What is a trademark license?

I want to make a souvenir using a popular character, but the character is probably registered as a trademark.
I don’t think I can use them without permission.

You are right.
If the character is registered as a trademark, using it without permission could be an infringement of the trademark.
You need to ask for permission to use the trademark.
This is called a “Trademark license”.

I see. License is a word I hear a lot.
What do I have to do to get a license?

Generally, a license is obtained from the trademark owner.
First, let’s go over the purpose of the license and then look at the types of licenses and the contents of the agreements in turn.

An attractive brand has high product value, and business using that brand power is attractive.
There are also cases where a company may want to use a well-known character as a billboard for their company.

In such cases, it is necessary to obtain a license to use the registered trademark.
However, many people may feel that a license agreement sounds like a high hurdle.

This article explains trademark licensing agreements and answers questions that may arise when signing a license agreement in Japan.

What is Trademark Licensing?

The owner of a registered trademark has a monopoly on the right to use that trademark.
Therefore, it is important to note that the unauthorized use of a registered trademark by others who do not have any rights to it will result in trademark infringement.

Therefore, if you want to do business using a registered trademark, you must obtain permission from the trademark owner to use that registered trademark.

For this purpose, it is common practice to conclude an agreement for the use of the registered trademark between the trademark right holder and the user.
This contract is called a license agreement, and as will be described in more detail later, the terms and conditions of use of the registered trademark as well as the royalty fees are agreed upon.

The person who permits the use of a trademark (the trademark owner) is called the “licensor” and the person who receives permission to use the trademark is called the “licensee”.

So in my case, all I have to do is ask the rights holder of the registered trademark of the character for permission to use it!

That is correct.
The Trademark Law provides that the owner of a trademark may grant permission to others to use the registered trademark (Trademark Law Articles 30 and 31). The license to use can then be registered with the Patent Office. We will look at this in more detail later.

Purpose of License

There are two types of licenses, depending on the purpose of the license.

1. Trademark value utilization type (intrinsic type)
By continuously using the trademark on quality goods and services, the trademark owner can accumulate consumer confidence in its goods and services.

In this way, the trademark itself becomes more appealing to the customer and creates value.
The original purpose of licensing is to take advantage of the appealing power of a trademark that has already accumulated credibility.

In the case of such a license, the licensor attempts to control the quality of the licensee’s goods and services so that the value of the trademark is not compromised. Consumers may also expect comparable quality for the licensee’s goods.

In this case, the attractiveness of the trademark is reflected in sales, and the license fee will often be based on sales proceeds.

2. Not exercising the right to prohibit use type
In addition to the original license, there are other types of licenses that are intended to obtain a covenant not to exercise prohibition rights from the trademark owner and to continue to safely use and sell his or her trademark.

For example, if the trademark of a brand you have launched is similar to a registered trademark of another trademark owner, you may find yourself in trouble when the trademark owner asks you to stop using the brand after it becomes popular (exercise of the right of prohibition).
In such cases, if the trademark owner grants permission to use a trademark similar to the registered trademark (without exercising the right of prohibition) through consultation between the parties, the trademark can be used as is.

The trademark owner has the benefit of earning royalties from the license agreement, and the licensee is willing to pay the royalties if it does not have to change the brand that has become so popular.

In the case of such licenses, unlike those that exploit the trademark value, the royalty fee will often be paid in a lump sum at the beginning, rather than based on sales.

Type of License

Next, let us review each of the multiple types of licenses.

1.　Exclusive license (exclusive right to use)
An exclusive license means that only the licensee has the exclusive right to use the product.
The trademark owner cannot grant an exclusive license to more than one person for the same content.
Nor can the trademark owner use the trademark within the scope of the exclusive license.
It is also possible to file a claim for injunction or damages for infringement, and the trademark owner has almost the same rights as the trademark owner.

Note that an exclusive license will not take effect unless it is registered with the patent office, so care should be taken to register it.
In practice, the exclusive nature of the license may be specified only in the contract between the parties, and registration may not be required.

2. Non-exclusive license (non-exclusive right to use)
This type of license is often used in business.
Unlike an exclusive license, the same content can be licensed to multiple licensees.

Although a non-exclusive license does not need to be registered with the Patent Office, it may be safer to register it to avoid problems in the event that the trademark owner or exclusive licensee later changes so that it can continue to be used.

Among the non-exclusive rights of use, there is also an “exclusive non-exclusive right to use,” which prohibits the trademark owner from licensing the use of the trademark to anyone other than this licensee.
In this case, the trademark owner and the exclusive non-exclusive licensee may use the trademark.

3. Sublicense
When a person who has received a license from the trademark owner grants a license to another person, it is called a sublicense.

Whether or not sublicensing is possible is to be agreed upon at the time of the license agreement. If a sublicensing agreement is to be made, it is necessary to check whether or not sublicensing is allowed in the original license agreement.

4. Cross-licensing
This may not be common in trademarks, but it is often used in patents.
In other words, it is a license agreement that allows both parties to use each other’s patented inventions in the event that Company Y wants to use the patented invention of Company X for its own product and Company X wants to implement the patented invention of Company Y.

In terms of trademarks, if two companies use each other’s trademarks to sell their respective collaborative products, they may enter into a cross-licensing agreement for each other’s trademarks.

When signing a license agreement, you may select the license type best suited to your business type from the above.
For example, in a franchise agreement, since the trademark will be used in multiple outlets, a non-exclusive license agreement would be suitable, and sublicenses are usually not allowed.

In addition, when becoming the exclusive distributor in Japan for a well-known brand of a foreign company, it is advisable to conclude an exclusive license agreement. However, in such cases, the royalty fee may be high, as described later, so it is necessary to proceed with the agreement carefully, taking the balance into consideration.

Contents of License Agreement

The license agreement should primarily address the following items, which should be clearly stated in the agreement

This section explains the main items based on the assumption of a trademark value-utilization type (original type) license agreement.

(i) Trademark rights and designated goods and services subject to the agreement
(ii) Licensing and registration of the right to use
(iii) Royalty fees (royalties)
(iv) Reporting method for royalty fees
(v) Quality control method
(vi) Contract period and region
(vii) Termination
(viii) Governing law

(i) Trademark rights and designated goods and services subject to the agreement
This is an important item to specify the rights that are the subject of the trademark license.
To identify the rights, a trademark sample, trademark registration number, designated goods and/or services, and the date of registration of establishment are specified.
Also, check in detail whether the goods/services for which the license is sought are covered by the trademark right in question, who the trademark owner is, how long the right is valid, whether any other licenses have been registered, etc.
This information can be verified by requesting the registry from the JPO.

(ii) Licensing and registration of the right to use
You should determine what kind of license is to be granted.
In the case of an exclusive license, it is also necessary to determine if the granted right to use will be registered with the Patent Office or not, and what the right to use will be until the license is registered with the Patent Office.
Furthermore, it is also necessary to determine whether or not sublicensing is possible.

(iii) Royalties (royalties)
Decide on the royalty as well as the royalty base (including details of the “net sales price”etc..), the method of royalty payment, taxes, late fees, etc.
From the licensor’s point of view, it may also be a good idea to set a minimum royalty fee.
Royalties will be explained in detail later.

(iv) Method of reporting royalties
If royalties are determined on a sales basis, it is necessary to report the amount and volume of sales at regular intervals, so a method for reporting and confirming such information should be determined.
For example, the following statement should be included in the agreement: “A royalty report shall be submitted every month (or every quarter or every year) within X days of the end of the relevant period.
If it is necessary to verify the appropriateness of the royalty report, an audit should also be determined.

(v) Quality Control Methods
Quality control should also be stipulated so that the licensor can control the products sold by the licensee to maintain a certain level of quality.
The licensor should also specify quality standards in the promotional materials for the goods sold by the licensee to ensure that the trademark is used appropriately.

(vi) Contract Term and Territory
Define the term of the license and the region in which the product is licensed to be sold.
For example, the contract term is set at one year from the date of issue, and the contract is automatically renewed for another year if there is no notice of intent to change or terminate the contract within a few months prior to the expiration date. The general practice is to automatically renew the contract for another year if there is no notice of intent to change or terminate the contract within a few months before the expiration date.

(vii) Termination
Determine the conditions under which the license agreement will be terminated.
It is a good idea to determine the conditions for mid-term termination, how the inventory will be sold at the end of the license agreement (i.e., whether a sell-off period will be allowed), etc.

(viii) Governing law and court of jurisdiction
If the contract is international, it would be advantageous to designate a location that is easy for the person in charge or his/her representative to get to in the event of a dispute, and to ensure that the contract is governed by the laws of his/her own country.
In the case of a domestic contract, designate a court that is easy to get to.

The contents of the contract will have a significant impact on your business, so do not be hasty and take your time to consider the details.
If you have any concerns at all, we recommend that you consult with a patent attorney who is an expert in intellectual property matters.

We have an Strategic Station for Intellectual Contract that provides support for the conclusion of contracts related to intellectual property and other contract-related work.

What is the market rate for licensing fees?

Licensing fees are called royalties.

Running Royalty
A license fee (%) multiplied by sales or sales volume is paid at each period specified in the contract.
The market rate is around 3%, with a negotiated rate of 4-10% depending on the value of the registered trademark.
The higher the brand value and name recognition, the higher the license fee (%), and the type of license (exclusive or not) also has an impact.

In the case of an exclusive license agreement, the licensor may require a “minimum deposit” to ensure that licensing income is generated even if no sales are made at all.

Initial Royalty
This is a method in which a lump-sum initial payment is made at the time the license agreement is concluded, with no additional payments thereafter.
Since it is not dependent on sales, there is a risk of not receiving additional royalty income even if the product becomes a hit, but it is easier for the licensee to conclude a contract because the expenditure is fixed.
This method is often used in the case of licensing of non-exercise of prohibition rights.

Licensing fees vary depending on the type of license.
If an exclusive license is established, the trademark owner will also not be able to use the trademark, giving the licensee the same rights as the trademark owner, so a higher royalty can often be set than in the case of non-exclusive license agreement.
In any case, one must carefully consider the advantages and disadvantages of the method of determining royalties and consider the contract method with the least risk.

Summary

So many things to consider well in advance when signing a licensing deal!

Yes, you are right.
If you negotiate with licensors without thinking, you may be taking a big risk, so consult a patent attorney if you have any concerns.

We hope you enjoyed this explanation of licensing agreements.
You should start by considering whether to enter into a license agreement for a well-known trademark or to use your own trademark for the purpose of developing your own brand, but you should also make sure that your brand’s trademark is not already registered.

First, use amazingDX to check the registrability of your brand’s trademark.
With AmazingDX, you can easily check the possibility of registration.
If you find that your trademark has a good chance of being registered, you can easily order to file an application online.
We hope you will take advantage of this service.

https://amazing.dx.harakenzo.com/app/search/