Licensing of Trademarks

Rather than selling a mark outright to another, a trademark owner can license the right to use a mark to another and continue to retain ownership of the mark. Trademark licensing arrangements are routinely seen in franchise agreements in which a franchisor, such as Burger King, allows its franchisees to use Burger King's marks. The licensor may grant an exclusive license, in which case the mark can be used only by the licensee, or a nonexclusive license, as is the case with franchise agreements, by which several parties have the right to use the licensor's marks. The licensor may retain rights to use the mark or may agree not to use the mark while the license is in effect. The licensor is paid a one-time lump sum license fee or receives periodic payments, called royalty payments, based on sales of the licensed product or service. In this way, trademarks provide a revenue stream for their owners.

A critical component of a license agreement is that the licensor must retain quality control of the mark, meaning that the licensor must retain the right to ensure that the goods and services offered by the licensee meet the licensor's standards. For example, Burger King must retain the right to monitor its franchisees to determine that the food products, cups, bags, and other items that bear the Burger King marks are of the quality and consistency used by Burger King itself. Failure to include quality control provisions results in what is called a naked license, and the licensor loses all rights to the mark. Thus, license agreements not only state that the licensee's use must be consistent with the licensor's quality control standards but generally allow the licensor to inspect use of the mark, review advertising materials that will display the mark, and be provided samples on a routine basis of the goods or materials that will bear the mark.

Although license agreements can be recorded with the PTO, there is no requirement to do so, and most parties do not record their license agreements on the basis that the agreement is a private one between parties and there is no need for it to become a public record. Foreign practice is quite different, however, and many foreign countries require that license agreements, called registered user agreements, be placed on file with the foreign trademark office in which the mark was originally registered. See Figure 5-3 for a sample trademark license agreement.