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Key Considerations When Negotiating a Trademark License Agreements

In this article, readers will gain an understanding of trademark license agreements, including their definition, purpose, and the various types involved. The article dives into the roles and responsibilities of the parties involved and provides valuable insights into setting the scope of the license, quality control provisions, financial terms, royalties, and intellectual property rights. Furthermore, the article discusses the importance of addressing term and termination procedures and highlights additional considerations, such as confidentiality provisions, indemnification, sub-licensing, and applicable law clauses. By understanding these key aspects, readers will be well-equipped to navigate the complexities of trademark license agreements.

Key Considerations When Negotiating a Trademark License Agreements

Definition and Purpose

A trademark license agreement is a legal contract between a trademark owner, referred to as the licensor, and another party, known as the licensee, that enables the licensee to use the licensor's trademark for specified purposes under specific conditions. Trademark license agreements are essential tools for businesses to expand their market reach, generate additional income, and protect the goodwill associated with their brands.

The primary purpose of a trademark license agreement is for the trademark owner to grant permission for the licensee to use the trademark while maintaining control over the quality and reputation associated with the trademarked goods or services. This control is crucial to ensure that the public continues to associate the trademark with the brand's quality and distinctiveness in the marketplace. In return, the licensee gets the benefit of using a well-established brand, which could lead to increased sales and market share.

Moreover, these agreements provide an additional revenue stream for trademark owners, as they typically involve royalty payments from the licensee based on the total revenue generated from the sale or use of the licensed goods or services. Licensing is particularly useful for expanding brand presence internationally or within new industries, without significant investment in infrastructure or operations by the licensor.

Types of Trademark License Agreements

There are several types of trademark license agreements, reflecting different relationships and objectives between the parties involved. Some of these include:

  1. Exclusive license: In this type of agreement, the trademark owner grants the licensee exclusive rights to use the trademark within a specific territory or market. No other party, not even the licensor, is allowed to use the trademark in that area. This type of agreement can be particularly useful when the licensee has a strong market presence and the licensor wants to leverage that strength for its trademark.
  2. Non-exclusive license: Under a non-exclusive license, the trademark owner may grant the use of the trademark to more than one licensee concurrently. This type of arrangement is suitable when the licensor wants to encourage competition among licensees or maximize market exposure for its brand quickly.
  3. Sole license: A sole license is a hybrid of exclusive and non-exclusive licenses. With a sole license, the trademark owner can continue using the trademark but does not license it to any other party. This setup ensures that the licensor maintains a presence in the market while the licensee can exploit the brand's reputation and goodwill.
  4. Sub-license: In some cases, a licensee may wish to sublicense its rights to use the trademark to another party. A sublicense must be explicitly stated and allowed within the original license agreement, along with the extent and scope of sublicensing rights, or it may be considered illegal.

Roles and Responsibilities of Parties Involved

A trademark license negotiation should clearly outline the roles and responsibilities of both the licensor and licensee, ensuring mutual understanding and facilitating a successful business relationship.

  1. The Licensor: The trademark owner's main responsibility is to maintain control over the quality and reputation of the brand associated with the trademark. The trademark owner must ensure that the licensee adheres to the prescribed quality standards and guidelines. Additionally, the licensor is responsible for enforcing the trademark protections against unauthorized use or infringement.
  2. The Licensee: The party granted the right to use the trademark needs to abide by the terms and conditions set forth in the license agreement, including the scope of usage, duration, and payment of royalties to the licensor. The licensee needs to maintain the quality standards specified, provide the licensor with regular reports or samples for inspection, and cooperate with the licensor on matters related to trademark protection.

Apart from the roles and responsibilities, the agreement should also include provisions related to the termination of the contract, dispute resolution mechanisms, and indemnification clauses. Careful drafting of a trademark license agreement is essential to prevent potential conflicts, protect the interests of both parties, and ensure the successful growth of the brand.

Setting the Scope of the License

One of the most critical aspects of a trademark licensing agreement is setting the scope of the license. The scope outlines the rights and restrictions that the licensee will have in using the licensed trademark. There are several key components that need to be addressed to define the scope of the license properly. These components include identification of the licensed trademark, defining the territory, establishing the field of use, and deciding between exclusive and non-exclusive rights.

Identification of the Licensed Trademark

The first step in setting the scope of the license is identifying the specific trademark being licensed. Trademarks can include logos, brand names, taglines, or other distinctive brand elements. The licensing agreement should clearly specify which trademarks are being licensed. It is essential to have a thorough and accurate description of the trademark in the agreement to avoid confusion and future disputes.

In some instances, there may be several trademarks associated with a brand. In this case, it is crucial to decide which trademarks will be included in the licensing agreement. For example, a company may have a primary logo along with several secondary logos used in various marketing materials. The licensor should specify if the licensee will have the right to use one or all of these trademarks.

In addition to describing the trademark, the agreement should also provide guidelines on how the trademark should be used. These guidelines clarify how the licensee can use the trademark in connection with their product or services without diminishing the brand's value or causing confusion in the marketplace.

Defining the Territory

The next step in defining the scope of the license is establishing the territory in which the licensee can use the trademark. Territory can refer to geographical areas such as countries, regions, or global rights. The licensor must carefully consider their strategy and distribution channels when determining the territory.

Limiting the territory prevents the licensee from exploiting the trademark outside the agreed-upon area and helps maintain control over the brand. On the other hand, granting too broad of a territory may lead to market saturation or dilution of the brand. Licensors should consider the capabilities and distribution of the licensee and the potential impact on the brand when defining the territory.

Establishing the Field of Use

The field of use defines the specific products or services in which the licensee can use the licensed trademark. Clear boundaries should be established in this area to avoid potential overextension or dilution of the brand. For example, a licensor may have a fashion brand and only want the licensee to produce and sell clothing items, not expand into accessories or home goods.

The field of use should be described in detail in the trademark licensing agreement, specifying the types of products or services which can carry the trademark. This description will help to prevent any misunderstandings or disputes about the authorized uses of the licensed trademark.

Exclusive vs. Non-Exclusive Rights

Finally, licensors must decide whether they want to grant exclusive or non-exclusive rights to the licensee. Exclusive rights mean that the licensee is the only party allowed to use the licensed trademark in the specified territory and field of use, while non-exclusive rights allow the licensor to grant the same rights to multiple licensees.

Each option has its advantages and disadvantages. Exclusive licenses can often lead to higher royalty rates and a more significant commitment from the licensee to promote and market the brand, but they may also limit the licensor's ability to take the brand in different directions or work with multiple partners. Non-exclusive licenses can provide a broader range of opportunities for the brand, but they may also lead to increased competition among licensees and increased monitoring responsibilities for the licensor.

Ultimately, the decision between exclusive and non-exclusive rights depends on the licensor's goals, the licensee's capabilities, and the overall strategy for the brand. Defining the scope of the license carefully and strategically through these four critical components will ensure a mutually beneficial trademark licensing agreement for both parties.

Quality Control Provisions

Quality control provisions are essential for ensuring the production of high-quality goods and services, maintaining customer satisfaction, and encouraging continuous improvement. They are often a vital part of contracts and agreements between parties in various industries.

Importance of Quality Control

Quality control is crucial for several reasons:

  1. Product and service quality: Quality control provisions help maintain the standards set for products and services. This ensures that customers receive what they expect and pay for, ultimately ensuring their satisfaction.
  2. Brand reputation: Maintaining high-quality standards helps build and maintain a strong brand reputation. This attracts more customers and ensures customer loyalty.
  3. Compliance with regulations: Quality control provisions can help businesses stay compliant with industry-specific quality regulations and standards. This is essential to avoid penalties, fines, and legal troubles.
  4. Cost control: Quality control measures can help identify any inefficiencies in the production process, thereby reducing waste and minimizing costs.
  5. Continuous improvement: Regular monitoring and evaluation of products and services help identify areas for improvement, thereby driving continuous improvement and innovation.

Setting Quality Standards

Setting clear and measurable quality standards is essential for proper quality control. The following steps can help establish quality standards:

  1. Define your objectives: Determine the key objectives in terms of quality and performance that your products or services should meet.
  2. Benchmarking: Research the industry standards and competitors' quality criteria. This will help set your expectations and create realistic quality goals.
  3. Develop measurable criteria: Ensure that the quality standards you develop can be measured, monitored, and tested. For instance, specific dimensions, durability levels, or performance parameters can be some standard criteria to gauge product quality.
  4. Incorporate customer feedback: Listen to customer feedback and incorporate it into your quality standards. This will help you maintain customer satisfaction and better address their needs.
  5. Document quality standards: Clearly document your quality standards to help manage expectations, communicate internally and externally, and perform quality checks consistently.

Approval and Inspection Rights

Approval and inspection rights allow parties involved in a contract or agreement to review and test products or services before accepting delivery or releasing payment. These approval and inspection provisions should be included in the agreement to avoid misunderstandings and disputes later. Some key aspects to consider while drafting these provisions include:

  1. The acceptance criteria: Clearly define the criteria that products or services must meet to be considered approved.
  2. Inspection process: Specify how, when, and where the inspections will be conducted.
  3. Timeline for approval or rejection: Establish a reasonable timeframe for the buyer to inspect and give their approval or rejection.
  4. Notification of rejection: Detail the process to notify the supplier if the deliverable does not meet the acceptance criteria and the required corrections.
  5. Consequences of rejection: Define the consequences of repeated failures to meet the quality standards, such as termination of the contract, penalties, or other remedies.

Managing Non-Compliance with Quality Standards

It can be challenging to ensure that all parties consistently comply with the established quality standards. Here are a few strategies to manage non-compliance:

  1. Regular audits: Conduct periodic audits to assess compliance with the quality standards and identify any issues.
  2. Provide feedback: Share the audit findings with the concerned teams or suppliers and offer constructive feedback for improvement.
  3. Establish corrective action plans: If non-compliance is identified, work together with the non-conforming party to establish a corrective action plan to address the issues effectively.
  4. Escalation: In case of repeated non-compliance, consider escalating the case to upper management or invoking contract provisions such as penalties or termination clauses.
  5. Continuous improvement: Encourage a culture of continuous improvement to address non-conformance issues and enhance the overall quality of products and services.Financial Terms and RoyaltiesFinancial terms and royalties are crucial components in any contractual agreement, particularly in the creative industries like music, publishing, and entertainment. These terms define how the creator of the intellectual property (the "licensor") will be compensated by the individual or company who wants to use that property (the "licensee"). This article covers various aspects of royalties and financial terms, including determining royalty rates, fixed fees vs. percentage royalties, minimum guarantees and advances, and reporting and accounting of royalties.

Determining Royalty Rates

The royalty rate is the percentage of revenue the creator or owner of the intellectual property will receive as compensation from the licensee. Determining royalty rates involves researching market benchmarks and considering factors such as the IP's type, the licensee's industry, the scope of the license (geographic, duration, exclusivity), the potential profitability of the licensed product, and the uniqueness or competitive advantage of the IP.

In many cases, licensors and licensees will negotiate the royalty rate based on market standards, which can vary significantly depending on the industry, type of intellectual property, and reach of the licensed products. For instance, royalty rates for book authors typically range between 10% to 15% of net sales, while rates for music recordings may vary from 12% to 20%.

It's essential to strike a balance between offering a fair royalty rate to the licensor while ensuring that the licensee has the financial incentive and projected earnings to make the venture worthwhile. This will typically require both parties to make informed assessments of the IP's value and negotiate a mutually acceptable royalty rate.

Fixed Fees vs. Percentage Royalties

The two primary ways to structure royalty payments are fixed fees and percentage royalties. A fixed fee is a one-time, lump-sum payment made to the creator or owner of the IP for the license to use the IP. This type of arrangement may be preferable in situations where the revenue from the licensed IP is challenging to estimate, product lifecycles are short, and there's a desire to simplify the tracking and reporting of royalties.

On the other hand, percentage royalties are based on a percentage of the revenue generated from the sale, lease, or subscription of the IP. Percentage royalties are common in industries with a more extended usage period for the licensed IP or when the licensor's ongoing involvement is expected, such as product development, marketing, or customer support. The percentage royalty provides a continuous income stream to the creator or owner, which is proportional to the licensed product's success.

Minimum Guarantees and Advances

Minimum guarantees and advances help licensors secure a specified level of compensation during the license term, regardless of the product's performance in the market. A minimum guarantee is the amount the licensee commits to pay the licensor, either upfront or over some time, to secure the licensing rights to the IP.

Advances are prepayments made to the licensor, usually at the beginning of the license agreement. They are designed to "advance" royalties to the licensor before the licensed product generates any revenue. Advances are typically recoupable against future royalties, which means the licensee deducts the advanced amount from future royalties until the advance is fully recouped.

These mechanisms offer the licensor some financial security and lower risk exposure while providing the licensee a strong incentive to commercialize the IP and reach the agreed-upon financial milestones.

Reporting and Accounting

Accurate reporting and accounting of royalties are essential in maintaining trust between the licensor and licensee, as well as ensuring compliance with the license agreement's financial terms. Royalty reports usually include detailed information on products sold, territories, channels, gross sales, net sales, amounts deducted due to returns or other discounts, and the resulting royalties payable to the licensor.

Licenses often include clauses that dictate the frequency and format of royalty reports, requirements for supporting documentation (such as invoices, sales reports, or tax documents), and provisions for an audit by the licensor or a third-party accounting firm. These provisions help ensure transparency and accountability in royalty reporting, protect the licensor's IP rights, and safeguard both parties against disagreements, financial disputes, and potential litigation.

Intellectual Property Rights and Protection

Intellectual property (IP) rights and protection are vital for businesses and individuals as they protect their creations, ideas, inventions, and artistic works from being used by others without permission. These protections come in various forms, such as trademarks, copyrights, and patents. By ensuring that intellectual property is registered and protected by the appropriate legal means, owners can benefit from the exclusive rights to their creations, as well as prevent unauthorized use. This article will discuss the ownership and registration of trademarks, handling infringement issues, and procedures for dispute resolution.

Ownership and Registration of Trademarks

Trademarks are symbols, words, or phrases that distinguish and identify the source of goods or services of one party from those of others. They serve as a valuable branding asset, helping consumers to recognize the products and services they enjoy and trust. Trademark registration is crucial for businesses to protect their brand and prevent competitors from using similar marks.

To register a trademark, the owner must follow specific steps and fulfill some requirements. First, they should conduct a search to ensure the mark is not already in use by another party. Different countries and regions have their respective trademark databases where applicants can perform a search. In the United States, the United States Patent and Trademark Office (USPTO) maintains a database called the Trademark Electronic Search System (TESS).

Once the registrant is confident that no conflicting trademarks exist, they should prepare and submit an application to the appropriate trademark office. The application must include details about the mark itself, the relevant goods or services, and the owner's information. The application should also be supported by a filing fee.

After submission, the trademark office will review the application for compliance with the applicable laws and regulations. If no issues or objections are found, the office will publish the mark for third-party opposition. If no opposition is raised within the specified period, the office will issue a registration certificate confirming the registration. After obtaining trademark registration, the owner should actively monitor and enforce their rights to ensure ongoing protection against infringement.

Handling Infringement Issues

Trademark infringement occurs when someone uses a mark confusingly similar to a registered trademark without the owner's consent. Infringement can damage the reputation of the trademark owner, cause consumer confusion, and result in financial loss.

To handle infringement issues, trademark owners should first attempt to resolve the matter through communication with the infringing party, such as sending a cease-and-desist letter. This notice will inform the infringer of their unauthorized use of the trademark and ask them to halt their activities. In many cases, disputes can be settled amicably without involving legal action.

However, if the infringing party refuses to cease their activities, it may be necessary to initiate legal action. This step may involve filing a lawsuit in the appropriate court, asserting a claim of infringement, and seeking remedies such as an injunction, monetary damages, and legal costs. Legal representation is often necessary to ensure the best possible outcome.

Procedures for Dispute Resolution

When trademark disputes arise, employing alternative dispute resolution (ADR) methods before resorting to litigation can be beneficial. ADR, which includes negotiation, mediation, and arbitration, is generally a faster and more cost-effective way to resolve disputes.

In mediation, a neutral third-party mediator facilitates discussions between the disputing parties to help them reach a mutually acceptable settlement. The mediator, typically a legal expert or attorney with experience in trademark and IP law, does not impose a resolution but facilitates communication and helps guide the parties towards a solution.

Arbitration, on the other hand, is an adjudicative process where an arbitrator (or panel of arbitrators) makes a decision on the dispute based on the applicable law and evidence presented by the parties. The decision is usually binding and may be enforceable in a court of law.

No matter the dispute resolution method chosen, it is essential for trademark owners to consult with legal professionals knowledgeable in IP law. These experts can guide them through the process and help protect their valuable intellectual property interests.

Term and Termination

When entering into any agreement, it is important to understand the term and termination provisions, as these clauses dictate the timeline of the contractual relationship and describe the circumstances under which either party may bring that relationship to an end. This is particularly applicable in the context of a license agreement, where the rights to use certain property – whether intellectual, personal, or otherwise – are granted for a specific duration. This article will outline the key components of term and termination clauses, including the duration of the license, termination rights and procedures, and post-termination obligations.

Duration of the License

The duration of a license agreement is typically set as a fixed period, which can range from months to years, depending on the parties' intentions and the nature of the property being licensed. This term is critical, as it determines the length of time that the licensee has the right to use the property and the licensor can expect to receive payment or other consideration.

It is important for both parties to clearly define the commencement date of the license term. In some cases, this may coincide with the execution of the agreement itself, while in others it may be triggered by a particular event or a specific date in the future. Ensuring clarity in this regard is crucial to avoid misunderstandings and potential disputes down the line.

Additionally, the parties may decide to include provisions for extensions or renewals of the license term. These provisions can take various forms – there may be automatic extensions, which occur unless one party provides notice that it does not wish to renew, or there may be an option for the licensee to request an extension, typically contingent upon certain operational or financial criteria being met.

Termination Rights and Procedures

Circumstances may arise during the term of a license agreement that warrant the termination of the contractual relationship. Termination rights and procedures are an essential part of a well-drafted agreement, as they outline the grounds upon which either party can bring the agreement to an end.

Termination provisions typically encompass several categories of rights, including:

  • Termination for convenience: Allowing one or both parties to terminate the agreement without cause, typically upon providing a predetermined notice to the other party.
  • Termination for cause: Allowing a party to terminate the agreement if the other party commits a material breach – this usually includes failure to pay royalties, infringement of the licensed property, or violation of any other significant contractual obligations.
  • Termination for insolvency: Allowing a party to terminate the agreement if the other party becomes insolvent, enters into bankruptcy, or is otherwise unable to meet its financial obligations.
  • Procedures for exercising these termination rights should also be clearly outlined in the license agreement. This typically includes specifying the notice required, what form that notice must take (such as written or electronic), and any applicable cure periods, during which the breaching party can rectify the issue and potentially avoid termination.

    Post-Termination Obligations

    When a license agreement is terminated, it is essential to define the rights and obligations of each party following termination. These post-termination obligations can include:

  • The requirement for the licensee to cease using the licensed property and, in some cases, to return or destroy any materials containing that property.
  • The winding down of any ongoing projects or activities under the license, which may involve completing existing work, transferring active projects to the licensor, or, in some cases, arranging for a suitable third party to take over such work.
  • The payment of any outstanding royalties or other amounts due up to the date of termination, as well as any pre-agreed termination fees or damages.
  • Confidentiality provisions ensuring that any proprietary information provided by one party to the other during the term of the license agreement remains protected even after termination, usually for a specific period.
  • Clearly setting out the term and termination provisions within a license agreement is essential to protect the rights and interests of both the licensee and the licensor, and helps to avoid potential disputes down the line. Parties should take care to precisely define the duration of the license, the rights and procedures for terminating the agreement, and the post-termination obligations of each party.

    Additional Considerations

    When drafting or reviewing a software license agreement, there are several additional considerations to take into account. Some of these considerations include confidentiality provisions, indemnification and limitation of liability, sub-licensing and assignability, and applicable law and jurisdiction clauses. Each of these components is essential for protecting the rights and interests of both the licensor and licensee and should be carefully crafted to ensure a fair and legally enforceable agreement.

    Confidentiality Provisions

    Confidentiality provisions are an important element of a software license agreement as they protect the proprietary information and trade secrets of both parties. These provisions typically require the parties to maintain the confidentiality of any non-public information that is disclosed during the course of the contract, for a specified period of time.

    When drafting a confidentiality provision, it is important to clearly define what constitutes confidential information, including any technical specifications, source code, business plans, or customer data. The agreement should also set forth the procedures for maintaining and handling the confidential information, as well as any exceptions to the confidentiality requirements, such as disclosures required by law or authorized by the disclosing party.

    It is also essential to outline the consequences for breach of the confidentiality provisions, which may include monetary damages, injunctive relief, or termination of the agreement.

    Indemnification and Limitation of Liability

    Indemnification and limitation of liability clauses are essential for protecting the parties from various risks and liabilities that may arise during the course of the licensing agreement. The indemnification clause typically requires one party to indemnify, defend, and hold the other party harmless from any claims, losses, or damages resulting from the indemnifying party's breach of the agreement or infringement of any intellectual property rights.

    In drafting an indemnification clause, it is crucial to clearly specify the scope and extent of the obligation, as well as any limitations or exclusions to the indemnity. This may include limiting the indemnification to claims brought by third parties or requiring prompt and timely notice of any potential claim.

    The limitation of liability clause, on the other hand, places a cap on the amount of damages one party may recover from the other party in the event of a breach or other legal claim. Typically, the limitation of liability is expressed as a fixed dollar amount or a multiple of the license fees paid under the agreement. This clause should be carefully negotiated and drafted to ensure that it is reasonable and enforceable under the applicable law.

    Sub-Licensing and Assignability

    Sub-licensing and assignability clauses dictate the extent to which the licensee may sublicense or assign its rights and obligations under the software license agreement. These clauses are important for protecting the licensor's control over the distribution and use of its software and ensuring that the rights granted under the agreement do not inadvertently extend to unauthorized parties.

    When drafting a sub-licensing and assignability clause, it is essential to clearly define the scope and circumstances under which a sublicense or assignment may be permitted, as well as any conditions or limitations that must be met. For example, the licensor may require the sublicensee or assignee to enter into a separate agreement directly with the licensor, or require the licensee to obtain the licensor's prior written consent before entering into any sublicense or assignment.

    Applicable Law and Jurisdiction Clauses

    Applicable law and jurisdiction clauses are vital for defining the governing law and dispute resolution process of the software license agreement. These clauses designate the specific jurisdiction and legal system that will apply to any disputes or legal claims arising out of the agreement.

    When drafting an applicable law and jurisdiction clause, it is important to select a jurisdiction that is mutually agreeable to both parties and has a well-developed and predictable legal system. The jurisdiction chosen should also have a strong and enforceable intellectual property rights framework, as well as any relevant experience or expertise in technology licensing disputes.

    In addition to selecting the appropriate jurisdiction, the parties may also want to consider including an arbitration or alternative dispute resolution provision, which can offer a more efficient and cost-effective means of resolving disputes as opposed to traditional litigation.

    1. What is the significance of defining the scope of the trademark license agreement?

    Defining the scope of the trademark license agreement is crucial because it establishes the parameters of the licensed rights. Such definition includes the geographic area, duration, and the specific goods or services for which the trademark may be used, thereby reducing the likelihood of potential disputes.

    2. Why is it important to determine the exclusivity of the trademark license agreement?

    Determining exclusivity is important because it clarifies whether the licensee will have exclusive rights to use the trademark within the predefined scope or if the licensor can also grant licenses to other parties. Exclusivity can impact the value and negotiation leverage of the agreement.

    3. How do royalty payments and fee structures impact the negotiation of a trademark license agreement?

    Royalty payments and fee structures directly influence the financial aspects of the agreement. Parties need to carefully negotiate the appropriate rates, payment terms, and any minimum royalties or guarantees to ensure a fair and mutually beneficial arrangement. Such negotiations often involve a balance between upfront fees and ongoing royalties.

    4. What role does quality control play in a trademark license agreement?

    Quality control is essential to maintaining the value and reputation of the trademark. The agreement should clearly define the standards and requirements for the licensee, including any approval processes for products or services, monitoring mechanisms, and the right of the licensor to inspect and enforce compliance.

    5. How should termination provisions be addressed in a trademark license agreement negotiation?

    Termination provisions should be clearly outlined to ensure both parties are aware of their rights and obligations upon termination. Key aspects to consider include notice periods, the handling of unsold inventory, and post-termination obligations such as the removal of trademark usage from products or marketing materials.

    6. Why is it essential to discuss indemnification clauses in the negotiation process?

    Indemnification clauses are vital to protect both parties from potential liabilities resulting from the other party's actions. By discussing indemnification during negotiations, parties can allocate risks appropriately and ensure that each party remains responsible for its actions relating to the use and enforcement of the trademark.