Legal Considerations in Terminating Sublicense Agreements
It is a well-established principle in the United States that a trademark license is terminable at will. Menendez v. Holt, 128 U.S. 514, 524 (1888). But what does the law say about termination when a valid licensor has entered into a sublicense agreement with a third party to use such a trademark? There is not a coherent body of law that litigants can rely on in such “sublicense” termination suits, as the case law is sparse on this particular issue and spread out over various jurisdictions. Yet understanding the legal considerations surrounding the termination of a trademark sublicense can be of great significance to trademark licensors, licensees, and sublicensees. This article focuses on considerations such parties should take into account when evaluating or considering sublicense agreements, and the potential for termination of the same.
Considerations To Take into Account for Trademark Licensors:
Generally, consent to use a sublicense is terminated when the sublicensee knows or has reason to know that the trademark owner is no longer willing to permit the particular use. See Restatement (Third) of Unfair Competition § 29(d) (1995). This unwillingness may be manifested in words or conduct that is inconsistent with continued consent of the mark. Id. For example, two court-approved ways to terminate a license are: (1) sending the sublicensee a cease-and-desist letter (Eagle Hosp. Physicians, LLC v. SRG Consulting, Inc., 2005 WL 8160544, at *6 (N.D. Ga. Mar. 24, 2005)), or (2) initiating a lawsuit against the sublicensee for infringement of the sublicense (Chicago Mercantile Exch. Inc. v. Ice Clear US, Inc., 2021 WL 3630091, at *13 (N.D. Ill. Aug. 17, 2021)). Nothing shows lack of consent like commencing an infringement lawsuit.
Further, there is no legal rule that a sublicense automatically survives the termination of the master license agreement. In re Weinstein Co. Holdings, LLC, 2020 WL 6816961, at *3 (Bankr. D. Del. Aug. 17, 2020). In general, if the main agreement is terminated, the licensor no longer has the right to sublicense the agreement (unless expressly provided in the master license agreement that the sublicense survives). Nemo dat quod non habet (“no one gives what he doesn’t have”). Accordingly, should a trademark licensor wish to terminate both an existing license and any related sublicenses, it should expressly indicate its unwillingness to allow any further use.
Notwithstanding these general principles, even if a licensor seeks to terminate both a trademark license and/or any sublicenses, it is possible that the master license agreement pursuant to which a sublicense was granted may not allow it, as the question of whether a sublicensee’s rights may survive termination could depend on interpreting such an agreement. Fraunhofer-Gesellschaft zur Forderung der Angewandten Forschung E.V. v. Sirius XM Radio Inc., 940 F.3d 1372, 1380–82 (Fed. Cir. 2019). Courts that have addressed this issue have considered extrinsic evidence to resolve ambiguities in the master license agreement concerning the survival of a sublicense, for example: (1) whether the sublicensee performed all its obligations under the sublicense agreement at the time of the termination of the master license agreement, (2) the trademark owner’s knowledge of and agreement to the terms of the sublicense agreement and any amendments made to the sublicense agreement, (3) whether the parties discussed the sublicensee’s long-term reliance on the license’s validity, (4) the trademark owner’s role in the alleged infringement and the parties’ assumptions that a license would be required for the sublicensee’s continued use of the mark, (5) other discussions among the parties before and after execution of the relevant agreements that may shed light on the effect of a termination of the master license agreement on the sublicense, and (6) commercial practices and custom. Id. at 1382. Trademark licensors should therefore be cognizant of the importance of the language, and above factors, when preparing or entering into any master license agreements that could impact their future rights.
Considerations To Take into Account for Trademark Sublicensees:
Similarly, it is important for parties that are sublicensing trademarks to carefully consider the contractual terms related to the master license agreements applicable to such trademarks. Indeed, while there are few reported instances of sublicensees winning sublicense termination claims, in those cases where sublicensees have been successful against a master licensor it was for reasons such as: (1) the master license agreement had an express provision that called for specific performance to the sublicensee (Tarrant Apparel Grp. v. Camuto Consulting Grp., Inc., 838 N.Y.S.2d 498, 499 (App. Div. 1st Dep’t 2007)), or (2) the licensor fraudulently misrepresented information that the sublicensee relied on to enter the sublicense (Ostano Commerzanstalt v. Telewide Sys., Inc., 794 F.2d 763, 765–66 (2d Cir. 1986)).
In the event of termination, sublicensees may also have some recourse and success defending against termination if they can show that the licensor did not own the mark or abandoned the mark, or prove laches leading to equitable estoppel. See Eagle Hosp. Physicians, 2005 WL 8160544 at *6. Factors courts have considered in such an analysis related to sublicensees include whether the licensor: (1) failed to use its mark anywhere in the nation or for several years, or (2) knew about the alleged trademark misuse and negligently delayed asserting its rights such that it caused prejudice to the sublicensees. Id. (citing Conagra, Inc. v. Singleton, 743 F.2d 1508, 1516–17 (11th Cir. 1984)); see also Restatement (Third) of Unfair Competition § 29. These factors should be considered by a party considering sublicensing a trademark.
Given the uncertainty of the applicable law described above, and the fact that multi-factor tests have often been applied by courts considering sublicensee termination claims, licensors, licensees, sublicensees, and their attorneys should be cognizant of this potential issue when negotiating license agreements or otherwise preparing to litigate the issue.