By: Daniel Nageotte, Esq.
Licensing out a trademark for third-party use is a common practice amongst trademark owners. If done correctly, it accomplishes two goals. First, licensing generates new revenue streams for mark owners by way of licensing fees and royalties. Second, licensing can lead to substantial growth for a reduced price as the licensee bears some of, if not all, the costs associated with using the mark with its customer base. Indeed, licensing arrangements seem like a low-risk/high-reward opportunity to many; however, mark owners need to be cautious because, if done incorrectly, licensing a trademark can lead to a “naked license” designation, which results in the loss of some or all of a trademark owner’s rights in a mark.
A naked license refers to a license under which a trademark owner does not maintain adequate control over the subject mark. Generally, this concept only comes up in litigation where an alleged infringer will assert a naked license defense. Under this defense, the alleged infringer argues that the mark owner does not hold any rights to the mark because they do not maintain “adequate control” over the mark when it has been licensed out for third-party use. If this defense prevails, the mark owner loses some, if not all, of its rights to the mark. This may seem harsh, but it is important to remember that trademark rights are not in place to protect trademark owners. Instead, trademark rights are in place to protect consumers.
In particular, trademark protections prevent consumer confusion as to who is the responsible party for a mark and the products bearing it.
Indeed, avoiding a “naked license” designation is of the utmost importance for all trademark owners. However, simply stating that you have control over a mark is insufficient. Instead, trademark owners need to evaluate their own situations and determine what measures need to be taken to demonstrate that they maintain enough control over the mark.
Generally speaking, courts consider three factors when determining if a trademark owner maintained “adequate control” in a licensing arrangement as to avoid a naked licensing designation.
First, courts examine whether the trademark owner held any contractual control over the quality of the use of the mark. Although it is important to designate who owns the subject trademark in a licensing agreement, this in itself is not enough.
Rather, it is far more important to include in any licensing agreement provisions that explicitly outline how the trademark owner maintains control over the licensee’s use of the mark. For instance, identifying certain quality metrics that must be met by the licensee when using the mark, establishing how the trademark owner can monitor the licensee’s use of the mark, and setting forth the remedies available to the trademark owner in the event that the use is not sufficient.
Second, courts analyze whether the trademark owner actually controlled the quality of the mark’s use. Courts tend to put more weight on this factor as it examines what steps were actually taken by the trademark owner, as opposed to just what was agreed to. Truly, actions speak louder than words. Thus, it is imperative that a trademark owner not only identify ways to demonstrate control over the use of the mark, but actually do those things. Meaning, if there are set quality control metrics that must be met by the licensee when using the mark, the onus is on the trademark owner to get the licensee to do what is needed to ensure those metrics are met.
Finally, the last factor considered by courts in determining if adequate control was maintained is whether the trademark owner reasonably relied on the licensee to maintain the quality of use. Like the second factor, the onus here is on the trademark owner. It is not enough for a trademark owner to say that they trusted the licensee. Instead, to the extent a trademark owner does rely on a licensee to maintain quality, it is up to the trademark owner to prove that such reliance was reasonable. Again, trademark protections are not in place for the trademark owners; instead, they are in place for the consumers. As such, it is up to the trademark owner to prove why its reliance on the licensee was reasonable.
Licensing arrangements can lead to substantial benefits for trademark owners; however, the possibility of a naked license designation gives mark owners a reason to proceed with caution. To be sure, trademark owners can avoid such a designation by simply (i) identifying ways to maintain control over the use of the mark prior to entering into any such licensing arrangement and (ii) following through with the execution of such measures. Ultimately, it comes down to having a plan in place and executing it.
