“NAKED”  LICENSING OF TRADEMARKS

IVAN HOFFMAN, B.A., J.D.


        Now before you get all excited here, the title does not refer to the act of licensing trademarks without wearing clothes.  Instead, the term “naked licensing” refers to the legal concept whereby a trademark owner licenses a trademark to another party for that other party’s use without that trademark owner’s retaining the right to approve the said use of the mark in connection with the licensee’s goods or services.

        This is a well-established principle in trademark law, recently re-enunciated in a case out of the Ninth Circuit (Barcamerica International USA Trust v. Tyfield Importers, Inc. et. al.).   The principle arises because a trademark is obtained (or granted in the form of a registered mark) based on the use of the mark in commerce in relationship to certain goods or services.  The basis for the rights in the mark is that the public has come to associate the mark with the said goods or services and thus relies on that mark and the goodwill and reputation attached to the same in making its purchasing and consuming decisions. It is incumbent on the trademark owner to enforce its mark against misuse and if the owner fails to do so, it risks being deemed to have abandoned the mark and thus may lose its rights to the mark.

        The same principles apply when a mark’s owner licenses the mark for use by another party.  Such licensing is generally permitted provided that the mark’s owner retains the right to approve the licensee’s use of the mark and supervise any element of quality control over the same.  The logic is clear:  if the mark is to have the import of signifying a particular source of certain goods or services and the public is going to have the right to rely on that mark for that significance, then when the mark is licensed to a party for use other than by the mark’s owner, the mark’s owner should be in a position to approve the use of the mark in relationship to the licensee’s good or services so that the public, upon seeing the mark in regard to those goods or services provided by the licensee, may rely on the same good will and quality it has come to know in relationship to that mark.  If, for example, you have ever traveled in foreign lands with trepidation about eating some indigenous food, you know the feeling of comfort you derive when you see a well known brand and thus feel you can rely on a known level of quality.  If the trademark owner does not retain the right to approve and does not in fact approve the licensed use, the trademark owner becomes vulnerable to a claim that it has abandoned its mark and the rights therein.

This Case

        The case dealt with the rights to market wines under the trademark “Leonardo Da Vinci.” Barcamerica had a registration in that mark dating back to 1984 and the mark had become incontestable in 1989.  In 1988 and again in 1989, Barcamerica entered into licensing agreements with Renaissance Vineyards by which Renaissance was granted first the non-exclusive and then the exclusive right to use the said trademark in connection with wines for a certain time period.  However, neither agreement contained any provisions granting Barcamerica the right to quality control over the licensee’s production of wine.  The evidence in the case indicated that once in a while, the mark owner’s principal, George Gino Barca, would occasionally taste the wine produced by the licensee and relied on the reputation of the licensee’s winemaker, who had, by the time of the appeal, died.

        One of the defendants, Cantine Leonardo Da Vinci So. Coop. sold wines under the same trademark but not in the United States.  When it began selling wines in the United States, through Tyfield, its importers, it ran a trademark search and concluded that Barcamerica was no longer selling wine and had abandoned the mark.  Cantine then instituted a proceeding seeking to have the Barcamerica mark cancelled.

        The Court stated, citing various sources:

But ‘[u]ncontrolled or ‘naked’ licensing may result in the trademark ceasing to function as a symbol of quality and controlled source… Consequently, where the licensor fails to exercise adequate quality control over the licensee, ‘a court may find that the trademark owner has abandoned the trademark, in which case the owner would be estopped from asserting rights to the trademark.’
        It is important to note that the trademark owner may lose its rights by virtue of its actions or inactions and the intention of the owner is not directly relevant.  In other words, rights can be lost even though it was not the intention of the mark’s owner to abandon the rights in the mark.

        The Court went on to state that formal provisions in an agreement regarding quality control, while very important, may not be necessary provided that “the particular circumstances of the licensing arrangement [indicate] that the public will not be deceived.” [emphasis added].  In other words, a license will not be held to be a “naked” one if “the licensor is familiar with and relies on the licensee’s own efforts to quality control.”

        In this case, the trial court found that there was no sufficient relationship between the licensor and the licensee for the licensor to have relied on the quality control efforts of the licensee.  The court cited several cases where the relationships were of long standing duration and in such instances, such reliance was justified.

        Thus, in this case the evidence described above was held not to be sufficient to establish such quality control and the agreement itself was silent on the subject.

        The Court stated:

It is important to keep in mind that ‘quality control’ does not necessarily mean that the licensed goods or services must be of “high” quality, but merely of equal quality, whether that quality is high, low or middle.  The point is that the customers are entitled to assume that the nature and qualify of goods and services sold under the mark at all licensed outlets will be consistent and predictable.
        The Court went on to say that the standard of quality control will vary on a case by case basis.  However, in the instant case, given the nature of the product, i.e. wine, it would have been reasonable to expect that quality control would at least have required the licensor to sample and taste the wine each season.

Conclusion

        The lesson of this case is to have a valid and thorough licensing agreement covering the issues raised in this case.  Copying from a form book or using forms passed around by others can result in a defective agreement and, as in this instance, loss of all rights in the mark.  How cost effective is that approach?  How expensive is the “savings” achieved by the use of such forms?  The other lesson is to in fact be diligent in protecting your marks, both in licensing relationships and in your own use.

© 2002 Ivan Hoffman.  All Rights Reserved.

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This article is not intended as legal advice.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States law.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship.

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No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the author.

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