Ms. Gorman

Hospitality Law

Limitations on Licensor's Liability: Can a Licensor Get Away with Capping Trademark Liability?

By Tara K. Gorman, Partner, Perkins Coie LLP

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 décor 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.

  • Trademark indemnification: Licensor indemnifies licensee for any claims which arise out of a trademark claim. This means in the case where licensee uses the trademark properly and licensor breaches its obligation to keep the trademark in good standing (registered etc.), licensor will indemnify licensee for any damages that arise out of such a trademark claim. For example, the licensee does everything right: (i) paid licensor the license fees for the right to use the trademark, (ii) developed the hotel to the development standards, and (iii) operated the hotel to the operating standards, but licensor didn't live up to its end of the bargain and did something wrong which caused the a third party to sue licensee or resulted in a situation where licensee is no longer able to use the trademark. In this case licensor would indemnify licensee. This is when trademark indemnification comes into play.

  • General indemnification: Licensor indemnifies licensee for any claims which arise out of the licensor's obligations (other than trademark) under license agreement. This is far more extensive in a hotel management context because the hotel manager is at the property performing services. In the license agreement context, the trademark indemnification is the critical element, and the general indemnification is less important. Other than periodic inspections there are no "services" offered under the license agreement.

Typically stand alone license agreements have both general indemnification and trademark indemnification. While there are no "services" offered under the stand alone license agreement other than inspections, it is still important to obtain general indemnification. Just in case something happens that is not covered under trademark indemnification, the licensor would be required to indemnify the licensee under the general indemnification provision. Some argue that general indemnification in a stand alone license agreement is unnecessary when the licensor and the hotel manager are affiliates because the hotel owner is indemnified under the hotel management agreement for the licensor's activities at the property as the hotel manager conducts the inspections on behalf of the licensor. While that is a fair point, prudent developers obtain general indemnification in both stand alone license agreements and in hotel management agreements.

Recently, some licensors have gotten down right skimpy on the indemnifications they are willing to offer in stand alone license agreements. While "back in the day" they would offer both general indemnification and trademark indemnification, in the newer license agreements licensors come out of the gate offering ONLY trademark indemnification and NO general indemnification. To make matters worse some licensors have gone as far as to create a company policy to LIMIT licensor's liability to a certain dollar amount. In the case of trademark liability, licensee has no control over trademark claims, has done everything right, and trademark indemnification comes into play only in the event of licensor's inability to keep up its end of the bargain. Therefore, the idea of a dollar limit on trademark liability is a hard pill to swallow. The main purpose of a developer entering into a stand alone license agreement is to walk away with the right to use the brand name. The theory is that branding a hotel adds value - and the value is in the name. The party that has control over the name and the proper registration of the trademarks associated with the name is the licensor. If the licensor does not keep up with its primary obligation - to keep its trademark in good standing - and that results in a trademark claim, the licensor should fully indemnify the licensee for damages arising out of such trademark claim.

While in these tough economic times, it's admirable to reduce your risk of liability, savvy developers should fully negotiate the indemnification provisions in stand alone license agreements and ensure that they fully understand what sort of risk they are taking before agreeing to a licensor's request to cap its trademark liability, when the licensor has the control over trademark issues.

Real estate attorney Tara Gorman represents sellers, owners and licensors in the acquisition, disposition, finance, development, management and leasing of major hospitality, resort and commercial properties. Her property deal portfolio includes domestic and international hotels, office buildings, condo-hotels, water parks, casinos, restaurants and retail stores. Additional areas of practice depth include telecommunications and finance. Ms. Gorman can be contacted at 202-654-6253 or tgorman@perkinscoie.com Extended Bio...

HotelExecutive.com retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.com.

Receive our daily newsletter with the latest breaking news and hotel management best practices.
Hotel Business Review on Facebook
RESOURCE CENTER - SEARCH ARCHIVES
General Search:

SEPTEMBER: Hotel Group Meetings: Demand is Trending Up

Mike May

Millennials, Zika, Brexit, elections, the economy, mega-mergers…every quarter brings a newsflash du jour. Hotel professionals need a genie to tell them what to ignore and what requires their action. This article summarizes the most relevant trends affecting group meetings – along with tips from corporate meeting planners on what hotels can do to help their group customers succeed, and help you improve a hotel’s group meeting business. Read about the importance of authentic local experiences, unique venues, event apps, and negotiations with buyers. READ MORE

Paul Van Deventer

In the U.S. alone, the meeting and event industry drives $280 billion in annual economic impact. To add perspective, that’s more than air transportation, the motion picture industry or spectator sports. Additionally, the industry generates a massive amount of taxes, with $88 billion generated at the state, federal and local level last year; taxes that help our communities pay for services, build schools, fix roads and maintain parks. The Meetings Mean Business (MMB) Coalition—an industry advocacy group of which MPI is a part—has been conducting video interviews with top executives at major companies to find out just how important meetings and events are to their bottom line. READ MORE

Brian Bullock

Last year, millennials surpassed Generation X to become the largest generation in the U.S. workforce. They also may be history’s most fickle generation. Two-thirds of millennials plan to leave their current organizations by 2020, according to a recent survey by Deloitte. Additionally, 44 percent said they would leave their current employers within the next two years if given the choice. So it’s not surprising that businesses are adjusting everything – from office space to company culture to the way business is conducted – to cater to millennial wants and needs. Companies have recognized that attracting and retaining top talent from this burgeoning generation is no joke. READ MORE

Michael Dominguez

As the meetings market has fully recovered from the 2008 recession, this industry expansion has given all the players in the meetings market some unique circumstances that have not been collectively experienced before at any one given time. If this was a social media relationship, we would have to list it as “it’s complicated”! First the good! We are experiencing record demand in North America that has set records now for 3 consecutive years. What is most encouraging is that there is not a particular scale of hotel that is leading this growth, but rather all segments are showing record strength. READ MORE

Coming Up In The October Online Hotel Business Review


Feature Focus
Revenue Management: Measuring All Hotel Revenue Streams
Revenue Management is a dynamic and ever-evolving profession and its role is becoming increasingly influential within hotel operations. In some ways, the revenue manager's office is now the functional hub in a hotel. Primarily this is due to the fact that everything a revenue manager does affect every other department. Originally revenue managers based their forecasting and pricing strategies on a Revenue per Available Room (RevPAR) model and some traditional hotels still do. But other more innovative companies have recently adopted a Gross Operating Profit per Available Room (GOPPAR) model which measures performance across all hotel revenue streams. This metric considers revenue from all the profit centers in a hotel - restaurants, bars, spas, conference/groups, golf courses, gaming, etc. - in order to determine the real gross operating profit per room. By fully understanding and appreciating the profit margins in all these areas, as well as knowing the demand for each one during peak or slow periods, the revenue manager can forecast and price rooms more accurately, effectively and profitably. In addition, this information can be shared with general managers, sales managers, controllers, and owners so that they are all aware of and involved in forecasting and pricing strategies. One consequence of a revenue manager's increasing value in hotel operations is a current shortage of talent in this field. Some hotels are being forced to co-source or out-source this specialized function and in the meantime, some university administrators are looking more closely at developing a revenue management curriculum as a strategy for helping the hospitality industry close this gap. The October issue of the Hotel Business Review will address these significant developments and document how some leading hotels are executing their revenue management strategies.