In addition to using a trademark to market their own products or services, sometimes a trademark owner will license their trademark to another entity in exchange for royalties. This may be a larger business with a greater ability to make the product in large quantities. Some trademark owners may be unaware that they cannot simply license the trademark and trust the licensee to use it properly. They need to monitor the licensee’s actions related to the trademark, ensuring that the products or services provided by the licensee meet appropriate quality standards.
If you do not monitor the licensee, this is known as a naked license. A trademark owner may lose the rights to their trademark if the licensee’s products or services fail to meet quality standards. This may seem unduly harsh, but the purpose of the rule is to protect consumers.
Reasons for the Prohibition Against Naked Licenses
Trademarks are meant to inform consumers about the source of a product. Consumers rely on them in making purchases, since they trust a company that places a certain mark on its products to meet the standards associated with the mark. People develop an understanding of the quality that they can expect when they see a logo or another signifier on a product. Thus, while trademark law protects the owners of certain marks, it also protects consumers from making misguided decisions based on inaccurate or incomplete information.
If a company licenses its trademark to a company that makes similar but inferior products, a consumer likely would assume that the licensee’s products would meet the standards of the trademark owner. They would be unpleasantly surprised if they purchase the licensee’s products because the products would fall short of their expectations. (In some cases, they might even suffer health consequences.)
Failing to monitor the use of your trademark thus results in the loss of the trademark’s value in the marketplace. It no longer means anything about the products with which it is associated. This is sometimes known as the “abandonment” of a trademark. To avoid an abandonment problem, trademark owners usually include a provision in license agreements that requires the licensee to periodically send samples of products marketed under the trademark to the trademark owner.
Cancellation of Trademarks Based on Naked Licenses
When a wine company failed to monitor a company to which it had licensed its trademark, a federal appellate court canceled its trademark rights. In another case decided by a different federal appellate court, a bridal shop lost trademark protection when it licensed its trademark to several other entities but failed to supervise them. This was a family-owned company that may have lacked the resources to effectively monitor several licensees, which is a lesson that small business owners can learn. In general, if the trademark owner fails to exercise control over a licensee, or does not provide for supervision in the licensing agreement, a court will find that the trademark has been abandoned because it is a naked license.
In addition to receiving samples from a company to which you have licensed your trademark, you will want to get reports from the licensee on the types of products that are being sold with your trademark. You should know and approve the nature of the use of the trademark to ensure that it corresponds to the standards associated with it.