Naked Trademark Licensing
Ok, so we all know what a trademark license is. A contract where the grantor grants the grantee the right to use the grantor’s trademark. So why would this type of contract be considered naked and why do I care?
When you think of a trademark, you think about the logo or name of the company but you may not think about the “good will” associated with the trademark. Good will refers to the reputation your company has developed with its consumers and is technically a separate intellectual property from your trademark. When a trademark license fails to include the good will associated with the trademark, that license is considered naked. A trademark owner includes the good will in a trademark license by exercising quality control over the licensee’s use of the trademark.
For example, if a company that makes and sells a product licenses another company to make and sell the product under their trademark fails to include a provision in the contract allowing them to periodically review the quality of the products being produced by the licensee, the consumer may end up purchasing the licensee’s product which doesn’t meet the licensor’s standards. The trademark owner is granted brand protection because the consumer is assured of the same level of quality when purchasing and they know who to complain to if they aren’t satisfied. If the trademark owner breaches that deal, they may loose their trademark protection.
So the bottom line is that engaging in a naked license may result in a loss of trademark protection. Not just for the naked licensed products, also for the ones the licensor makes and sells. The same analogy applies to service businesses.
As a business owner, this rule affects you in two ways. First, if you have established a trademark holding company that licenses your company’s trademarks to another entity that operates the business, some courts will find that such a license is naked. Trademark holding companies probably don’t create a tax advantage anyway, so this type of arrangement should be avoided.
Second, if you are using a trademark license instead of a franchise agreement, you may have a naked license. Under the Federal Trade Commission’s rules, a franchise includes three elements: a trademark license, payment of a fee, and significant operating control. Well you can’t avoid the fee payment unless you aren’t planning on making any money, which would make it a bad business deal. You can avoid the trademark license by having the licensee operate under your trademark, but most businesses are more interested in buying your reputation than your business plan. So you likely will create a trademark license, where the licensee will pay you, but you won’t control the way they operate. This is a naked license and could again result in the loss of your trademark rights.
I did my best to break this down in an understandable way but reading back over it confirms the complexity of this issue. If you are considering business development strategies like trademark licenses, franchising, distribution agreements, affiliate agreements, etc., make sure you have spoken to a trademark attorney to ensure you don’t inadvertently enter a license with you pants down.