From the Dr. Seuss animated series on Netflix to the business empire of a child YouTuber, the business prowess of successful mass licensing deals cannot be understated. Licensing offers an invaluable way to promote the brand awareness of a growing business and to maintain the influence of a powerful existing brand.
It's no surprise that the allure of successful licensing can be particularly strong for trademark owners who are new to these deals. However, this eagerness to expand the reach and presence of their marks may create a blind-spot for the owners. If the owners unwittingly fall into naked licensing - and disputes over trademark infringement later arise - they risk finding themselves in weakened positions.
Basics: Licensing trademarks in Canada
Section 50 of the Trademarks Act is the legal basis of how licensing deals work under Canadian trademark law. If the owner of a trademark gives a licensee permission for the trademark to be used in Canada or another country, then the use, advertisement, or display of that trademark by the licensee will be treated as if the owner themselves used, advertised, or displayed it. To the extent that the public is put on notice that the use of the trademark is licensed, the presumption at law is that the use is licensed by the owner and under the owner's control.
What is naked licensing?
Naked licensing happens when a trademark owner fails to exercise quality control over a third-party's operations and usages of the mark. It is a classic trap for the unaware.
The idea of "control" is key when it comes to whether your licensing is "naked" or "covered". The difference between the two is the owner's obligation and ability to exercise quality control over the use of the trademark on goods manufactured or services provided by a licensee. The purposes of quality control are 1) to maintain a consistent and predictable quality of goods or services offered under the mark, and 2) to ensure that the mark functions reliably as an identifier of the product or service.
By allowing naked licensing, owners can put themselves at risk of failing the owner-licensor's duty to exercise quality control of the goods and services offered by the licensee under the mark. If the licensing agreement is found to be a naked license and the owner deemed to have abandoned the mark, then it can create a defence to trademark infringement.
Proceed with caution: How to prevent naked licensing
As with many legal ailments, prevention is the best cure. We recommend trademark owners to work with legal counsel on the following points:
- Make sure that the terms of quality control are set out clearly in a written agreement.
- Develop an action plan for carrying out, measuring and documenting the quality of trademark use by the licensee. This may entail conducting site visits for inspection and getting the licensee to commit to a set of guidelines and a scorecard with specific criteria for quality standards.
- Strategize for timely measures to be taken, should a decline or change in expected quality become a material concern.
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.