Understanding trademark licensing agreements for SMEs

Aleck Ncube

Intellectual Property, Aleck Ncube
SMALL to medium enterprises (SMEs) who wish to license their Trademarks must understand the following important clauses in order for them to benefit from any Trademark licensing agreement they enter into.

1. Preliminary clauses: Title of Agreement
In most licensing situations, there is more than one agreement involved. In the case of a Trademark licence it would be called a Trademark Licence Agreement, and if it included patent rights or know-how it could be called a Trademark, Patent and Know-How Licence Agreement, and so forth. It is useful to have a title, which does describe the subject matter of the agreement.

Effective Date

After the title of the agreement there is, in most cases, an effective date clause, which essentially states when the agreement and the terms and conditions become effective as between the parties.

Description of the Parties

This section will contain the exact legal name of the party, the legal nature of the entity involved whether it be a partnership, sole proprietorship, corporation, and so forth, as well as an indication of where the parties involved have been incorporated or created together with their location and address.

Preamble

This portion of the licence normally sets the stage or describes the history between the parties, which leads up to the actual execution of the agreement.

Definitions Section
The definition section will set out what the parties intend certain words or phrases within the agreement to mean as at the date of the creation of the licence, which is the relevant time for interpreting the true meaning or intent of the parties while entering into the licence agreement.

2. Grant clause (Extent of rights)

-Exclusive licence: An exclusive Trademark licence provides the licensee with the right to use trademark to the exclusion of all, including the licensor.
Thus, the Trademark owner cannot use the Trademark himself nor can he licence any rights to others. The licensee remains the only user of that mark in the relevant market. It may be seen as or deemed to be an assignment particularly where there is no termination date.

-Non-exclusive licence: A non-exclusive licence grants to the licensee the right to use a Trademark according to the grant, the licensor may continue to use the Trademark himself as well as grant other licences.

Any of the above licences can also include other limitations or limited rights provisions.

The most common of those limited license provisions is that the territory of the licensee is limited either as to the products or services that can be provided in association with the Trademark, the geographical territory within which the licensee can sell, the location or site from which the licensee can sell (site location) or the market sector to which they can sell and promote the licensed product or service.

Sub-License

The licensee may be granted the right to sub-licence some or all of the rights included within the licence and the licensor may wish to be a party to any sub-license that the licensee enters into.

Territory

A Trademark could be licensed for use by a licensee in the whole world, in certain specified countries, groups of countries or territories within countries.

Licences could also be granted for use in specific industries or for specific market sectors, that is, wholesale as opposed to retail, commercial as opposed to residential, and so forth.

Term or Duration

In many licence agreements, the term of the licence is stated in terms of three, five or ten year increments.

Reservation of Rights

The grant clause often includes not only the grant of the rights to the licensee but also an indication or reservation of rights to the licensor for future licensing opportunities or for the entry of the licensor itself into the marketplace. In addition, most sole, exclusive and even non-exclusive licence set minimum sales objectives on a periodic basis.

-Commercial and financial considerations

Payment and royalties
Lump sum payments: These can take the form of fully paid up licence agreements, where a lump sum is agreed to and paid at the time of the licence right is being granted. Lump sum payment may also be spread, periodically, over the term of the license.
Royalties: The most usual type of consideration is to provide for some sort of upfront fee as well as an ongoing royalty payment based on sales. In some cases an upfront fee is paid as against royalties.

Once royalties to be paid exceed the upfront fee, then the royalty payments are paid on a monthly, quarterly or some other periodic payment basis.

The amount of the royalty, in terms of percentage, may vary from product to product, service to service and industry to industry.

The royalty is usually calculated on a defined “base” rate. In some cases, this might be net profit, net sales, gross profit or gross sales.

Royalty rate: The appropriate royalty rate depends on numerous factors including the relative bargaining strength of the licensor and the licensee, profit potential, the size of the territory, how well the trademark is known, the competitive situation in the marketplace relating to the products or services involved.

Royalty base: The base amount upon which the royalty rate is calculated whether it be called gross sales, gross profits, net sales or net profits or some other expression. It is calculated in accordance with the definition included in the definition section or in the royalty section itself. The provisions of the royalty section would also deal with

-when royalties are to be paid;
-the penalty for not paying royalties on time;
-the issue of withholding taxes in foreign jurisdiction where there are restrictions on the payment out of monies from the country;
-and interest on outstanding payments as well as the method of payment.

In many licence agreements, the royalties are paid into a trust account at a financial institution which is only accessible to the licensor. It could be as simple as a monthly cheque or bank wire transfer to the licensor.

Finally, a Trademark licence must include a service of Legal or Non-traditional Dispute Resolution Proceedings clause. This clause allows the parties to act outside of the rules of any given court or alternative dispute resolution rules to allow for simplified service of documentation, in accordance with the notice provision of the agreement, which would be less expensive and more expeditious.

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