A brand license can take many forms, ranging from a solitary paragraph in a sale agreement to a 100-page standalone masterpiece.
Although the brand itself may be simple, the licensing terms need to be carefully drafted. In June this year, the England and Wales Court of Appeal held that licensee Alaska Airlines was liable to pay up to USD160 million in brand licensing fees to its licensors within the Virgin Group.
This arose from the interpretation of a minimum royalty provision of just a few lines.
Here are six key clauses typically found in a brand license, including some of the main points to consider in each.
Parties
The licensor will ideally be the owner of the trademark and other branding elements subject to the license (the brand). However, if the licensor is not the owner but instead takes a license from a third party, the licensee should request a copy of that head license (in redacted form, if necessary) to verify its scope, and assess whether the terms pose any risk to the licensee's continued use of the brand.
Although the licensor will usually give a warranty that it can grant the license, the damages for breach of warranty may not provide much comfort if the rights to use the brand are withdrawn by the ultimate owner of the brand. An intra-group head license is usually a lower risk for the licensee, but this may depend on the structure and governance of the licensor group. If the licensor is an IP holding company, the licensee may request a guarantee of performance from another group company for additional comfort (for example, concerning any obligations to maintain and enforce the trademarks).
The licensee party structure is usually more straightforward: it will typically be the principal company running the business under the brand, with certain sub-licensing rights to affiliates.
The licensor will want to ensure that the licensee is an entity of substance, which can take action and deliver remedies if there is a dispute. The licensor will want to ensure that sub-licensees are subject to the same terms as the licensee, that it has sufficient visibility and control over sub-licensees (including audit and approval rights), and that they continue to meet the required criteria for being a sub-licensee.
Grant and scope
The licensor will prefer to define the brand by reference to a defined list of trademarks (registered or unregistered) and other visual elements, set out in a schedule. This avoids the risk of inadvertent or uncertain licensing and makes it easier to grant both exclusive and non-exclusive licenses for different elements of the brand.
For example, if a chocolate brand (ChocIP) were to grant a license to 'all IP rights used in relation to the ChocBar product', this might include the ChocIP brand and logo, the ChocBar brand and logo, the distinctive ChocBar shape, the ChocIP colour scheme and other design elements that may be shared with other ChocIP products.
Each of these may need to be subject to a different form of exclusivity. If ChocIP were to later sell another of its products, it would need to be able to explain to the purchaser which elements of its packaging had been licensed out and on what terms; this would be very difficult using the example wording above.
In response, the licensee may argue that a floating category of IP rights is necessary to future-proof the license and allow for slightly different iterations of design elements across media. One compromise is to define the licensed rights, but include a simple mechanism for adding additional rights, if required.
From both parties' perspectives, the scope of the license should be clearly defined, including the type of goods/services, industry/sector, channel and territory. This should also include appropriate carve outs: for example, where the licensor needs to be able to use the brand as part of international marketing campaigns or cross-industry sponsorship opportunities.
The licensee should think carefully about the territorial restrictions of the license.
For example, if it intends to sell products online, it may not be possible to prevent individuals from outside of the territory from accessing the website, and EU competition law generally prohibits a retailer in one EU country from refusing to fulfil unsolicited orders received from another EU country (i.e. 'passive sales'). The licensee may however agree not to actively target or solicit potential customers outside the territory, for example by restricting its choice of language, cultural reference points or marketing channels.
Quality control
The licensor will want to ensure that the licensee preserves the brand's reputation and goodwill and uses the brand in a manner that is consistent with its own quality standards.
The licensee will usually be required to comply with the licensor's written requirements, guidelines or specifications for use of the brand, which may be appended to or referred to in the license. The licensor will want the flexibility to update this, and to have the right to give ad hoe directions from time to time. This can be risky for the licensee, who should try to limit the frequency and extent of permitted amendments, and include certain protections for when compliance with new requirements would be unduly burdensome or costly.
For example, if a delivery company were to change its signature colour scheme from brown to green, a licensee delivery operator would not only have to update most of its branded marketing assets, but also repaint its delivery trucks, which could disrupt its operations and impact sales. As such, it can be very important to have robust provisions to equitably share any costs and expenses, and to set reasonable timelines for making required changes.
The licensor may also request certain approval rights over the licensee's new applications of the brand, such as for a new advertising campaign or product design. Because the scope of the approval right, timelines and process for resolving disputes are heavily dependent on the product/service requirements and the practical constraints of the licensor and licensee teams, it should be negotiated in close cooperation with the business.
Protection and enforcement
Each party may be required notify to the other party if it becomes aware of potential disputes or challenges. From the notified party's perspective, this obligation should always include suspected and threatened infringements, and refer to activities that infringe IP rights, rather than IP rights that infringe (since an IP right cannot infringe another IP right - this is relevant also for IP warranties).
If the licensor also uses the brand in the licensed territory/ sector, the licensee may be happy to trust the licensor to enforce and defend the IP at its own discretion. However, if the licensor has limited economic incentive or has failed diligently to protect its IP rights in the past, the licensee may want to include certain rights to be involved in the process. These should be clearly defined, to set out the notification, discussion and decision rights and obligations for each party. The licensor may want a 'backstop', where the licensee can take action itself if the licensor fails to do so and the issue is causing damage to the licensee's business.
If the licensor receives damages from litigation or settlement payments from a third-party who has infringed the brand, the licensee may argue that it should receive these damages on the basis that it is the licensee's business that has been affected. The licensor will conversely argue that it should receive the damages to compensate it for the loss of value in its brand. It is helpful to consider the term of the license and the level of investment and economic interest of each party, to find the right balance. For example, a fast-food restaurant franchisee will typically rely heavily on the licensor restaurant brand owner to develop and manage the brand and produce branded assets, marketing materials and advertising. The restaurant brand owner also receives a proportion of the franchisee's net sales. In this context, the restaurant brand owner would have a stronger argument that it should retain any damages received from third party infringement due to its primary role in investing in the brand, especially if the franchise agreement is on a short-term renewal cycle.
Indemnity
If the licensor has no economic interest in the licensee's business (save for its right to receive a royalty payment), it may expect the licensee to fully indemnify it, without a liability cap, against any losses it suffers or third-party claims it receives from the licensee's use of the brand. This ensures that the licensor does not carry any risk, as it will have only very limited involvement in the licensee's business and will not share in the economic benefits derived from it. The licensor will also seek to minimise the conduct of claims provisions, to avoid being tripped up by any timing or notice requirements that might enable the licensee to escape liability.
By contrast, where the parties' interests are closely aligned, a licensee may seek to limit its indemnity to third-party claims received by the licensor arising from the licensee's breach of the license. The licensee may also request an indemnity from the licensor in respect of third-party IP infringement claims against it which arise from activities carried out under the brand in accordance with the license agreement, particularly if the licensee cannot reasonably diligence this risk (for example, in a sponsorship scenario). This is only likely to be acceptable to the licensor if limited to specific, approved uses of the brand. For example, earlier this year Superdry filed a trademark infringement action against Manchester City FC for its use of the 'Super DRY branding on its kits, which was licensed in from Asahi as part of its team sponsorship. The claim against Manchester City FC as licensee came after previous and ongoing disputes between Asahi and Superdry.
In either case, the indemnifying party should insist upon handling all indemnified claims, to avoid being financially responsible for the counterparty's own defence which it cannot control.
Termination and run-off
Aside from the usual contractual termination rights, the licensor will often expect a specific termination right if the licensee has caused certain harm to the reputation of the brand or has brought it into disrepute. It is important for the licensee to ensure that the threshold for termination is appropriately high and ideally link it to an objective trigger (such as the termination of a key sponsorship deal or a drop in sales across a certain period). To avoid the significant disruption caused by early termination, the licensee may agree to alternative remedies such as the payment of liquidated damages for specific breaches, or loss exclusivity. If a license is expressed to be perpetual or irrevocable, it is important to clarify whether this is subject to any termination rights.
It is usually essential for the licensee to have a certain 'ramp-off' period post-termination, as immediate de-branding is rarely realistic in the physical world, especially if a branded product is in the supply chain. Ramp-off rights will depend on the sector: For example, under sports sponsorship, merchandising or broadcasting arrangements, a licensee may have existing contractual relationships with other stakeholders and so may need to continue using the brand for a defined period, such as the remainder of the season. There are valid reasons why the licensor would want to immediately prevent any further or ongoing damage to the brand by the licensee. but an immediate stop is likely to cause more damage than a sensible ramp-off.
Customers may believe the brand has gone bust or simply exited the market, which is not attractive for subsequent users of the brand.
