If you grant others the right to use your trademark (known as a trademark license), you must always supervise the nature and quality of the goods or services being produced using that trademark.
For example, if you are the owner of a trademark for clothing, and you license its use to a shoe company, you must supervise the quality of the shoe company’s products using your trademark. Specifically, you must diligently monitor the shoe company’s use of your mark to ensure that the company is using it correctly and in accordance with the terms of your contract.
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 trademark rights if they issue naked licenses of the marks.
In a 2002 case, a court 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, make sure that you have 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 their products for quality.