This is the third of a six-part series exploring how companies can grow the value in their brands by leveraging and protecting their intellectual property. (See the first two columns in this series: Part 1 and Part 2.)

In today’s article, we will discuss how companies can expand and enhance the reputation of their brands—and generate additional revenue—through trademark licensing. Trademark licensing is the practice by which a trademark owner permits a third party to use its trademark, and the third party’s use of the mark inures to the benefit of the trademark owner. Notably, a trademark license differs from a franchise agreement, in which use of a mark is permitted as part of a business system prescribed by the franchisor.

Trademark licensing can help leverage the manufacturing, marketing, and distribution acumen and resources of third-party licensees to augment the goodwill of the licensor and its brands. The driving force behind the value and profit of many brands today, revenue derived from global trademark licensing continues to climb at a dizzying pace. It is estimated that global retail sales of licensed products accounts for more than $200 billion annually.

Savvy trademark license programs extend brand awareness to new product/service categories that may not be feasible for a company to enter on its own. Brand licensing also enables brands to more quickly penetrate new geographic markets while easing the burdens and liability posed by regulatory requirements and manufacturing responsibilities, and diminishing challenges posed by cultural barriers.

While many top trademark licensors, such as Disney, are in the entertainment field and involve character licensing, many successful licensing programs are based on corporate, fashion, sports, and collegiate brands. One example of a terrific corporate licensing program is Caterpillar’s foray into apparel and consumer products. Building on the success and reputation of its iconic brand for heavy machinery, Caterpillar has launched a profitable worldwide program involving the sale of licensed footwear, clothing, hats, watches, toys, and other consumer products.

While the rewards to a successful licensing campaign can be great, such arrangements must be entered into with careful consideration. Licensing opportunities must be evaluated in the context of overall marketing strategy and, on the legal side, care taken to properly establish the relationship between the parties. Improperly drafted agreements or mismanaged licensing programs may result in loss of control over the brand and/or damage to the company’s reputation.

One of the primary functions of a trademark is to communicate to consumers the source of a product and, by extension, that products or services emanating from that source are of a quality consistent with the other offerings emanating from a certain source. Thus, trademark owners exercising appropriate control over the quality of the goods/services offered by the licensee ensure that the mark continues to represent the quality that consumers have come to associate with the mark. Without adequate quality control provisions—and meaningful follow-through—the license agreement may be construed by a court to be a “naked license” in which the licensor is found to have abandoned the rights to its mark.

On the flip-side, where a licensor maintains an extreme degree of control or involvement in the design, marketing, and distribution of a product, licensing could potentially expose the licensor to product liability actions for defective or harmful products. Too high a degree of control might expose the licensor to patent infringement liability and antitrust violations. Thus, controlling the quality of licensed products in order to avoid loss of trademark rights, and balancing that control in order to avoid exposing the business to risks properly borne by the licensor are imperative.

Technological innovations coupled with increased globalization will continue to provide businesses with exciting opportunities to expand the reach of their brands via different geographic markets, customer demographics, and distribution channels. As business and brands become more globalized, licensing undoubtedly becomes an even more important strategy for maintaining and enhancing brand value and increasing revenue. While there are many upsides to trademark licensing arrangements, businesses need to enter into such agreements with a clear idea of both the goal of the relationship and the strategy to be used to achieve that goal. With careful drafting—using specific language to delineate the obligations and parameters of the relationship—trademark licensing becomes a valuable tool to enhance a company’s bottom line.