Limitations on Licensor's Liability: Can a Licensor Get Away with Capping Trademark Liability?
By Tara K. Gorman Partner, Perkins Coie LLP | May 01, 2011
In this tough economic environment, we are seeing people "cutting corners" and pinching pennies everywhere we go – whether it's the consumer looking for the best deal, the hotel operator doing everything in its power to maximize the value of every dollar in the annual budget, or the licensor taking steps to decrease its risk by capping its liability to a specific dollar amount. While it's admirable to get the most bang for your buck and reduce your risk of liability, can a licensor really get away with capping its trademark liability, when it has all the control over trademark issues? This is the topic that we will address in this article. We will start by explaining the basics of the licensor/licensee relationship and the types of indemnification provisions typically found in license agreements.
When a developer decides to use an established brand or "flag" on its hotel, it must first go through the process of obtaining the right to use the name of the brand, and all that goes with it - the development standards, operating standards. The licensor dictates every detail from the room size to the decor to the standards of management of the hotel.
License deals come in many forms. Some brands wrap up the license aspect of the deal and the management aspect of the deal into one document. In these cases, the hotel management agreement or operating agreement and the license to use the brand go hand-in-hand and the developer can not cut a deal where it can use the brand name unless it hires the brand as the hotel manager as well. In other cases, there are two or more documents governing the relationship. The License Agreement is the document in which the brand (the licensor) grants the developer (the licensee) the right to use the brand name and dictates all the development and operating standards that go with it. For purposes of this article, we'll call this a "stand alone license agreement".
More often than not, the stand alone license agreement is coupled with a hotel management agreement. The hotel management agreement is the document which the management arm of the brand contracts with the developer to manage the hotel. Some brands will agree to enter into a stand alone license agreement and the management is handled by a third party manager with no relation to the brand. Often the licensor prefers that the hotel is managed by an affiliate of licensor in order to more easily ensure that all the operating standards are complied with. This arrangement gives the developer a bit of a safety net as well, as there are often fail safes put in place in the license agreement in connection with compliance with operating standards if the operator is an affiliate of licensor. I.e., if an affiliate is managing the hotel, the licensor can't call "default" for failure to comply with operating standards.
In a stand alone license agreement, the licensor grants the licensee the right to use the brand, and in simple terms the licensee has the right to continue to use the brand as long as the licensee develops the hotel in accordance with the development standards, operates the hotel in accordance with operating standards, and timely pays the license fees. The obligation of the licensor is to supply the licensee with all the information, oversight, and the standards that the licensee needs to comply with the development standards and operating standards, and most importantly to keep its brand in good standing. By keeping its brand in good standing the Licensor must register its trademarks with the proper authority in the required jurisdictions and ensure that no other party can "steal the name". Clearly, this is over simplifying this process. Basically, the licensor controls the entire process of protecting the trademark. While most license agreements require the licensee to inform the licensor of any trademark claim, the licensor keeps complete control over the trademark registration, upkeep and in the event of a trademark claim, trademark defense.
This brings us to indemnification. Stand alone license agreements generally contain two types of indemnification: general indemnification and trademark indemnification.