Transitional Trademark License Clauses (Pro-buyer)

Transcription

1 Transitional Trademark License Clauses (Pro-buyer) Daniel Glazer, Fried, Frank, Harris, Shriver & Jacobson LLP and PLC Intellectual Property & Technology Form clauses for a buyer's transitional use of a seller's trademarks after a corporate transaction, drafted with terms favorable to the buyer. These clauses can be used in connection with an asset purchase, stock purchase, merger or auction where the buyer is obtaining the seller's assets, entities or business but is not obtaining long-term rights to one or more of the seller's trademarks after closing. These Standard Clauses have integrated drafting notes with important drafting and negotiation tips. This is just one example of the many online resources Practical Law Company offers. To access this resource and others, visit practicallaw.com. Read This Before Using Document Scope of Standard Clauses In a corporate transaction, the target company or acquired business may use certain trademarks the seller intends to retain after the transaction. In this case, the buyer may need the right to continue using these trademarks for a temporary period after the closing while it transitions away from their use. This issue is common in a carve-out or divestiture transaction (see Practice Note, Carve-out Transactions ( These Standard Clauses are for use in a purchase or merger agreement. They allow a target company or acquired business to make limited use of certain of the seller's trademarks that were used in the seller's or target company's business before the closing for a relatively brief wind-down period (typically 120 days or less). These clauses are drafted in favor of the buyer and therefore include a broader license for the buyer and its affiliates to use the seller's marks during the transition period in a manner consistent with the use of the marks before the transaction. If the buyer requires use of the seller's marks for a longer transition period (typically more than 120 days), it is customary for the parties to enter into a long-form transitional trademark license agreement. This is so the agreement may include provisions covering situations, such as inspection rights and infringement claims, that may arise at a later date, and are therefore more appropriately dealt with in a separate document. If possible, a long-form license agreement is negotiated before signing and is attached as an exhibit to the purchase or merger agreement. Alternately, the parties may include a covenant to negotiate a long-form license agreement between signing and closing of the transaction. For model transitional trademark license clauses drafted in favor of a seller, see Standard Clauses, Transitional Trademark License Clauses (Pro-seller) ( Learn more about Practical Law Company practicallaw.com

2 Transitional Trademark License Clauses (Pro-buyer) For more on trademark and other intellectual property issues in corporate transactions, see Practice Notes, Intellectual Property: Stock Purchases and Mergers ( and Intellectual Property: Asset Purchases ( For an overview on conducting trademark due diligence, see Practice Note, Trademark Due Diligence in Mergers and Acquisitions ( Assumptions These clauses assume that the seller owns all of the seller marks to be used during the transition period. If an affiliate or affiliates of the seller own any applicable marks, these clauses should be modified accordingly. Similarly, the clauses include bracketed language that should be modified based on the transaction structure and whether the buyer is acquiring a specific target company or the seller's business (for example, in an asset sale), referred to respectively as the "Company" and "Business" in these Standard Clauses. If the buyer is acquiring multiple seller entities, this language should be revised to refer to the companies, rather than a single acquired entity. Defined Terms Certain terms are capitalized but not defined here because they typically are defined elsewhere in the purchase or merger agreement (for example, Business,,, Closing Date and Law). These Standard Clauses (including the defined terms) should be modified according to the particular purchase or merger agreement into which they are incorporated. 1. Marks. (a) Retained Ownership. acknowledges that (i) as between and, owns all trademarks, service marks, trade dress, trade names, and domain names (collectively, "Trademarks") consisting of or incorporating [IDENTIFY MARKS] (collectively, the " Marks"), and (ii) has no rights, and is not acquiring any rights, to use the Marks after the Closing Date, except as stated in this Section [SECTION NUMBER]. Retained Ownership This clause identifies the seller marks that have been used by the target company or acquired business before the transaction and which the buyer must generally cease using after the closing date. If these provisions cover several different marks, a disclosure schedule can be used to identify the relevant marks. During due diligence, the buyer should identify all marks owned by the seller and used by the target company or acquired business. It should ensure that the marks covered by these transitional trademark clauses are not overbroad and that any marks important to the target company or acquired business are transferred to the buyer or covered by a long-term license. 2

3 For a checklist on trademark due diligence in M&A transactions, see Trademark Due Diligence in Mergers and Acquisitions Checklist ( Where the buyer is acquiring certain seller entities and the seller holds record ownership of any marks that those entities should own, the buyer should seek to have the seller transfer ownership before signing. If this is not possible, the buyer should seek a covenant specifying the relevant marks and jurisdictions, as applicable, and requiring the seller to make the transfer before the closing date or as soon as practicable after it. If the transfer in certain jurisdictions cannot be made for a significant time after the closing date, the buyer can seek a licensing arrangement for the right to use the marks until the transfer is practicable. The seller should ensure that the retained seller marks are defined to include all relevant owned marks. The seller may also seek to have the definition of seller marks expressly include all registrations and applications for registrations for any of the seller marks and broaden the definition to cover: Any and all variations of or acronyms for any of the seller marks. Any marks confusingly similar to or dilutive of the seller marks. The seller may also seek to include an express acknowledgement by the buyer that as of the closing date any and all rights of the target company or acquired business to use the seller marks will terminate and revert to the seller. If any seller marks are owned by the target company or acquired business, the marks should be transferred to the seller before the closing date. If it is not possible to transfer the marks before the closing date or the transfer may not be effective, then the seller may require a: Covenant from the buyer agreeing to take all actions necessary or reasonably requested by the seller to transfer all rights. Broad exclusive license to the seller covering the period before the rights are transferred, subject only to the permitted uses specified in these clauses. Corporate Names During due diligence, the seller should identify all relevant entities with corporate names that incorporate any of the seller's marks. If the buyer is acquiring any entities with corporate names that incorporate any of the seller's marks, the seller should consider including an additional clause obligating the buyer to begin changing the relevant entities' names within a specified period of time after closing. If the name is used solely as a corporate name and is not otherwise known by the public, a brief period to begin transitioning, such as ten days, may be sufficient. However, the buyer may require a longer period of time or broader rights if the name is used as a trademark or is otherwise known by the public. For an example of this clause, see Standard Clauses, Transitional Trademark License Clauses (Proseller), Corporate Names ( (b) Transitional Trademark License. Effective as of the Closing Date, hereby grants to and its Affiliates[, including the Company] (collectively, the "Licensees"), for [one-hundred and twenty (120) days] after the Closing Date (the "Transition Period"), a worldwide, royalty-free, non-transferable, non-exclusive irrevocable license to use the Marks in connection with the continued operation of the Business 3

4 Transitional Trademark License Clauses (Pro-buyer) in a manner consistent with the ['s/company's] use of the Marks prior to the Closing Date, including (i) in connection with the manufacture, sale, distribution, promotion, advertising and marketing of the [Company's/Business'] goods and services, and (ii) on [the Company's/Business'] existing stocks of signs, business cards, packaging, letterheads, invoice forms, Internet and Intranet websites, advertising, marketing and promotional materials, machinery and equipment, inventory and other documents and materials containing or bearing any Mark ("Existing Stock"). Each Licensee may sublicense the rights granted in this Section [SECTION NUMBER] to its authorized distributors, vendors, subcontractors and resellers acting on behalf of the Licensee in connection with the continued operation of the Business during the Transition Period. All goodwill generated by the Licensees' use of the Marks as permitted in this Section [SECTION NUMBER] inures solely to 's benefit. Transitional Trademark License This provision includes a broad license for the buyer to continue using the applicable marks owned by the seller during the transition period as necessary for the buyer or target company to operate the business in a manner consistent with the use of the marks by the seller or target company before the transaction. This includes the manufacture and sale of goods and services, as applicable, as well as use with existing stock of materials and inventory. The license extends to the buyer's affiliates, including, if applicable, the target company, and includes a right to sublicense the rights. The license covers a 120-day wind-down period. While a shorter transition period can be specified, the parties should consider entering into a long-form transitional trademark license agreement if a transition period greater than 120 days is used. The buyer should ensure that the specified transition period and scope of use are sufficient for it to operate the acquired business or for the target company to operate after closing. For example, the above clause, while broadly covering uses made before the transaction, does not permit any new uses of the marks. The buyer's due diligence of the acquired business's or entities' use of the seller marks will be important for these purposes. Where a broader or long-term license is required, the buyer may seek a long-form transitional trademark license agreement. License Scope It is generally reasonable for the seller to grant the buyer those rights necessary for a proper transition. However, the seller should limit the scope of the license to only those rights and the territory required for the buyer to operate the target company or acquired business after closing. For example, depending on the circumstances: The buyer may only require use of the marks for the wind-down of existing stock of materials and inventory, rather than a broad license covering all pre-existing activities such as manufacturing. The buyer may not require a license to use the marks outside of the US. The buyer's affiliates may not require a license. The buyer may not require the right to sublicense the rights to third parties. 4

5 In evaluating the duration of the transition period, the seller may seek to specify that the buyer must cease using the seller marks as soon as reasonably practicable after the closing date and no later than the specified end date. After the transition period, the seller may also expressly require the buyer to remove or destroy or cause others to remove or destroy all seller marks from any remaining stock of materials and inventory. Where, as in the above provision, the license permits the buyer to use the seller marks in connection with an inventory of existing products, the seller may want to specify a distinct inventory sell-off period or other additional requirements. For example, after the transition period, the buyer may be permitted to continue using the inventory as they are part of the acquired assets but be required to completely and permanently cover, delete or destroy the seller marks. Disclaimer, Indemnification and Equitable Relief In addition to refining the scope and nature of the license, the seller should also seek to include the following additional provisions to limit the risks arising from the buyer's use or misuse of the marks and protect the seller's reputation: A disclaimer of all liability for the use of the trademarks and of any express or implied representations and warranties relating to the trademarks. An indemnity by the buyer for its use of the seller marks as permitted by or in violation of the agreement. This may be subject to a reasonable carve-out for infringement and dilution claims, as the seller is generally the party positioned to be aware of and defend these claims. An acknowledgement that misuse of the marks will cause irreparable harm to the seller and therefore the seller may prefer to prevent or mitigate a misuse of its marks by means of equitable relief, including an injunction, rather than relying on damages for breach of the agreement. The seller may also include an acknowledgement by the buyer that it will not permit its employees or others to hold themselves out as officers, employees or agents of seller or its affiliates when conducting business or enter into contractual arrangements. (c) [Transitional Domain Name License. Effective as of the Closing Date, hereby grants to the Licensees during the Transition Period a worldwide, royalty-free, non-transferable, exclusive license to use the following Internet domain names incorporating the Marks: [IDENTIFY DOMAIN NAMES] (the " Domains") as URLs in connection with the continued operation of the Internet and Intranet websites operated under those URLs prior to the Closing Date. shall maintain the registrations for the Domains in full force and effect for the duration of the Transition Period at 's cost and expense, unless directed otherwise by.] Transitional Domain Name License If the target company uses or acquired business use any domain names incorporating the seller marks that are necessary to operate the business after the closing, the buyer can include this optional clause. The license to the domain names in this clause is coterminous with the transition period as defined in the transitional trademark license provision, but can be modified to define a distinct period of time if appropriate. This provision also assumes that the website registration or registrations are owned by the seller, but that the website will be maintained and operated by the buyer or target company. 5

6 Transitional Trademark License Clauses (Pro-buyer) If these provisions cover a number of different domain names, a disclosure schedule can be used to identify the relevant domain names. In addition to securing the right to operate any necessary domain name through a license, the buyer should confirm that it will have the ability to maintain and operate the website or websites after the closing or whether the seller will control and operate the website or websites on the buyer's behalf during the transition period. If one or more relevant websites will be maintained and operated by the seller, the buyer should include a covenant obligating the seller to maintain and operate the site or sites as necessary in support of the buyer's or target company's business. This covenant can require the seller to maintain the site's or sites' existing content and functionality, unless changes are agreed to by the buyer. If one or more relevant domain names will in fact be owned by the buyer after the transaction, a license may not be required to the domain names themselves. However, the buyer should ensure any domain name that incorporates a seller mark is covered by a license. If the buyer needs to access or use on an ongoing basis any addresses for domain names that incorporate any seller marks, it should include: The express right to continue accessing and using the addresses. If necessary, an obligation for the seller to provide related services, such as support and forwarding. The buyer's obligation can be included in a related transition services agreement. For a model transition services agreement, see Standard Document, Transition Services Agreement ( us.practicallaw.com/ ). If a provision addressing domain names is included in the agreement, the buyer may seek to narrow the scope of the license. For example, the seller may specify that the buyer only has the right to use the seller domains during the transition period for the purpose of redirecting users to websites used by the buyer or target company. If the buyer will retain ownership of any applicable domain names after the closing, the seller should include a provision specifying that after the necessary transition period the buyer must transfer all rights to and control of the domain name back to the seller. (d) Quality Control. shall ensure the Licensees use the Marks only in the form and manner consistent with which, and in connection with goods and services of a level of quality equal to or greater than the quality of goods and services in connection with which, [/the Company] used the Marks immediately prior to the Closing Date. 6

7 Quality Control A trademark owner must exercise quality control over third parties' use of its trademarks to avoid: Damaging the reputation of its products or services. A naked license that can result in abandonment of a mark on the basis that the mark no longer functions as an indicator of source and uniform quality. This provision sets a minimum quality control requirement keyed to the seller's standards before the closing date. For a transitional use provision, this general standard is appropriate and typically reasonable from the buyer's perspective. For more on trademark quality control, see Standard Document, Trademark License Agreement: Drafting Note: Quality Control ( As part of its due diligence, the buyer should ensure that it understands the manner in which the seller marks have been used and whether there are any special requirements for use. If the use of the seller marks during the transition period is limited to winding down use of existing stock of materials and inventory, it is unlikely that any special requirements will need to be considered. To the extent that the buyer is using the marks to create new materials, additional requirements may be appropriate. To safeguard its marks, the seller should ensure that the transitional trademark license includes, at a minimum, a quality control provision consistent with the above provision. The seller should also consider including additional provisions relating to the protection of its trademarks, for example, covenants that: The buyer will ensure that all use and distribution of the seller marks and stock complies with applicable laws and industry practice. The buyer will not and will not permit others to: use any seller mark in a way that tarnishes, degrades, disparages or reflects adversely any of the seller marks or the seller's or its affiliates' business or reputation, or that dilutes or otherwise harms the value, reputation or distinctiveness of or the seller's goodwill in any seller mark; register or file applications to register any trademark that consists of, incorporates, is confusingly similar to or is a variation, derivation, modification or acronym of, any seller mark; or contest the ownership or validity of any of the seller marks. The seller may also consider including a right to terminate the license if the buyer, its affiliates or, if applicable, sublicensees, fail to comply with the license's terms and conditions or otherwise fail to comply with the seller's directions about the use of the marks. For examples of these additional provisions, see Standard Clauses, Transitional Trademark License Clauses (Pro-seller), Quality Control and Trademark Protection ( com/ ). 7

8 Transitional Trademark License Clauses (Pro-buyer) (e) Other Uses. Licensees may not use the Marks after the end of the Transition Period, except that Licensees may at all times after the Closing Date (i) retain and use, for Licensees' internal business purposes, records and other historical or archived documents containing or referencing the Marks; (ii) use the Marks to the extent required by or permitted as a fair use or otherwise under applicable Law, including uses that would not cause confusion as to the origin or sponsorship of a good or service; and (iii) refer on their websites and in their advertising, marketing and promotional materials to the historical fact that [the /Company] previously conducted the Business under the Marks. Other Uses This provision specifies certain permitted uses for the seller marks after the transition period. In addition to the right to retain materials for internal business purposes, this provision expressly permits the buyer to make uses of the mark on a non-trademark or fair use basis or as otherwise permitted or required by law. While the buyer would arguably have the right to make these uses of the marks absent this acknowledgement, it should seek to include them in the provision to avoid any unintended ambiguity or future dispute. The buyer can argue that the language is intended to ensure that it is made no worse off than any other third party. If the buyer is acquiring any entities with names that incorporate any of the seller's marks, it may also want to include an express right to state that any new entities were "formerly known" under the seller's name. The buyer's right to identify any entities in this manner should be expressly negotiated, as it will require the ongoing use of the relevant seller's marks in connection with any new marks. The seller may seek to limit this provision to the retention for internal business purposes of materials containing or referencing the seller marks. It may argue that regardless of any provision the buyer would otherwise be permitted to make non-trademark or fair uses of the marks or uses required or permitted by law. If the seller insists on an express right to additional uses for the marks after the transition period, such as ongoing use as part of a "formerly known" formulation, the seller should consider limiting the permitted time period for the use and the importance of obtaining indemnification from the buyer for any claims arising out of the buyer's use. Practical Law Company provides practical legal know-how for law firms, law departments and law schools. Our online resources help lawyers practice efficiently, get up to speed quickly and spend more time on the work that matters most. This resource is just one example of the many resources Practical Law Company offers. Discover for yourself what the world s leading law firms and law departments use to enhance their practices. To request a complimentary trial of Practical Law Company s online services, visit practicallaw.com or call Use of PLC websites and services is subject to the Terms of Use ( and Privacy Policy (