Avoid Naked Licensing

When business owners develop a wonderful product, often other people want to sell the product or use the trademark to develop other products.

For example, a business develops a popular tasty rum and sells it under a registered trademark, YUMMY. Friends of the creator want to make rum cakes and rum sauces using the YUMMY mark. The two parties may end up negotiating a licensing agreement regarding the products and trademark.

If the license agreement does not include adequate quality control over the licensee, it will be considered a “naked license.”

Failure to exercise control over the nature and quality of the goods or services sold by the licensee under the licensed mark can result in the loss of some or all rights in the licensed trademark. Judge Posner stated in 1989:

“The owner of a trademark has a duty to ensure the consistency of the trademarked good or service. If he does not fulfill his duty, he forfeits the trademark . . . The purpose of a trademark, after all, is to identify a good or service to the consumer, and identity implies consistency and correlative duty to make sure that the good or service really is of consistent quality, i.e., really is the same good or service.” Gorenstein Enterprises, Inc. v Quality Care-USA, Inc., 874 F.2d 431 (7th Circuit Court of Appeals, 1989)

To avoid naked licensing, make sure you include provisions in the licensing agreement that address the following issues:

  • Quality control of use of the trademark
  • Quality control of quality of product
  • Audit/inspection provisions for control of trademark use and quality of product
  • Audit provisions for payment of licensing fees if based on percentage of sales
  • Goodwill from the license will still be owned by the licensor
  • Make sure the license is not forever, there should be a period of use with a renewal clause and a termination clause in case the licensee violates the agreement

The trademark owner should make sure it enforces the quality control provisions in the agreement. Failure to enforce the agreement could be considered an abandonment of the mark. If there is a “close working relationship” between the licensor and licensee, then place a clause in the agreement that states the basis of the close working relationship and why the licensee can be trusted to maintain the quality of the product and use of the trademark based on history or procedures in place at the business.

Trademarks are intended to identify the source of a product or service. The mark is considered a symbol of quality, attesting to the consistent, predictable nature of the identified goods or service. Consumers rely on the mark to identify the quality and source of goods and services. If a trademark owner allows other parties unfettered use of the trademark, then the trademark owner has abandoned its trademark rights.