Trademark Licensing Agreement Format for Businesses

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Introduction

A registered trademark is one of the few business assets that can generate revenue without the owner manufacturing a single additional product or opening a single new outlet. This is achieved through licensing: the trademark owner permits another party to use the mark in exchange for a fee, royalty, or other consideration, while retaining ownership of the mark itself.

Trademark licensing is common across a wide range of business arrangements in India, including franchise operations, manufacturing under a brand name by a third-party manufacturer, regional distribution arrangements where a distributor is permitted to use the brand in marketing, multi-brand retail arrangements, and group company structures where a holding company owns the trademark and licenses it to operating subsidiaries.

However, a trademark licence that is poorly drafted, or that exists only as an informal understanding without a written agreement, creates significant risk for both parties. The licensor risks losing control over how the mark is used, which can damage the brand or, in certain circumstances, affect the validity of the trademark registration itself. The licensee risks operating under a brand with no certainty about the terms of use, the duration of the arrangement, or what happens if the relationship ends.

This guide explains the structure and essential clauses of a trademark licensing agreement under Indian law, the difference between registered and unregistered users, and the key considerations for businesses entering into licensing arrangements as either licensor or licensee.

For drafting, reviewing, and registering trademark licensing agreements, Quick Startup India provides complete support for businesses on both sides of a licensing arrangement.

What Is a Trademark Licensing Agreement

A trademark licensing agreement is a contract under which the owner of a registered trademark (the licensor) grants another party (the licensee) the right to use the trademark in connection with specified goods or services, for a specified period, within a specified territory, subject to terms agreed between the parties.

Unlike a sale or assignment, which transfers ownership of the trademark, a licence leaves ownership with the licensor. The licensee receives only the right to use the mark on the terms set out in the agreement, and that right ends when the agreement ends, expires, or is terminated.

Trademark Licensing Under the Trade Marks Act, 1999

The Trade Marks Act, 1999 recognises the concept of “permitted use” of a trademark by a person other than the registered proprietor. A licensee whose use of the mark is recorded with the Trade Marks Registry as a “registered user” benefits from certain statutory protections, including the licensee’s use of the mark being treated, for certain purposes, as use by the registered proprietor, which can be relevant to defending the registration against a non-use cancellation application.

While recording a licensee as a registered user is not mandatory for a licence to be valid as a contract between the parties, it strengthens the licensee’s position and provides a public record of the licensing arrangement.

Why a Written Trademark Licensing Agreement Is Essential

Without a Written Agreement, Use May Not Be “Permitted Use”

If a trademark owner allows another party to use the mark without any written agreement, and a dispute later arises, it can be difficult to establish that the use was authorised “permitted use” under the Act as opposed to unauthorised use that the owner had simply failed to act against. A written agreement removes this ambiguity by clearly documenting that the use was licensed and on what terms.

Protecting Brand Standards and Quality Control

A licence agreement allows the licensor to impose quality control standards on how the mark is used, including specifications for products or services offered under the mark, packaging and presentation standards, and approval rights over marketing materials. Without such provisions, a licensee’s poor-quality products or inconsistent branding can damage the reputation associated with the mark, affecting the licensor’s broader business even outside the licensed territory or product category.

Clarity on Royalties, Term, and Termination

Disputes over licensing arrangements frequently centre on exactly these issues: how much is owed, for how long the arrangement runs, and under what circumstances either party can exit. A written agreement with clearly defined terms for each of these issues substantially reduces the likelihood of such disputes, and provides a clear basis for resolution if they do arise.

Risk of Losing Control Over the Mark

If a licensor allows extensive, long-term use of the mark by a licensee without a written agreement defining the scope and limits of that use, and without exercising any oversight, the licensor risks a future dispute in which the licensee claims rights to the mark, or claims that the arrangement was effectively a transfer of rights rather than a limited licence. A properly drafted agreement that clearly establishes the licensor’s continuing ownership and the limited, revocable nature of the licensee’s rights protects against such claims.

Essential Clauses in a Trademark Licensing Agreement

1. Parties and Recitals

The agreement should clearly identify the licensor (the registered proprietor of the trademark, with details of the trademark registration including registration number, class, and date) and the licensee (the party receiving the right to use the mark). The recitals section typically describes the background, including the licensor’s ownership of the mark and the licensee’s interest in using it for specified purposes.

2. Grant of Licence

This is the operative clause that defines the scope of the licence, and should specify:

• The specific trademark or trademarks being licensed, by registration number and class.
• The goods or services in connection with which the mark may be used.
• Whether the licence is exclusive (no one else, including the licensor, may use the mark for the licensed purposes), sole (only the licensor and the licensee may use the mark, no other licensees), or non-exclusive (the licensor may grant similar licences to other parties).
• The territory within which the licensee may use the mark, whether all of India, a specific state or region, or a specific set of outlets or channels.
• Whether the licensee may sub-license the mark to others, and if so, under what conditions.

3. Term and Renewal

The agreement should specify the duration of the licence, whether it is for a fixed term, renewable automatically unless terminated, or renewable only by mutual written agreement. Given that trademark registrations themselves require periodic renewal every 10 years, the licensing agreement’s term should be considered in relation to the underlying registration’s renewal cycle.

4. Royalty and Payment Terms

The financial arrangement is central to most licensing agreements and should specify:

• Whether the consideration is a one-time fee, a recurring royalty, a percentage of sales or revenue, or a combination.
• The basis on which any percentage royalty is calculated, such as net sales, gross sales, or a defined revenue metric, with a clear definition of that metric.
• The frequency of payment, such as monthly or quarterly.
• Any minimum guaranteed royalty payable regardless of actual sales, which is common in exclusive licensing arrangements to ensure the licensee makes meaningful efforts to use the mark.
• The currency of payment and treatment of applicable taxes, including GST on the licensing service and any TDS obligations.
• Audit rights allowing the licensor to verify the sales figures on which royalty calculations are based.

5. Quality Control and Standards

This clause should set out the standards the licensee must meet in using the mark, which may include product specifications, manufacturing standards, packaging and labelling requirements, and the licensor’s right to inspect the licensee’s facilities, products, or marketing materials, and to require corrective action if standards are not met.

6. Approval of Use of the Mark

The agreement should specify whether and how the licensee must obtain the licensor’s approval before using the mark in new contexts, such as new product lines, new packaging designs, or new advertising campaigns, and the timeline within which the licensor must respond to such requests.

7. Ownership and Goodwill

A clear clause confirming that the licensor remains the owner of the trademark, that any goodwill generated through the licensee’s use of the mark accrues to the licensor, and that the licensee acquires no ownership rights, registration rights, or rights to apply for registration of the mark or any similar mark, is essential to prevent disputes over ownership arising from the licensee’s use.

8. Registered User Recordal

The agreement should address whether the parties intend to record the licensee as a registered user with the Trade Marks Registry, which party is responsible for filing the application for recordal (typically a joint application by both parties), and how the costs of such recordal are to be borne.

9. Infringement and Enforcement

This clause should specify the licensee’s obligation to notify the licensor of any actual or suspected infringement of the mark that comes to the licensee’s attention, and clarify which party has the right to take enforcement action against infringers, since the right to sue for infringement generally rests with the registered proprietor unless the licence agreement and registered user recordal provide otherwise.

10. Confidentiality

Where the licensing arrangement involves the sharing of business information, formulations, processes, or other confidential information beyond the trademark itself, a confidentiality clause protecting such information should be included.

11. Termination

The agreement should specify the grounds on which either party may terminate, which typically include material breach not remedied within a specified cure period, insolvency of either party, and in some cases termination for convenience with notice. The clause should also address what happens to existing stock bearing the mark, signage, and marketing materials at the time of termination, often providing a sell-off period during which the licensee may dispose of existing inventory.

12. Post-Termination Obligations

Following termination, the agreement should require the licensee to immediately cease all use of the mark beyond any agreed sell-off period, remove the mark from signage, packaging, and marketing materials, and not represent any continuing association with the licensor or the mark.

13. Indemnity

This clause allocates responsibility for losses arising from breaches of the agreement, including the licensee’s indemnification of the licensor for losses arising from the licensee’s use of the mark in a manner that breaches the agreement or applicable law, and in some arrangements the licensor’s indemnification of the licensee against third-party claims that the licensed mark infringes another party’s rights.

14. Governing Law and Dispute Resolution

The agreement should specify the governing law (typically Indian law for domestic arrangements), the courts or arbitral forum with jurisdiction over disputes, and the procedure for dispute resolution, including whether arbitration is mandatory before litigation can be pursued.

15. Assignment

This clause addresses whether either party may assign their rights or obligations under the agreement to a third party, which is particularly relevant if either party undergoes a merger, acquisition, or corporate restructuring during the term of the licence.

Exclusive, Sole, and Non-Exclusive Licences: Choosing the Right Structure

Exclusive Licence

An exclusive licence grants the licensee the sole right to use the mark for the specified goods, services, and territory, to the exclusion of everyone else, including the licensor itself. This is appropriate where the licensor wants to fully delegate operations in a particular territory or category to a single licensee, such as a master franchise arrangement for a specific country or region.

Sole Licence

A sole licence permits both the licensor and the licensee to use the mark, but no other party may be granted a licence for the same scope. This structure is less common but may suit arrangements where the licensor wants to retain its own operations in the licensed territory or category while also permitting one licensee to operate there.

Non-Exclusive Licence

A non-exclusive licence permits the licensor to grant similar licences to multiple licensees for the same or overlapping goods, services, and territories. This structure is typical for franchise arrangements where multiple franchisees operate under the same brand in different locations, or for manufacturing arrangements where the licensor engages multiple contract manufacturers.

The choice of structure has significant implications for royalty rates, as exclusivity typically commands higher royalty rates or minimum guarantees, since the licensor is foregoing the ability to license others in the same scope.

Trademark Licensing in Common Business Arrangements

Franchise Agreements

Franchise arrangements are among the most common forms of trademark licensing in India. The trademark licence is typically one component of a broader franchise agreement that also covers operational manuals, training, supply arrangements, and ongoing franchise fees. The trademark licensing clauses within a franchise agreement should be drafted with particular attention to quality control, since brand consistency across franchise outlets is central to the franchise model.

Contract Manufacturing Under a Brand Name

Where a brand owner engages a third-party manufacturer to produce goods that will be sold under the brand owner’s trademark, the manufacturing agreement should include trademark licensing provisions authorising the manufacturer to apply the mark to the goods and packaging, strictly for the purpose of manufacturing for the brand owner, with no rights to use the mark for any other purpose, including selling the goods to any party other than the brand owner.

Group Company Arrangements

Where a trademark is owned by a holding company or a designated IP-holding entity within a corporate group, and used by one or more operating subsidiaries, a licensing agreement between the IP-holding entity and each operating entity formalises the arrangement, supports the commercial rationale for any intra-group royalty payments from a tax perspective, and ensures the trademark’s use across the group is properly documented.

Distribution and Marketing Arrangements

Where a distributor is permitted to use the brand owner’s trademark in advertising, signage, and marketing of the distributed products, a limited-scope licence covering only such marketing use, distinct from a licence to apply the mark to products themselves, is appropriate and should be scoped accordingly.

Tax Considerations in Trademark Licensing

GST on Licensing Fees and Royalties

The licensing of a trademark is treated as a supply of service for GST purposes, and royalty or licence fee payments are generally subject to GST at the applicable rate. Both parties should factor GST into the structuring of payment terms, and the agreement should specify whether amounts mentioned are inclusive or exclusive of GST.

TDS on Royalty Payments

Royalty payments made under a trademark licensing agreement may attract tax deduction at source under the Income Tax Act, and the agreement should reflect the parties’ understanding of how such deductions will be handled, particularly in arrangements involving payments to or from group companies.

Transfer Pricing for Cross-Border and Related-Party Licences

Where a trademark licensing arrangement involves related parties, whether across borders or within a domestic corporate group, the royalty rate and terms should be consistent with arm’s length principles, as related-party licensing arrangements are subject to scrutiny on transfer pricing grounds.

Registering the Licensee as a Registered User

What Registered User Status Means

Recording a licensee as a “registered user” with the Trade Marks Registry creates a public record of the licensing arrangement and provides the licensee with certain statutory protections regarding the validity of their use of the mark.

Process for Recordal

An application for registered user recordal is filed jointly by the registered proprietor and the proposed registered user, supported by the licensing agreement or relevant extracts demonstrating the relationship between the parties, the nature of the permitted use, and the duration of the arrangement. The Registry examines the application and, if satisfied, enters the registered user’s details against the trademark registration.

When Recordal Is Particularly Important

Recordal is particularly valuable in long-term, exclusive licensing arrangements, and in situations where the licensor’s own use of the mark may be limited or absent in a particular territory or category, such that the licensee’s use is the primary evidence of the mark being in active use, which can be relevant if the registration is challenged on grounds of non-use.

Common Mistakes in Trademark Licensing Agreements

Failing to Define the Scope of the Licence Precisely

Vague descriptions of the licensed goods, services, or territory create ambiguity that can lead to disputes over whether a particular use by the licensee falls within or outside the scope of the licence. The licensed scope should be defined with the same precision as the trademark registration itself.

No Provision for What Happens to Stock at Termination

Agreements that are silent on the treatment of existing inventory bearing the mark at the time of termination leave both parties without a clear answer when the relationship ends, often resulting in either the licensee continuing to sell branded stock indefinitely or the licensor demanding immediate destruction of commercially valuable inventory, neither of which serves either party well without prior agreement.

Royalty Tied to an Undefined Revenue Metric

Royalty clauses that refer to “sales” or “revenue” without defining the term precisely, including whether discounts, returns, taxes, and shipping charges are included or excluded, are a frequent source of disputes when the parties calculate the royalty differently.

No Quality Control Mechanism

Licensing agreements that grant the right to use the mark without any corresponding quality control or approval rights leave the licensor unable to prevent the licensee from using the mark in a manner that damages the brand, even where such use technically falls within the licensed scope.

Treating the Licence as a De Facto Assignment

Agreements drafted so broadly, for such a long term, and with so little oversight that they function in practice as a transfer of the mark, while being labelled a “licence,” can create disputes over the true nature of the arrangement and the licensee’s rights if the relationship later breaks down.

Frequently Asked Questions

Conclusion

A trademark licensing agreement converts a brand from an asset that only its owner can use into a commercial relationship that can generate licensing revenue, support franchise expansion, enable contract manufacturing, and structure intra-group brand usage, all while preserving the owner’s underlying rights to the mark.

The value of this arrangement depends entirely on the quality of the agreement governing it. A licence that clearly defines its scope, sets out royalty terms with precision, establishes meaningful quality control, and addresses what happens at termination protects both the licensor’s brand and the licensee’s investment in operating under it. A licence that exists informally, or that is drafted without attention to these elements, leaves both parties exposed when disagreements arise, as they commonly do over time in any ongoing commercial relationship.

Define the scope of the licence precisely. Set out royalty terms with a clearly defined revenue metric. Build in quality control and approval rights. Address termination and post-termination obligations from the outset. And consider registered user recordal for significant or long-term arrangements.

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Anjali Pandey

Anjali is a Digital Marketing Expert at Quick Startup India  who builds websites that rank and convert. She specializes in SEO-driven web development, helping people find the right legal help online.