Oct 08 | 2015

Getting Caught with your Pants Down: The Embarrassment of Naked Licensing

You know that dream where you find yourself in front of a crowd in nothing more than your underwear?  For trademark owners there is a real-life nightmare known as “naked licensing,” and its consequences are more serious than waking up in a cold sweat.  Naked licensing occurs when a trademark owner lets others use a trademark without maintaining control over how the trademark is used.  Naked licensing is usually a defense raised by someone who has been accused of using a trademark without permission.  It is a judicial decree of the loss of trademark rights, meaning that the trademark owner loses its ability to prevent others from using that trademark.  Trademark owners need to be aware of this important issue and how to avoid it.

Lack of Control = Naked License = Loss of Trademark Rights

Quality control is crucial in trademark licensing, and it is the key to avoiding allegations of naked licensing.  The premise behind naked licensing is that consumers anticipate and deserve consistency in the quality of goods or services sold under a particular trademark, and it is that consistency and expectation that create valuable goodwill associated with the use of the trademark.  A trademark owner that fails to ensure consistency when others are permitted to use a trademark damages the owner’s goodwill and renders the trademark unprotectable.

When determining whether there was adequate quality control to avert a naked licensing determination, courts typically consider three factors:

  1. Did the trademark owner retain contractual rights over the quality of the goods or services associated with the trademark?  This can be demonstrated by placing standards and oversight requirements in the contract.
  2. Did the trademark owner actually control the quality of the trademark use?  The lack of a written agreement is not determinative as long as the trademark owner exhibits actual control over the quality through site visits, product packaging approval, or similar oversight measures.
  3. Did the trademark owner reasonably rely on the licensee to maintain the quality?  Unless the trademark owner establishes clear guidelines regarding quality, or there is a longstanding business relationship with the licensee and a proven track record of consistent quality emanating from the licensee, it will be difficult for the trademark owner to claim that its reliance on the licensee for quality control was reasonable.

Examples of Naked Licensing

Two real-life examples with different facts, but the same disastrous conclusion shed light on the naked licensing issue.

One: A bridal store utilized written license agreements to permit others to open up their own stores under the bridal store’s trademark.  Even though the agreement was in writing and licensees paid an annual licensing fee for the permitted use, the written agreement did not include any quality control requirements nor did it expressly provide the bridal store (the trademark owner) with the power to supervise how its trademark was to be used.  The bridal store ultimately sued for trademark infringement when a licensee continued to use the trademark beyond expiration of the written agreement.   The court ruled in favor of the licensee on the grounds that the bridal store abandoned its rights by failing to account for any quality control measures in the agreement.  In making its decision, the court noted that even if a licensee provides high-quality goods or services under another’s trademark – as was the case here – the trademark owner still needs to ensure that the quality is consistent with what consumers will expect from the trademark owner.  In essence, consistency trumps quality, and a failure to ensure consistency can lead to naked licensing. (Eva’s Bridal Ltd. v. Halanick Enterprises, Inc., 639 F.3d 788 (7th Cir. 2011))

Two: A non-profit organization dedicated to building a community of recyclers encouraged the creation of local recycling groups and permitted these groups to use the non-profit’s trademarks.  There was no written license agreement nor did the non-profit provide trademark usage guidelines for the local groups.  Instead, the non-profit encouraged the groups to “Keep it Free, Legal, and Appropriate for all Ages,” but the local groups were not required to adopt this standard.  One of the local groups filed a declaratory judgment action against the non-profit after the organization demanded that this group stop using the trademarks.  The local group was seeking a declaration from the court that it could freely use the trademarks since it believed that the non-profit had abandoned its rights by engaging in naked licensing.  The court sided with the local group and determined that naked licensing had occurred, because even informal sharing of trademarks among community-based local groups required the trademark owner to exercise some semblance of control  over how its trademarks were to be used.  (FreecycleSunnyvale v. Freecycle Network, 626 F.3d 509 (9th Cir. 2010))

These two examples offer important takeaways for trademark owners.  The first shows that a written agreement regarding trademark rights is only as good as the specific quality control measures included in that agreement.  The second example shows that a naked licensing determination is inevitable when there is a complete lack of any attempt to enforce quality control standard.

In view of these real life examples, remember the keys to avoid naked licensing.  When permitting others to use your trademark, make sure to solidify the terms of use in writing.  Also, include provisions that allow for your prior approval of the other party’s use of your mark, including periodic review of inventory and marketing collateral, and periodic review of on-site premises.  If the other party refuses to sign a written agreement and you are determined to allow for the other party’s use of your mark, make sure to exert actual control over the other party’s use via periodic site visits and police the use of your trademark.  In the absence of any oversight or written controls, do not assume that your licensee is maintaining the level of quality that your customers have come to expect.

By Adam W. Sikich, Esq.