Brand merchandising and licensing is a multibillion-dollar business.1 Given the money at stake, it goes without saying that it is important for both trademark owners and licensees to have written agreements in place to protect their respective interests. Traditionally, trademark license agreements cover issues such as the extent of the license grant, the products/ services covered by the license, term and termination rights, royalty calculations and payments, product liability, indemnity, and quality control.

Focusing specifically on quality control provisions, generally, these provisions enable the trademark owner/licensor to contractually control the quality of the products and services provided by the licensee. With quality controls in place, courts generally recognize a trademark owner/licensor and a licensee as being sufficiently "related" with respect to the licensed mark – meaning that the licensed trademark continues to function as an indicator of a single source for a product or service, although the licensee is in fact providing the goods and/ or services rather than the licensor.2

The consequence of failing to establish that a trademark owner/licensor and a licensee are "related," for example, through quality control, can be a finding of abandonment of the mark through "naked" licensing.3 Third parties challenging the validity and enforceability of a licensed mark often attack the validity of any license related to the mark on these grounds, as trademark owners are sometimes not careful in either drafting the license agreement to include quality control provisions or actually enforcing its quality control provisions. In the context of quality control, it may not be enough that a trademark license agreement merely contains quality control provisions.

Some courts have held that the mere right to control quality in an agreement is not sufficient, ipso facto.4 When the issue of abandonment through "naked" licensing is raised, courts often look beyond the trademark license agreement for evidence that quality was actually controlled in some fashion.5

In some court decisions, a trademark owner/licensor has been required to produce evidence of an active quality control program to avoid the determination that the license granted is a "naked" license.6 In a somewhat different approach, some court decisions have required that a trademark owner/licensor provide evidence that the quality of the goods and services provided under the license has remained constant during the period of the license to avoid the determination that the license granted was a "naked" license.7

Special circumstances between a licensee and licensor may avoid the conclusion that the license was merely a "naked" license despite lacking express quality control provisions. For instance, common ownership of the licensor and the licensee companies,8 the prior longstanding relationship of the parties,9 or laws or regulations governing processes or products used in connection with the licensed mark,10 may be sufficient to avoid a determination that a license was a "naked" license.

Obviously, these types of special circumstances may change over time, even if in existence when the license is granted. So, the parties, and particularly a licensor, may consider having a formal quality control program in place to withstand later "naked license" challenges by third parties. Some aspects of the program may include:

  • Providing standards to licensees governing the format and display of the licensed mark on the goods and services
  • Preparing regular written reports of approvals granted relating to marketing and promotional materials and compliance with trademark standards
  • Providing training manuals and seminars to licensees governing the making and selling of the licensed goods and/or providing licensed services
  • Providing licensees with specifications for the making of the licensed goods and/or providing licensed services
  • Issuing periodic merchandising bulletins to licensees with approved sales promotion concepts and approved products
  • Providing raw materials to licensees or specifying approved suppliers
  • Conducting regular licensee site inspections by qualified personnel
  • Preparing regular written reports of licensee site inspections
  • Maintaining customer complaint logs for licensed products
  • Conducting periodic quality inspections of licensed products/services

Implementing these suggestions may assist in proving that there is an active and effective quality control program sufficient to defeat a "naked license" attack on the license, and hence the trademark. Having a demonstrably effective license agreement may also ensure the quality of the goods and services and their continued successful commercialization.

Footnotes

1 http://www.beanstalk.com/power-/facts.html

2 See, e.g., Dawn Donut Co. v. Hart's Food Stores, Inc. 267 F.2d 358, 367 (2d Cir. 1959).

3 See, e.g., Barcamerica Int'l, USA Trust v. Tyfield Imp., Inc., 289 F.3d 589, 597-98 (9th Cir. 2002); Haymaker Sports, Inc. v. Turian, 581 F.2d 257, 260 (C.C.P.A. 1978); Stanfield v. Osborne Indus., 839 F. Supp. 1499 , 1504-05 (D. Kan. 1993), aff'd, 52 F.3d 867 (10th Cir. 1995); Koretz v. Heffernan, 1993 U.S. Dist. LEXIS 1846, at *17-18 (N.D. Ill. Feb. 18, 1993).

4 Ritchie v. Williams, 395 F.3d 283, 290(6th Cir. 2005); Halo Mgmt., LLC v. Interland, Inc., 308 F. Supp. 2d 1019, 1029-30 (N.D. Cal. 2003); Yamamoto & Co. (Am.), Inc. v. Victor United, Inc., 219 U.S.P.Q. 968, 980, (C.D. Cal. 1982); Cartier, Inc. v. Three Sheaves Co., 465 F. Supp. 123, 129 (S.D. N.Y. 1979); First Nat'l Bank of Omaha v. Autoteller Sys. Serv. Corp., 9 U.S.P.Q.2d 1740, 1743 (T.T.A.B. 1988).

5 Id.

6 See supra notes 3 and 4.

7 Irene Calboli, The Sunset Of "Quality Control" In Modern Trademark Licensing, 57 Am. U. L. Rev. 341, 371-74 (2007) (discussing progressive erosion of quality control and advocating an approach based upon consumer expectations of quality).

8 Sterling Drug Inc. v. Lincoln Labs., Inc., 322 F.2d 968, 973 (7th Cir. 1963).

9 Taco Cabana Int'l, Inc. v. Two Pesos, Inc., 932 F.2d 1113, 1121-22 (5th Cir. 1991), aff'd, 505 U.S. 763, 120 L. Ed. 2d 615, 112 S. Ct. 2753

10 Syntex Labs., Inc. v. Norwich Pharmacal Co., 315 F.Supp. 45, 56 (S.D.N.Y. 1970), aff'd, 437 F.2d 566 (2d Cir. 1971).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.