The Risks a Licensor Poses to a Licensee: How Can They Be Limited?

Most form license agreements assume that licensees pose greater threats to licensors than the other way around.  Aside from the bargaining power held by brand owners, which allows them to demand more in a contract than they themselves will deliver, most licensing professional assume that the deal’s real risks are posed by scandal-prone licensees like apparel manufacturers who depend on sweat-shop labor or toy companies whose gadgets choke toddlers.  Licensees are not generally allowed to argue (or if they argue are generally ignored) that licensors pose the same sorts of risks to them.  Should this be the case?  Should licensees seek – and be unwilling to do deals if they are not granted – protection from the potential scandals and mistakes of licensors in whose marks they invest?  It depends.

One example: What could be safer than the mark of one of the most popular NFL teams in existence: the Washington Redskins?  Not much, from the perspective of most licensees.  Yet the Redskins own name has become a lightning rod for the opposition of Native Americans to the use of historical slurs as team names.  The Trademark Trial and Appeal Board concurred by canceling the Redskins’ registration of their own mark.   The Redskins are appealing that decision – continuing to play, and have t-shirts sold, under their long-time name – but unless the decision is reversed they may be denied, and their licensees may be denied, protection in the use of a name in which they all made a substantial investment.[1]  More important, even if protection for the marks were upheld, what is it worth to a licensee whose use of it is protested every time he tries to sell another t-shirt?

Another example:  What could be safer, if your business depends on popular film marks, than licensing rights to a second sequel to a world-famous comedy film franchise?  Not much, unless the film happened to be the most recent Austin Powers movie, originally named “Austin Powers in Goldmember.”  The title’s arch satire surely renders it inoffensive to most people – but not to the owners of the even more valuable film franchise built around the names James Bond and “Goldfinger.”[2]  Threatened with a legal version of the bladed bowler thrown by Oddjob, Goldfinger’s chauffeur, New Line Cinema agreed to change the film’s name.   Where does that leave its licensees, the ones who have built products and packaging on a film name that no longer exists?  Without relief, if the license agreements they entered into are like most.

Licensees do consider risks posed by licensors, when those risks are evident. But not all such risks – like the risk that the word “Redskins” will become offensive, like the risk that even Austin Power will push the bounds of propriety too far – are always evident.   There are, however, ways that a licensee can at least ask for protection from them.

Bringing disrepute on the mark: a two-way street

Most of the protection a licensee can seek is simply a reciprocal version of the protection that licensors themselves demand.  In most license agreements, for example, the licensee agrees to a provision something like the following: “Licensee shall not, directly or indirectly, do anything that may have an adverse effect on Licensor’s ownership rights in the Licensed Marks or dilute or diminish the value, reputation or appurtenant goodwill thereof.”

In some agreements, the licensor will agree to some reciprocity, usually committing not to do anything that will have an adverse effect on the licensee’s business – but not avoiding adverse effects on its own marks or business. Why should a licensee not be able to terminate its own agreement if the licensor itself injures the value of its own mark – the only reason why a licensee is willing to become a licensee to begin with.  The only good reason is that the licensor is powerful enough to refuse the request; but it does not hurt to ask.

Losing Rights in the Licensed Mark

A licensee can also beef up the representations and warranties that it asks a licensor to make, or at least its own options if its legal expectations are not met.  Licensors sometimes represent and warrant ongoing ownership in their own marks; some licensors refuse.  But even in such cases, a licensee could reasonably ask for the right to terminate the contract if the licensor’s rights in the licensed mark (whatever the licensor represented or warranted in the agreement) disappear.  It may never obtain redress for the losses it incurred investing in a mark that has gone away, but it should not be liable for guaranteed royalties and other obligations associated with a deal that has lost all its value.

No smart licensor gives away anything it can keep.  But licensees who consider that even an apparently innocuous license could possibly subject them to embarrassment, controversy, and even the loss of trademark protection for the marks they take on, should spend some time thinking about, and requesting protection against, the risks that the marks they license will be a liability.

From the August 2002 issue of The Licensing Letter