A trademark is one of those assets that never appears on the balance sheet yet can generate more revenue than almost anything else a business owns. The way to turn it into revenue without selling it, and without losing ownership, is a licence agreement. From franchise chains to character licensing, from regional manufacturing deals to expansion into adjacent product categories, this agreement sits at the foundation of many business models. This article covers the legal framework of trademark licensing and the clauses that must appear in the agreement.
The Difference Between a Licence and an Assignment
These two concepts are often confused, but their consequences are opposites:
| Licence | Assignment | |
|---|---|---|
| Ownership | Stays with the trademark owner | Changes hands |
| Duration | Fixed term or indefinite | Permanent |
| Revenue | Recurring (royalty) | One-off payment |
| Control | The owner carries out quality control | The acquirer is free |
| Reversion | Reverts to the rights holder when the agreement ends | No reversion |
We cover the assignment process separately in Trademark Assignment and Inheritance.
Types of Licence
Exclusive licence
The trademark owner cannot grant a licence to anyone else for the same scope. Unless the agreement provides otherwise, the owner cannot use the mark within that scope either. This is the strongest position for the licensee — and its price is naturally higher.
An exclusive licensee is, as a rule, entitled to act against infringements without needing the trademark owner to bring the action. It is important for the boundaries of this authority to be clearly set out in the agreement.
Non-exclusive (simple) licence
The trademark owner continues to use the mark themselves and can also grant licences to more than one party. This is preferred in models aimed at broad distribution.
Partial licence
A licence can be limited to specific goods and services, a specific geographic region, or a specific sales channel. For example, use of the mark might be permitted only for class 25 products, only in a particular region, and only in physical stores.
Clauses That Must Be in the Agreement
The backbone of a trademark licence agreement is made up of the following headings:
- Parties and trademark information: Registration numbers and classes should be listed individually. Vague expressions such as "all my trademarks" generate disputes.
- Type of licence: Exclusive or not? This single sentence determines the value of the agreement.
- Scope: Which goods and services, which geography, which sales channels.
- Term and renewal: Start date, end date, conditions for automatic renewal.
- Fee and payment: Fixed fee, percentage of turnover, per-unit fee, or a hybrid model. Minimum guaranteed fee and reporting periods.
- Audit right: The trademark owner's authority to inspect the licensee's records.
- Quality control: Brand usage guidelines, product quality standards, an approval mechanism.
- Sub-licensing: Whether the licensee may pass the licence on to someone else.
- Infringement monitoring: Who acts, and how, against third-party infringements.
- Termination and its aftermath: Grounds for termination, the period for selling off stock, ending use of the mark.
- Dispute resolution: The competent court or arbitration.
Quality Control: The Heart of the Agreement
The most neglected yet most critical clause in licence agreements is quality control. The reason is simple: a trademark gives the consumer a guarantee of origin and quality. If the licensee manufactures a low-quality product, you are the one who suffers the damage.
An effective quality-control clause includes:
- A requirement for prior written approval of the product and packaging
- An obligation to comply with the brand usage guidelines (logo proportions, colour codes, typography)
- The right to take samples and carry out inspections
- A cure period and a right of termination in the event of non-compliance with standards
- An approval process for advertising and marketing materials
Why Does Registering the Agreement Matter?
A licence agreement is valid between the parties regardless; but if it is not registered, it may not be enforceable against good-faith third parties. In practice this means: if the trademark owner assigns the mark to someone else, there is a risk that the new owner will not recognise your licence.
Registration also brings the following benefits:
- It documents the licensee's authority to act against infringements.
- It presents the mark to banks and investors as a revenue-generating asset.
- It documents the relationship for accounting and tax purposes.
Registration is carried out through TÜRKPATENT's electronic filing system; we explain the process in our EPATS Guide.
A Licence Removes the Risk of Non-Use Cancellation
Even where the trademark owner does not use the mark themselves, use by a third party with the owner's consent counts as the owner's own use. This is an important tool for companies with a broad portfolio that do not actually operate in every registered class: by licensing an unused class, you generate revenue and eliminate the cancellation risk at the same time.
To rely on this, the licensee's use also needs to be documented: sales reports, invoices and packaging samples should be shared with you under the agreement. See our Trademark Use Requirement article for detail on the use requirement.
How Does It Relate to Franchising?
A franchise agreement includes a trademark licence but is a broader structure than one: alongside use of the mark, it adds a business system, transfer of know-how, training, a supply chain and operational standards. In other words, every franchise includes a trademark licence, but not every trademark licence is a franchise.
If you are considering growing a chain, having the mark registered is a precondition — otherwise you would be selling a franchisee nothing more than a "right of use," which is a legally weak foundation.
How Is the Licence Fee Set?
There is no single correct way to calculate the fee; four models are common, varying by sector and the mark's strength:
- Percentage of turnover (royalty): The most common model. A set percentage of the licensee's branded-product sales is paid. Which turnover figure applies (gross, net, after returns) should be defined in the agreement.
- Fee per unit: Preferred for products where production volume is easily measured; reporting is simpler.
- Fixed periodic fee: Offers predictability but stops you sharing in the mark's growth.
- Minimum guarantee plus royalty: The standard in professional agreements. The licensee pays a minimum fee even without sales; royalty kicks in as sales grow.
The minimum guarantee clause is the most effective tool for preventing a licensee from "reserving" the mark without actually using it. It is also common to add a performance condition: if a set sales target is not met, the exclusive licence converts to a non-exclusive one, or the agreement is terminated.
What Happens After Termination?
The part of the agreement that generates the most disputes is the moment it ends. What needs to be written down:
- Stock sell-off: How long, and through which channels, can remaining branded products be sold?
- Physical assets: What happens to signage, packaging and production moulds?
- Digital assets: Who keeps the domain name, social media accounts and advertising accounts? Without this clause, an account built up over years can stay with the licensee.
- Customer data: The fate of personal data must be arranged in line with the applicable regulations.
- Non-compete: Whether the licensee may set up a similar brand after termination.
When these clauses are written from the outset, the separation is painless; when they are not, the separation means litigation.
Tax and Accounting Dimension
Licence income is taxed, for the trademark owner, as income from an intangible right. For licences granted abroad, withholding tax and double-taxation treaties come into play. Stating clearly, when drafting the agreement, whether the fee is gross or net and who bears the withholding tax prevents disputes later on.
Common Mistakes
- A verbal agreement. Permission granted without a written agreement cannot be proven once the relationship breaks down.
- Leaving the scope undefined. If the class, region and channel are not specified, the licensee will interpret the boundaries in their own favour.
- Not registering it. Leaves the licence unprotected in the event of an assignment.
- Leaving termination unaddressed. What happens to signage, stock and social media accounts once the agreement ends?
- Skipping the quality-control clause. A mark's reputation erodes quickly under uncontrolled use.
Build Your Licence Agreement With Webx
A trademark licence, structured correctly, delivers recurring revenue and controlled growth; structured poorly, it can cost you control of your own mark.
At Webx we support trademark owners in drafting licence agreements, registering them, and managing the process. Explore our legal protection service or get in touch.