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 email@example.com Extended Bio...
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