation who may use such trademarks.
Reason 2: Trademark infringement
Where a business provides third parties with a licence to use its trademark, the business exposes itself to a greater risk that its rights in these trademarks may be infringed.
After all, the trademark may be used across a wider range of goods and territories, and more people will have some form of access or another to the trademark.
A business may thus wish to require its third-party licensees to take certain actions, in the event that they detect or suspect an infringement in the business’ rights in its trademarks. These actions may include:
● notifying the business immediately of such a breach and providing all known details with respect to the breach;
● taking all steps necessary to mitigate the effects of the breach; and/or
● making no comment or admission to any third parties with respect to such circumstances.
These requirements may be set out in a trademark licence agreement.
Reason 3: Indemnities
An indemnity is an obligation on a party (“Indemnifying Party”) to compensate another party (“Indemnified Party”) for losses that the Indemnified Party may suffer as a result of an event (“Indemnified Event”). It is a tool that parties use to transfer risk.
An Indemnified Party may request for an Indemnifying Party to provide an indemnity in relation to an Indemnified Event, if the Indemnified Event is beyond the Indemnified Party’s control and that losses which the Indemnified Party may potentially suffer as a result of such event are extremely high.
A business that provides third parties with the right to use its trademarks exposes itself to the risk of huge losses, particularly if third parties use these trademarks in a distasteful or inappropriate way, or where these third parties fail to comply with applicable laws when using such trademarks.
In this regard, it may be prudent for a business to obtain certain indemnities from these third parties in relation to their use of the licensed trademarks, so that the business may minimise (or even eliminate) any losses that may arise as a result of matters that are beyond its control.
Such indemnities may be set out in a trademark licence agreement.
Reason 4: Set out termination of licence
A business may not want its licensing arrangements to go on forever. Even if they do, it would be prudent for a business to have rights to terminate the licensing arrangement, if that arrangement becomes untenable and if remaining in that arrangement would cause more harm than good.
Circumstances under which a business may find that a licensing arrangement becomes untenable may include:
● where the licensee keeps flouting its licensing restrictions to the detriment of the business’ profitability and/or reputation;
● where the licensee breaches applicable laws; or
● the trademark cannot be registered in the licensee’s territory.
These grounds of termination, as well as the consequences of termination ought to be set out in a trademark licence agreement.
Reason 5: Enforceability
As a general point, having a written trademark licence agreement lends enforceability to parties’ rights and obligations in relation to the trademark licensing arrangement for various reasons, including:
● terms are set out in writing, and this serves an tangible evidence of the parties’ intentions with respect to the engagement; and
● signatures serve as evidence of parties’ agreement to the written terms
It is thus key for parties to have a written trademark license agreement.
We hope that this article has been helpful to you as a start-up trying to make headway in the business world.
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*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.