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Is Your Brand Exposed by a Naked License?
Practical Law Legal Update 7-522-7113 (Approx. 4 pages)
Is Your Brand Exposed by a Naked License?
by Practical Law Intellectual Property & Technology
| Published on 05 Aug 2014 • USA (National/Federal) |
A discussion of the importance of quality control in trademark licensing and the risks of a naked license. This Legal Update includes links to resources that discuss the issues and provide guidance for drafting quality control provisions in a trademark license.
Quality control is a critical aspect of trademark licensing. A trademark licensor must exercise adequate quality control over its licensees' goods and services to ensure that the licensed mark continues to signify a:
- Single source of origin.
- Uniform and predictable quality of goods or services offered under the mark.
The Lanham Act provides that a trademark is deemed abandoned when the mark owner's course of conduct causes the mark to lose its significance as a mark (15 U.S.C. § 1127). If a trademark licensor does not exercise adequate quality control over a licensee's activities, the licensed mark may lose its trademark significance, as it no longer signifies a single source and uniform quality, two core functions of a trademark. Therefore, consumers may be deceived and a court or administrative tribunal may find that the license is "naked," resulting in abandonment of the mark or other limitation of rights (see Barcamerica Int'l USA Trust v. Tyfield Imps., Inc., 289 F.3d 589 (9th Cir. 2002)).
For more information on the potential impact of uncontrolled (naked) licensing, see Practice Note, Loss of Trademark Rights: Abandonment through Uncontrolled (Naked) Licensing.
While the level of control necessary to avoid a naked license is typically low, many factors determine the appropriate nature and extent of quality control provisions in a trademark license including:
- The industry involved.
- The licensed goods or services.
- The relative leverage of the parties.
Key aspects typically include:
- Requirements to use appropriate formulae, recipes or business methods.
- A requirement that all goods match a defined set of criteria.
- Requirements to use certain premises, machinery or materials.
- The provision of regular samples and (where appropriate) the inspection of premises or factories.
Quality control provisions in a license should extend to the packaging and storage of goods and review of advertising and promotional materials. A trademark license should also clarify:
- How to judge quality control standards.
- The point at which to determine that the quality control standards have been breached.
The licensor should exercise its quality control rights because the critical inquiry is generally the nature and extent of the quality control actually exercised by the licensor and not simply the existence of written quality control provisions.
However, a licensor must not exercise so much control over the licensee that it increases exposure to:
- Product liability claims relating to the licensee's products.
- A finding that it created a franchise relationship.
For more on quality control in a trademark license, see Practice Note, Trademark License Agreements: Quality Control.
For a sample pro-licensor quality control provision in a trademark license and drafting guidance, see Standard Document, Trademark License Agreement (Pro-licensor): Section 5.
For a Checklist of issues that a trademark licensor should consider when starting a licensing program, selecting a licensee and entering into a trademark license agreement, see Trademark License Checklist.