The term "trademark licensing" is a fairly wide expression, which can exist under various forms of contractual relationships. This article is intended as an overview of the standard provisions relevant to licensing agreements for the manufacture of goods and pure trademark licensing agreements for the purpose of merchandising, in the context of trademark and competition law in the European Union.
The close connection between the trademark and the goods or services for which it is used and known, and therefore between the trademark and the business which produces those goods or services, is a determinant factor in negotiating the terms of the license for use of the trademark to unrelated third parties.
As a starting point, the negotiations should focus on due diligence considerations, in order to ascertain the validity of the trademark in the territory of the license and its ability to be used for the goods or services intended by the license.
As a matter of practice, the licensee will request that the licensor provide explicit warranties as to the validity of the trademark, although the latter will usually provide the following limited warranty: "The licensor warranties that, to the best of its knowledge, there are no third party rights to or in connection with the Trademark existing at the effective date of this Agreement".
Successively, it may be useful, if not necessary, that the parties determine the goods and/or services that will be included in the scope of license, in particular if the trademark registration is valid for certain goods and/or services for which the licensor intends to segment the market, or for goods and/or services which do not fall within the normal scope of use of the trademark, in the case of trademark merchandising. This can be especially true of the licensing of a well-known trademark.
The agreement may also provide obligations and restrictions concerning the use of the trademark in advertising, i.e. the various media which can be used and the minimum content requirements to be met.
A key aspect of any license agreement is its geographic scope and exclusive or non-exclusive character. Under the Italian trademark law, an exclusive trademark license can only be granted for the entire national territory. Under European competition law, the segmentation of markets between the various Member States may be prohibited if it is found to contravene Article 81(1) of the EC Treaty and is not exempted under Article 81(3). A further discussion follows at the end of this article.
A typical clause may read as follows: " The Licensor grants the Licensee, for the entire term of this Agreement, the (exclusive/non-exclusive) right to use the trademark for the manufacturing and/or sale of the Licensed Goods and/or Services in Italy (or other countries of interest)".
In the case of an exclusive license, the licensee will usually agree not to license the use of the trademark to unrelated third parties, although it may retain the right to use it for itself. However, the licensee will often require the licensor to waive this right of self-use if the introduction of the trademark in the territory of the license would require a substantial investment on the licensee’s part, with corresponding high expectations of financial return.
Among other obligations imposed on the licensee, the agreement may contain specific clauses regarding the graphic reproduction of the trademark for labelling, packaging and advertising purposes and the insertion of a disclaimer that the trademark is used under the supervision of the licensor.
Another key clause in licenses for the manufacture of goods concerns the quality control of the goods manufactured and sold directly by the licensee. This clause constitutes the meeting point between the intention of the parties and the consumer’s interests. This type of clause may impose on the licensee minimum requirements, such as the use of selected raw materials or of qualified workers.
On the other hand the clause may impose more stringent quality requirements, such as the exclusive use of manufacturing processes and technology, of machines, materials and components, all supplied by the licensor or by designated third parties. In order to maintain the standard of quality of the goods sold under the trademark, the agreement should contain specific clauses regarding communication by the licensor to the licensee of the necessary technical information, as well as regarding the procedure to adopt for goods that do not measure up to the licensor’s quality standards.
This clause also usually entitles the licensor to conduct inspections and tests on samples of goods manufactured under the license and to send designated personnel to oversee or assist the licensor in certain phases of the manufacturing process. However, it is not essential that the licensor conduct a constant supervision of the licensee’s activities; instead, it is sufficient that the licensee provide the licensor with a sample of goods upon request or at regular intervals, and consent, upon reasonable notice, to visits from the licensor’s qualified representatives for inspection of the work methods, use of materials, manufacturing and inventorying of the licensed goods.
In order to avoid any disagreements as to fitness of the goods under the license, the authors recommend the adoption of the following clause: "Every good which is manufactured and is intended for sale under the trademark licensed in this License Agreement, which does not meet the standards of quality defined in this Agreement, shall, at the Licensor’s expense, be removed from production and re-worked to meet such standards or be destroyed". Alternatively, the parties may agree that these goods can be sold without using the licensed trademark.
Notwithstanding the above, the parties can also agree that the goods produced under the license will have different characteristics according to their destination to different national markets.
Another fundamental clause of the agreement concerns the payment of a valuable consideration to the licensor, which may be more or less complex and is usually a combination of a lump-sum that may be paid initially or at subsequent milestones; of periodic royalty payments, calculated as a percentage of the volume of sales, whether gross or net sales; and of set fees for technical assistance and other services provided by the licensor.
A problem connected with the commercialisation of the goods under the license will often occur in the form of a conflict with third party rights and of trademark infringement by third parties. It is usually a good practice to include a clause that provides which party will bear the legal costs of defending the trademark in either case. In practice, it is recommended that the exclusive licensee be responsible for conducting and paying for all legal proceedings related to the validity and protection of the licensed trademark in the territory of the license, subject to the obligation to inform the licensor of such legal matters. Where the license is not exclusive, then the right and onus of defending or enforcing the trademark rights must lie with the licensor, who may eventually call as an interested party the licensee, and in any case must inform the licensee of developments in related legal proceedings.
The question then poses itself as to the validity of certain termination clauses, which prohibit the licensee from challenging the validity of the trademark registration that is the subject matter of the agreement. While early decisions of the European Commission held that no-challenge clauses where invalid under Article 81 of the EC Treaty as being overly restrictive of competition (Goodyear-Euram decision, Dec. 19, 1974; Penney decision, Dec. 23, 1977), more recently it held that such clauses were only invalid in the case of a well-known trademark if it could be asserted that the registration is void on the basis of the trademark’s generic or descriptive character. In this case, if the trademark is successfully challenged it falls into public domain and can be used by everyone. Furthermore, "only where the use of a well-known trademark would be an important advantage to any company entering or competing in any given market and the absence of which therefore constitutes a significant barrier to entry, would this clause which impedes the licensee to challenge the validity of the trademark, constitute an appreciable restriction of competition within the meaning of Article 81(1)" (Moosehead/Whitbread decision of March 23, 1990, point II, point IV(a); see also the ECJ’s judgement in the Windsurfing case, February 26, 1986, grounds 80 and 81).
Other clauses which run afoul of Article 81 of the EC Treaty have been found to be:
- Bans on parallel exports by third parties within the Community (Velcro/Aplix decision, July 12, 1985; Winthrop E.C.J. judgement, Oct. 31, 1974).
- Exclusive purchasing obligations for goods other than those that are crucial for the quality of the goods manufactured under the license.
- Obligations of the licensee to sell the goods at a priced fixed by the licensor.
- Obligation of the licensee to manufacture at designated establishments, except if this is required to ensure the quality of the goods (Campari decision, December 23, 1977).
On the other hand, the following clauses have been exempted and allowed in most cases under Article 81(3), as "improving the production and distribution of goods in the Community, while allowing consumers a fair share of the resulting benefit":
- Exclusive licenses, when the exclusivity is necessary to ensure the licensee a sufficient profitability on its investments (Campari decision, point III.A.1).
- Prohibition on the licensee to manufacture or sell contemporaneously the goods bearing the trademark of a competitor (Campari decision, point III.A.1; Moosehead/Whitbread decision, point No. 15). It has also been commented that such a clause does not inherently restrict inter-brand competition and hence shouldn’t be deemed invalid under Article 81(1) (see Aldo Frignani, Trademark Licensing and EU Antitrust Law, Proceedings from the LES European Conference, Venice, Sept. 1999, pp. 222-232.)
- Prohibitions on active sales outside the territory of the license, provided the prohibition does not extend to passive sales outside the territory, from unsolicited buyers. The Commission has given a useful definition of active and passive sales in the recent Guidelines on Vertical Restraints, October 13, 2000, which in particular defines commerce on the Internet as being passive sales, unless there is actual evidence that the web site primarily targets a consumer in another territory (or consumer group allocated to another distributor), by the use of banners or links on the sites of providers specifically available in such other territory or to such other consumer group, or by the use of unsolicited e-mail as a form of direct marketing (see document No. 2000/C 291/01; paragraphs 50 and 51).
It is worthy noting that the above-mentioned forms of contractual frameworks for trademark licenses are generally not considered vertical agreements, which are defined as contracts for the purchase, sale or re-sale of goods and/or services between suppliers and buyers which are at a different level on the production or distribution chain. These vertical schemes are typically characterised as franchise and distribution agreements. Because of their importance in the development of a European consumer market and of market competition in the EU, the Commission has adopted a Block Exemption Regulation on Vertical Agreements and Concerted Practices (EC/2790/1999 of Dec. 22, 1999) in order to facilitate and clarify the exemptions from prohibition under Article 81(3) of the EC Treaty. However, since agreements which are primarily trademark licenses do not provide for the purchase and sale of goods from the licensor to the licensee, they are excluded from the scope of the Block Exemption.
Hence, it shall continue to be necessary to assess the compliance of trademark licensing agreements with EU antitrust law on a case by case basis, based on the criteria set out in Article 81, which broadly prohibits any business practices which affect trade between Member States and have the object or effect of preventing, restricting or distorting competition in the Common Market. Only where it can be proven to have a beneficial effect in terms of quality, price and choice for European consumers can a restrictive trademark license agreement be upheld as legally valid in the European Union.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.