Trademark Licensing & Assignment Agreements

Trademark Licensing & Assignment Agreements

Terms:


Representations & Warranties:
In contracts for sale or lease of property (including intellectual property), the conveying party is usually asked to make some promises regarding the current status of the property. These promises, or statements of good-standing, are usually referred to as representations, warranties, or both.

Consideration:
Something of value (either a promise, an act or an object) that a promisor receives from a promisee in return for his promise.


Because a trademark is property, it may be conveyed in several of ways. Basically, a mark owner may:

  • Assign all rights in the mark to another entity (outright sale).
  • Assign some rights in the mark to another entity (partial assignment).
  • Grant another entity the right to use the mark for certain purposes for a certain period of time (license).

EXAMPLE (1): Johnny’s registered mark “Blue-Breath” for candy has done wonders for the sale of his breath mints. When a major candy manufacturer decides it would like to use the mark, it offers to buy the mark from Johnny. If Johnny sells the mark to the manufacturer, he will no longer be able to use it, and the manufacturer can use it as it sees fit.

EXAMPLE (2): After selling Blue-Breath for an extraordinary sum, Johnny takes a few years off work to relax and fish. While moving into his new mansion he discovers a fishing lure in his attic. The lure had been made by his Uncle Tony, and Johnny has only the fondest memories of the man. He begins selling “Uncle Tony’s Trout Teaser,” making use of the marketing knowledge he gained selling Blue-Breath. The Trout Teaser takes off, and soon, a major sports equipment company wants to buy the mark and make the lure on a grand scale. Johnny has seen how big business works (Blue-Breath is now used not only on candy but on a product which helps drunk drivers avoid breathalyzer detection, something which Johnny is very upset about) and wants to prevent his Uncle Tony’s good name from being attached to anything unseemly. He therefore agrees to sell the rights in the mark, but not the right to prepare derivative marks. (Unfortunately, being inadequately educated in trademark law, Johnny doesn’t realize that this won’t really protect him against others who want to use the name “Uncle Tony” in connection with products or services of which Johnny does not approve).

EXAMPLE (3): Perhaps learning his lesson with the fishing lures, Johnny swears never to sell a mark again. When his newest idea, “Cool Dog Crumbler” takes off (a training aid which quickly, and painlessly, forces a dog to submit to his owner’s will), he decides that he will only license the mark to the major pet products manufacturer which has approached him. The license limits the mark’s use to the specific product (drawings and diagrams of which are attached to the license agreement as Appendix A), and further constrains the way in which the mark may be used in marketing the product. The license agreement limits the geographic area in which the mark may be used, and lasts only 5 years, at which point Johnny has the right not to renew the license. While this gives Johnny a great deal of control, it also diminishes the mark’s value to the buyer.

Trademark Assignment

The outright assignment (sale) of all of the rights in a mark is a relatively simple thing compared to partial assignments and licenses. When a mark owner allows others to exercise rights over the mark yet keeps some rights to himself, he exposes himself to significant risks.

Recall that rights in a trademark can be lost in several ways, as discussed earlier in this chapter. The loss of these rights significantly diminishes the value of the mark (something a mark owner obviously wants to avoid). A mark can become generic, as we saw in the Bayer case, or it can be abandoned. We also covered the concepts of naked licensing and the failure to police – ideas which now fall into place in our discussion of trademark licenses.

When a mark owner assigns all rights in a mark, the original owner need not be concerned with how (or even if) the buyer uses the mark. If, following the transfer, the mark becomes generic or is abandoned, the original owner is not harmed. Further, because the owner retains no rights in the property, she need not concern herself with oversight or policing of any future uses of the mark.

This does not mean that genericism, abandonment, and other loss of trademark issues do not play a role in the contracts for sale of a mark. As with any party to a contract, the seller will likely be asked to make certain representations and warranties. For example, the buyer will want to be assured that the prior use of the mark by the owner has not infringed on the rights of any other mark owner. A representation as to the owner’s good faith effort to prevent genericism might be requested (although everyone understands that genericism can occur regardless of the mark owner’s effort to prevent it). Similarly, the buyer will want to know that the mark has been used (and the appropriate filings maintained) so that its status on the primary register is not at risk through abandonment.

The outright assignment of a mark usually means the assignment of four separate rights or interests:

  • The registration rights.
  • The right to prepare derivative works.
  • The income, royalties, and claims related to the mark, which are due or payable on or after the date of the assignment.
  • The goodwill related to the mark.

§1060 (“Assignment”) places a number of constraints on the assignment of marks, including the fourth requirement listed above. Under this section,

“The good will of the business in which the mark is used, or…that part of the good will of the business connected with the use of and symbolized by the mark”

must be included in the assignment. Subsection (2) makes clear that the goodwill of the business associated with other marks used by the seller can remain separate.

A sale of a trademark without the goodwill associated with the mark is an “assignment in gross.”  This sale is unenforceable and invalid, and if such a sale occurs the trademark is deemed abandoned.

What, then, is this goodwill which is so important in the sale of a mark? The goodwill of a mark is really at the heart of the mark’s value. If someone sells merely the mark itself (words, logo, etc.), it is essentially worthless without “all the goodwill he had built up associated with the mark.” Greelon, Inc. of Cincinnati v. Greenlawn, Inc., 542 F. Supp 890, 895 (S.D. Ohio 1982).

A precise definition of goodwill is difficult to come by. In the West Hornbook by Roger Schechter and John Thomas referred to earlier in these materials, we are provided with the following definition (at 772):

[Goodwill] is usually defined as the reputation a business has established over time, and its consequent expectation of continued business in the future based on past success.

Although Schechter and Thomas are not thrilled with this, or other formulations of the term, it is somewhat helpful. You might also think of goodwill as the meaning attached to the symbol or mark – the idea conveyed to consumers by that mark.

When you see certain brand names, certain images come to mind. Manufacturers launch pricey advertising campaigns to instill these images in the consumer’s mind. For example, the picture of Betty Crocker is carefully tailored to give rise to certain images in our minds, which hopefully will help us feel good about those products and lead us to purchase them. This is the goodwill associated with the mark.

For the buyer of a mark, one vital step following the assignment is prescribed by §1060(4). Under that section, a buyer should make the appropriate filing with the PTO within three months of the purchase. Otherwise, the new mark owner is open to risk of use of the mark by a

“subsequent purchaser for valuable consideration without notice.”

This concept is not unusual in property law, and is meant to protect an innocent third party who believes he is buying a mark from its lawful owner.

EXAMPLE: Abbott owns the registered mark “First Base Beef,” for a theme restaurant. On January 1st he sells the mark to Blockhead. On February 1st, he offers to sell the mark to Costello. Costello does not know of the prior sale. He does his due diligence and checks with the PTO, and the records there indicate that Abbott owns the registered mark. He pays a fair price for the mark and opens his own restaurant. Blockhead cannot prevent this use of the mark by a subsequent purchaser for valuable consideration, as Blockhead failed to file with the PTO (meaning there is no constructive notice here) and Costello did not have actual notice of the prior sale.

The sample Assignment of Trademark document attached addresses the basics of these issues. Of course, as the stakes are raised and more valuable property is conveyed, the intricacy of these issues and how they play out on paper is tremendously increased.

Trademark Licensing

Licensing a mark involves a host of issues which do not exist in the sale of marks. Except insofar as she makes certain representations and warranties, the status of a mark (genericism, abandonment, infringement on other marks, etc.) is of no concern to a mark owner selling the full bundle of rights in a mark. With licensing agreements, the owner must be aware of these issues and how the licensee’s use of the mark will affect the owner's property.

Naked licensing, or failure to police a licensed mark, can result in a finding that the owner has abandoned the mark. Obviously, a total loss of the mark’s value is not the goal when someone sets out to permit another to use his mark. Fortunately, it is easily avoidable.

Maintaining a licensed mark’s value comes in two stages. First, it requires a strong licensing agreement which clearly sets out the mark owner’s rights, the licensee’s obligations, and the limits of the licensed use. Second, it requires continued vigilance by the owner to ensure that the licensee is using the mark in accordance with the terms of the license agreement. Simply having the contract is inadequate; mark owners must police the use of their marks to prevent improper uses.

EXAMPLE: Myra grants Martha permission to use the mark “Wonder Mop,” and the two sign an iron-clad license agreement which strongly protects Myra. Because Myra has a number of business interests, she fails to notice when Martha begins using the mark in violation of the agreement. The best contract in the world does Myra no good if she “sleeps on her rights” (i.e., fails to enforce her rights).

As with an assignment, the owner will usually be asked to make certain representations and warranties, generally the same as those involved in an assignment. Additional clauses in a license agreement will include:

  • The term of the license.
  • Geographic limitations on the licensee’s use of the mark.
  • Provisions for the mark owner’s oversight of mark usage.
  • Details as to the type and quality of product with which the mark may be used.
  • Provisions for the mark owner’s inspection of product quality.
  • Other limitations on the licensee’s rights (such as a limitation on the right to convey the license to a third party).
  • A schedule of payments due and the method for calculating payment.

Unlike a sale, a license creates a continuing relationship between the mark owner and the licensee. As with any business relationship, things may go sour before the originally agreed upon end date, so clauses concerning breach, termination, damages, and other issues related to the early termination of the license are required.

Licenses can become very complex, involving multiple marks, products, geographies, etc. While a simple sample license agreement is attached, you should know that license agreements can easily reach 100 pages or more when major marks and long-term, big-dollar uses are involved.

Other §1060 constraints include the prohibition against selling the rights in a registration application, except under certain circumstances, and limitations on the sale of marks to assignees not domiciled in the United States.