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  • Writer's pictureDenny Esford

Naked Licensing – Almost as Scandalous as It Sounds

We’ve all heard the expression “use it or lose it.” This can apply to many situations, and says what it means: if you don’t use what you have, you could lose it. This expression is particularly appropriate to trademarks and their owners. In the trademark context, the expression speaks more to maintenance and control of licenses than of personal use.

The main goal of trademark law is to prevent consumer confusion over the source of goods and services. For example, when people see a restaurant named McDonald’s, they know that they can go in, order a Big Mac, and get the same ingredients and quality of burger they would at any other McDonald’s. They trust the restaurant with using that name to give them what they expect and associate McDonald’s as the exclusive source of the product they wish to purchase..

Now, imagine what would happen if you went into a McDonald’s, ordered a burger, and got something of terrible quality. That would likely influence your view of the chain as a whole, correct?It confuses consumers and dilutes the source of that high quality burger the consumer associates with the McDonald’s name. Usually, it is a party unconnected with the trademark owner that uses the same or a similar name for a product of terrible quality that hurts the hard-earned reputation of the McDonald’s name. However, this outcome is also possible if a company engages in what is referred to in trademark law as “naked licensing.”

When a trademark owner grants a license, he is essentially agreeing to keep the use of that name on a par with the owner’s own use. Naked licensing occurs when the trademark owner no longer does that. Specifically, this happens when the company no longer polices those who purchased a license to use the owner’s trademark – for instance, if the trademark owner never visits the store, checks on the quality of goods the licensee produces, or makes sure that the licensee is operating the store to the standards maintained by other users of the mark.

While the name “naked licensing” may not inspire much fear, the results of such actions are quite serious. The practice is in direct opposition to the goal of trademark law by permitting consumers to be deceived. Because of this, courts have frequently treated this as “abandonment” –the owner has forfeits his right to exclusively use the mark. When that happens, others can jump in and capitalize on the name and goodwill of the mark, causing the owner to lose sales and eventually the owners good reputation. All the benefits of federal trademark registration can disappear simply because of a failure to police licensees.

The moral of this story? If you own a trademark, make sure you’re participating in some form of quality control to keep not only your customers, but the courts, too, happy.

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