A trademark owner may license their trademark to another company in exchange for royalties in addition to using it to sell their own products or services. This could be a bigger company with more capacity to produce large amounts of the product. Some trademark owners may not realize that they cannot just license their trademark and assume that the licensee would use it properly. They must keep track of the licensee’s trademark-related activities and ensure that the licensee’s products and services satisfy relevant quality standards.
A naked license is one in which the licensee is not monitored. If the licensee’s goods or services do not exceed quality criteria, the trademark owner may lose their rights to their trademark. This may appear to be overly punitive, yet the rule’s goal is to safeguard consumers.
Reasons for the Prohibition against Naked Licenses
Trademarks are used to tell customers where a product comes from. Consumers rely on them when making purchases because they trust a company that places a certain mark on its products to fulfill the mark’s criteria. When people see a logo or similar signifier on a product, they build an understanding of the quality they may expect. As a result, while trademark law protects trademark owners, it also protects consumers from making poor decisions based on false or insufficient information.
A consumer would think that if a company leases its trademark to a company that creates comparable but inferior items, the licensee’s products will match the trademark owner’s criteria. If consumers purchase the licensee’s items, they will be disappointed since the products will fall short of their expectations. (They may even suffer health issues in some circumstances.)
Failure to keep track of how your trademark is being used might lead to a decrease in its market value. It has lost any relevance to the products with which it is related. This is commonly referred to as a trademark’s “abandonment.” To avoid any issue with abandonment, trademark owners frequently add a clause in license agreements requiring the licensee to deliver samples of products marketed under the trademark to the trademark owner on a regular basis.
Cancellation of Trademarks Based on Naked Licenses
A federal appeals court canceled a wine company’s trademark rights after it failed to oversee a company to which it had licensed its trademark. A bridal business lost trademark protection after licensing its trademark to multiple other entities but failing to monitor them, according to a different federal appeal court. This was a family-owned business that may not have had the means to efficiently supervise several licensees, which is a valuable lesson for small business owners to learn. In general, a court will determine that a trademark has been abandoned if the trademark owner fails to exercise control over a licensee or does not allow for supervision in the licensing agreement.
You’ll want to acquire reports from the licensee on the types of products being sold with your name, in addition to receiving samples from the company to which you’ve licensed your trademark. To guarantee that the nature of the trademark’s usage adheres to the standards associated with it, you should be aware of and approve it.