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Keeping Trademarks Covered: Avoiding Naked Licenses

Trademarks are commonly referred to as “source-identifiers.” They are logos or words that tell consumers where the good or service that they are purchasing comes from. This makes trademark licensing a bit of an unusual problem. After all, if the point of the mark is to tell consumers who makes a product, would it be wrong to say that letting someone else use that mark is misleading consumers? Yet, companies license their trademarks all the time. In fact, in a modern economy it is probably necessary to license in certain situations. In order to deal with these competing problems, courts have developed the “naked license” doctrine, which allows some trademark licenses, but not others.

What a Naked License Is

A naked license is a license where the trademark licensor does not exercise quality control over the products that the licensee is producing. The inquiry into whether a license is naked is highly fact based, rather than focusing on formalistic contracts. That means that a contract allowing for quality control does not necessarily mean a license is “clothed,” and the absence of such a contract is not proof that the license is naked. Instead, the court looks at whether the company exercises control over the quality of the goods in fact. If it does, then the trademark is safe. If not, then the license is a naked license.

One might expect that a court would simply invalidate a naked license, but the reality is actually considerably more serious for the trademark holder. The Lanham Act affirmatively requires the markholder to control the “nature and quality” of the products that the mark is attached to. Courts interpret failure to do so as “abandonment” of the trademark. A markholder’s abandoning the mark removes all of the holder’s rights in it, opening it up for anyone to use. This is even true if the mark is an “incontestable” mark, meaning that the mark is old enough that most methods of invalidating it no longer apply.

Why The Naked License Doctrine Exists

This may seem like an overly-harsh punishment, but it stems from the fact that the core of American trademark law is consumer protection. For some time in the history of American trademark law, licenses were rarely used and almost completely forbidden. The purpose of marks was to allow consumers to know who they were buying their goods from. If companies could sell their reputations like this, then they could deceive consumers. However, this idea was unique to American law, and courts eventually recognized that there were benefits from licensing that American companies were unable to capture.

In order to give companies access to these benefits, while still protecting consumers from deception, the courts developed the naked license doctrine. The idea behind it is that as long as the company still exercises quality control over the product, then it is alright for them to allow someone else to place their mark on it. In essence they are vouching for the quality of the goods, which they can do because they control that quality.

Trademark law can impose serious consequences for seemingly minor decisions. If you have recently become involved in a trademark lawsuit, or you have recently found someone infringing on your mark, contact a West Palm Beach trademark litigation attorney at Pike & Lustig, LLP today.

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