Trademarks are often licensed to third parties for production, manufacturing, or distribution. For example, imagine that you have developed an innovative tomato sauce, which you've named "Grandma's Fixin'" and created some notoriety in your small town. If you wish to expand, you might decide to license that trademark to a larger company capable of mass production and distribution. They are permitted to use the "Grandma's Fixin'" name in exchange for providing you with set royalties.
However, you cannot simply ignore your trademark after "renting" it to a third party. If you grant others the right to use your trademark (known as a trademark license), you must supervise the nature and quality of the goods or services being produced using that trademark.
For example, in the situation above, you must supervise the quality of the sauce and the marketing of your third-party manufacturer and distributor. Failure to supervise is referred to as a “naked license,” and the results can be disastrous. Indeed, a naked license can result in your losing the rights to your trademark altogether.
Why do courts force trademark owners to conduct this supervision of their trademarks? Why should they care how a trademark owner licenses its mark? The answer relates to the policy behind trademark law in the United States. A trademark is given to a business as an indicator of the source. It is meant to signify to consumers the origin of products bearing that trademark.
For example, a buyer of soda should be able to walk into a store and quickly see the “Coke” trademark and make a purchasing decision. That consumer’s decision to buy the can of soda is based on the consumer’s familiarity with Coke’s general quality, safety, and cost. The goal is, primarily, to benefit the consumers as much as the business itself.
What if Coke, seeking to make some quick cash, decided to license its name and logo to another soda company? Imagine that the first company to make an offer on the name and logo was not very sophisticated; its product was essentially cloudy water with lots of unhealthy syrup and poor quality control. Now, imagine that Coke made no efforts to police the company’s use of its mark, or the products to which the marks were attached. A consumer would naturally walk into a store, buy the sludgy soda, and be gravely disappointed upon learning that the “Coke” company did not, in fact, produce it.
This sort of a naked license would not be permissible, and indeed, could result in Coke losing its right to have its mark at all. Courts want trademarks to convey the source of origin to the marketplace. If the mark owner makes no effort to track or police its own mark, then the mark essentially losing its meaning as an effective source identifier.
Courts will often strip trademark owners of their trademark rights if they issue naked licenses of the marks. A failure to monitor one's trademark is seen as an effective abdication of a trademark owner's responsibility.
In a 2002 case, for example, the U.S. Court of Appeals for the Ninth Circuit cancelled the trademark rights of a licensor of a wine trademark because the company failed to supervise a company that had licensed the trademark. Barcamerica International USA Trust v. Tyfield Importers Inc., 289 F.3d 589 (9th Cir. 2002). Most trademark licenses are drafted to avoid this result by requiring that samples of all licensed trademark goods be periodically submitted to the trademark owner for approval and quality control.
Similarly, in Eva’s Bridal Ltd. v. Halanick Enterprises, 639 F.3d 788 (7th Cir. 2011), a family-owned bridal shop failed to supervise its licensees and as a result abandoned its right to the licensed mark. A similar result was reached when an organization did not exercise contractual or actual control over a licensee. The arrangement was considered to be a “naked license,” resulting in trademark abandonment and the loss of all trademark rights. FreecycleSunnyvale v. Freecycle Network, 626 F.3d 509 (9th Cir. 2010).
In short, if you own a trademark and are considering licensing it to another person or company, you'll want to make sure to institute a robust system of policing the mark. You should receive regular reports on the goods the company is selling with your mark and the nature of the use. You should also regularly test samples of its products for quality. In the "Grandma's Fixin'" example earlier, this could include regularly buying and tasting the sauce.