Clothing your trademark license with certain contractual provisions can possibly cover an otherwise uncomfortably bare exposure.
An owner of a trademark has a duty to ensure the consistency of its trademarks, as well as the good(s) and/or service(s) under which its trademarks are used. If a trademark owner enters into a license agreement and fails to include adequate quality controls over a licensee’s use of its licensed trademark, this trademark owner could lose its trademark rights due to a legal doctrine referred to as the “Naked Licensing Doctrine.”
Naked licensing can lead to situations where the public is deceived or misled, due to a separation between the trademark and the expected quality of good(s) and/or service(s). In other words, once a trademark no longer functions as a source identifier (i.e., functioning as a symbol of a known quality of the good(s) and/or service(s)), the trademark effectively loses its significance as a source identifier. Even if the goods and/or services are of similar quality, the lack of provisions controlling such quality can lead to problems. Oftentimes in these situations, once this significance is lost, the trademark can be deemed to have been abandoned under trademark law.
One example of naked licensing involves Freecycle, an Arizona non-profit dedicated to facilitating the re-use of unwanted items of others. The Ninth Circuit Court, in this instance, considered whether the trademark owner (i.e., Freecycle) had adequately controlled its licensees’ use of marks so as to prevent naked licensing. In this case, Freecycle allowed its licensees to use its trademarks without written licenses. Freecycle argued, in part, that it exercised control over its licensees through guidelines and policies published online. The Court rejected Freecycle’s argument and not only found that Freecycle failed to retain contractual control over the quality control provisions, but that Freecycle did not have actual control over the quality control provisions. In turn, the Court concluded that Freecycle engaged in naked licensing.
To comply with the current state of trademark laws, there are a number of legal provisions for addressing and/or monitoring the quality of goods produced and/or services provided under a trademark that must be incorporated in a trademark license agreement to prevent naked licensing. An example of such a provision generally includes an agreement where the licensee will agree to use the licensed trademark in accordance with such quality standards as may be reasonably established by the licensor. Nevertheless, including these provisions in a trademark license does not by itself protect the trademark. Even if these provisions are encompassed in a trademark license agreement, the trademark owner should make sure to also monitor, and if necessary, enforce the quality control provisions throughout the term of the license in order to preserve the inherent value of the licensed trademark. Any failure to enforce could also be considered an abandonment of the trademark.
Naked licensing is also a risk that should be assessed prior to any potential merger or acquisition. Prospective buyers and sellers should be aware of the potential detriments that a naked trademark license arrangement can pose relative to the strength and viability of a licensed trademark.
Therefore, it is prudent to seek out meaningful counsel and contact an experienced trademark attorney to discuss such potential licensing issues. Walter Haverfield’s trademark attorneys regularly counsel clients in such licensing matters.
*This article also appears in Crain’s Cleveland Business.