Trademark licensing is an option for businesses to grow their revenue, expand their brands, and reach new markets while avoiding many common costs and risks. If well executed, trademark licensing can lay the groundwork for international expansion without needing to immediately scale in-house operations.
Also known as brand licensing, trademark licensing is a legal agreement that allows trademark owners to allow third parties to use their trademark as licensees in exchange for a fee. The trademark owner retains ownership of the trademark, while effectively “renting” it out to the licensee.
In this article, we will cover the basics of trademark licensing, its different types and terms of licenses, main benefits for both parties, and how brands can mitigate the associated risks.
Benefits of Brand Licensing
Licensing presents a potentially huge win-win for trademark owners and licensees alike. For the trademark owner, there are a number of key benefits to establishing the partnership that range from providing direct and immediate benefits to contributing to long-term business development.
Generating revenue is one of the most direct benefits for the licensing brand. It provides a relatively passive additional income stream for them, while usually incurring zero additional costs, as the partnering business handles most of the new operations.
Income from licensing agreements can come in a few different models for the brand, such as:
Upfront payments: In this model, the licensee pays the brand an upfront payment in exchange for the right to use the trademark, usually made in annual or monthly installments.
Royalty fees: Here, the licensee pays the brand a royalty fee from a percentage of the sales made from the goods or services sold under the trademark. This is the most common way for brands to generate revenue through trademark licensing.
Minimum guaranteed payments: The licensee may also agree to make minimum guaranteed payments to the trademark-owning brand, regardless of the sales of the goods or services that are sold under the trademark. This can help to protect the brand from losing money if the licensee is not successful.
Expanding into New Territories
Growing the business into new regions offers long-term benefits for the licensor, beyond immediate revenue generation.
By choosing the right foreign licensee, a brand can use this partnership to sell in new geographic markets while minimizing the risks usually associated with geographic expansion.
Taking a brand that’s well-established in one country and expanding into another doesn’t automatically guarantee success. There are a lot of factors that can differ from the original market, like differences in culture, audience, and laws.
Working with a licensee in the new target market allows the brand to test the waters without major investment. This can also set the groundwork for a full brand-led expansion in the future, as the business will have a better understanding of the local market and its customers by that point.
Case Study: McDonald's vs Domino's in Italy
Italy is a country with an incredibly rich culinary heritage, and it’s developed a track record for resisting foreign fast food businesses developing within its borders. In the 2000s, McDonald's and Domino's Pizza embarked on quests to win over Italian taste buds, resulting in vastly different outcomes.
To ingratiate themselves with discerning Italian palates, McDonald's introduced a lineup of healthier options, including fresh salads and pasta bars. This adaptation to their menu was the biggest factor to MacDonald’s growing popularity among Italians, instantly elevating the brand's status.
McDonald's also acquired the Italian chain Burghy, and developed a strategic partnership with Italian oil giant Agip, which paved the way for McDonald's to set up shop at gas stations across the country.
While it hasn't eclipsed traditional Italian eateries, McDonald's has firmly planted its golden arches in Italy, thriving on its reputation for offering fast food that actually meets the demands of the local consumers.
In stark contrast, Domino's Pizza found itself retreating from the very heartland of its flagship product. Domino's had initially set its sights high, with ambitious plans to open nearly 900 outlets across Italy by 2030.
While MacDonald’s savvily adapted their products, at Domino’s, pineapple-topped pizzas were on the menu. The topping’s popularity is somewhat controversial in most countries, but downright blasphemous in Italy.
Domino's only managed to establish 29 branches in the country, all of which were eventually shuttered. The franchise holder, ePizza, filed for bankruptcy in April 2023, signaling the end of its Italian expansion.
These cases highlight the distinct trajectories of two global giants and the importance of local understanding when expanding a business internationally. While McDonald's succeeded in adapting its menu and strategy to become a favorite spot, Domino's couldn't crack the secret sauce.
The McDonald's journey showcases that even in a land renowned for its culinary prowess, a well-crafted strategy rooted in local sensibilities can lead to triumph. Meanwhile, Domino's exit underscores that merely expanding into a region where your product is already popular doesn’t guarantee success in any way.
Diversifying by Product and Customer
Trademark licensing can also allow the brand to diversify their business in other ways beyond expanding geographically.
Partnering with the right licensor can lead to diversifying the product, by applying the trademark and other branding to a whole new set of products. There’s also the option of vertical diversification, wherein the brand expands into the upstream or downstream parts of the supply chain.
Licensing can also connect the brand with a whole new customer base by adapting the product or service to a new audience.
In the fashion industry, collabs are likely the most successful incarnation of this type of licensing agreement right now. Older, well-established brands may struggle to catch the attention of younger audiences, particularly with fashion-conscious Gen Z.
A collab in the form of a trademark licensing agreement with an in-vogue fashion label can help bring the attention and approval of a new generation of customers.
Case Study: Minecraft x Burberry
Take a look at the Minecraft x Burberry partnership as an example of how completely unrelated brands can find value in each other.
Through the in-game adventure, "Burberry: Freedom to Go Beyond," Minecraft developed a pixelated rendition of London adorned with Burberry motifs, bringing together the worlds of high fashion and videogames. The designs were also brought to life as part of a limited edition collection, with physical and digital creations made to mirror each other.
This strategic partnership not only connected Burberry with existing Minecraft players but also introduced the brand to a new digital audience. The collab was so successful that it won the 2023 Licensing International award for Best CAA Brand Management
There’s immense value in developing innovative and unexpected brand collaborations. Brands should take inspiration from this partnership to consider their options of transcending traditional boundaries for their brand licensing agreements.
Benefits for the Licensee
There are a number of benefits for the licensee that make this partnership mutually beneficial.
Licensees can benefit from the awareness and reputation associated with the trademark owner's brand. This allows smaller retailers to set up shop more quickly than otherwise possible, leveraging an existing brand in order to accelerate directly to making sales.
Franchising is a very common method of licensing available to smaller entrepreneurs. After the initial investment, there’s a much lower risk compared to starting an entirely new business from the ground up, as the brand is already established and known in the market.
The explosion of fast food restaurant franchises over the past few decades is a testament to the success of this method.
For larger companies operating as the licensees, paying to use a trademark can help expand product portfolios and reach new audiences of customers. Using the licensor’s trademark can often provide the spark needed to start accelerating growth, or to tread new waters.
Types of Brand Licensing Agreements
Let’s now look at the different types of brand licensing agreements available to businesses. While there are myriad elements that go into a license agreement, there are two major things to choose between.
These primary options license agreement types relate to exclusivity and restriction, determining who has access to the IP and how the licensor can use the IP, respectively.
Exclusive and Non-exclusive Licenses
The difference between exclusive and non-exclusive licenses refers to which third parties have access to the licensor's IP.
In an exclusive license, the licensee is the only party that can use the trademark for those goods or services. This means that no other party, often including the licensor, can use the trademark for those goods or services without the licensee's permission.
In a non-exclusive license, the licensor can also grant licenses to other parties. The licensee is not the only party that can use the trademark for those goods or services, but they may be the only party that can use it in the way that is specified in the license agreement.
Restricted and Unrestricted Licenses
The licensor can also restrict the licensee's use of the trademark in some way by using a restricted license. This allows the licensor to retain a lot more control over their IP, while still bringing in some revenue from it.
To give some examples of restrictions, the licensor may authorize the licensee:
- to only use the trademark in a specific geographic area.
- to only use the trademark for a specific product.
- to meet mandatory quality standards.
- to avoid using the trademark in connection with other marks
- to only engage in marketing and advertising in approved ways
In an unrestricted license, the licensee has the right to use the trademark in any way that they see fit - or, at least, within a much greater scope. The licensor can still impose certain restrictions on the licensee's use of the trademark, such as requiring the licensee to use the trademark in a way that is consistent with the licensor's brand standards.
How to Decide Your License
There are countless factors that come into play when deciding what type of license to use. Particularly for newer businesses, this decision may not be an easy one.
If you are looking to protect your brand from unauthorized use, then a restricted license may be a good option. This will give you the most control over how the trademark is used and limit the number of parties using it. This will also help to avoid trademark infringement and naked licensing, which we’ll cover in the next section.
The downside of this is that it’s likely to limit the amount of revenue the partnership will bring in, compared to the alternative options. Licensors always prefer greater control over the IP they’re accessing, so they pay more for licenses that grant them freedom. So it’s up to the licensor to consider the balance between control and revenue.
Ultimately, the best way to decide which type of license to start with is to consider your specific goals and objectives. If you are not sure which type of license is right for you, we suggest you consult an attorney or trademark licensing expert for bespoke advice.
Licensing Risks to be Aware of
As with everything in business, trademark licensing brings risks along with its opportunities. There are general risks that you’ll find with any agreement with another business, like finding the right partners, deciding on price, ensuring the written agreements are clear, and so on.
Licensing agreements have two major risks that stand out, and they both involve the licensor’s intellectual property. Being an agreement that grants a third party access to a brand's IP, it’s essential that control over that IP is never lost.
Brand licensing agreements can also lead to trademark infringement if the licensee uses the trademark in a way that is not authorized by the agreement.
There are a number of ways a brand licensing agreement could cause trademark infringement. Namely, if the licensee uses the trademark:
- on goods or services that are not authorized by the agreement.
- in a geographic area that is not authorized by the agreement.
- in a way that is not consistent with the licensor's brand standards.
- in a way that is likely to confuse consumers.
To avoid trademark infringement in a brand licensing agreement, it's important to carefully review the agreement before signing it, ideally with the support of an intellectual property attorney. Make sure that the agreement clearly defines the ways in which the licensee is authorized to use the trademark, and frequently check in with the licensor to ensure the agreement is being adhered to.
Naked Licensing & Quality Control
One of the most essential elements of a successful licensing agreement is quality control. As a business gives some of its IP rights to a third party, it needs to be sure their IP won't be mishandled. It still functions as the mark of their brand, so improper use can lead to major problems.
Naked licensing is quality control mismanagement taken to the extreme. So much so that it can lead to the business forfeiting their trademark rights entirely.
Failing to monitor the use of your trademark can be costly. If you don't keep tabs on how your trademark is being used, it could fall to trademark dilution or even to trademark abandonment.
To avoid this, trademark owners often include a clause in their licensing agreements that requires the licensee to periodically send samples of products marketed under the trademark to the licensor, along with reports detailing the types of products being used with the mark.
Trademark licensing can be a great way for businesses to grow their revenue, expand their brands, and reach new markets.
However, it’s not something brands can sign and forget about. It’s essential to be aware of the risks involved, such as trademark infringement and naked licensing, and to take steps to mitigate them.
- Do your due diligence on the licensee. Before you enter into a licensing agreement, make sure to do your research on the licensee. This includes checking their financial stability, their track record of success, and their reputation.
- Consider starting with a restricted license. Brands engaging in licensing for the first time would be wise not to hand over too much control. Retaining this control is worth a lower return for inexperienced businesses.
- Get everything in writing. A well-drafted licensing agreement will help to protect both parties in the event of a dispute. Make sure to have the agreement reviewed by an attorney before you sign it.
- Monitor the licensee's use of the trademark. Once the agreement is in place, you should monitor the licensee's use of the trademark to make sure that they are complying with the terms of the agreement. Monthly updates at the very least are a good starting point.
- Take action if the licensee breaches the agreement. If the licensee breaches the agreement, you should take action to enforce your rights. This may involve terminating the agreement, suing the licensee for damages, or both.
By following these tips, you can help to mitigate the risks of trademark licensing and ensure that your experience is a positive one, while laying the groundwork for larger and more creative licensing agreements in the future.