Licensing your company’s trademark to another business can be a smart move. It can generate additional revenue, expand your brand’s reach and introduce your products or services to new markets. However, there’s a potential danger in giving another company permission to use your trademark without maintaining sufficient control over how it’s used.
This practice is called “naked licensing,” and it can have serious consequences for your intellectual property rights. In fact, a business that fails to exercise a certain amount of quality control over its trademark licensees could ultimately lose its exclusive rights to the mark.
How does naked licensing happen?
A trademark does more than identify a company’s products or services. It also tells consumers what to expect from the brand. When a business licenses its trademark to another company, it has a responsibility to enforce quality controls over the goods or services offered under that name.
For example, imagine that your company licenses its well-established brand name to a manufacturer. You collect royalties but never inspect the products, establish quality standards or monitor how the trademark is being used.
If the manufacturer begins selling inferior products under your company’s name, consumers may no longer be able to rely on your trademark as an indication of consistent quality. This is precisely the kind of situation that naked licensing rules are intended to prevent.
What are the potential consequences?
Under federal trademark law, failing to maintain adequate quality control over a licensed trademark can constitute abandonment of the mark. That means a court could determine that your business has actually forfeited its trademark rights.
The potential consequences are significant:
- Your company could lose its exclusive right to use the trademark.
- Competitors may be able to use a similar or identical mark without facing a successful infringement claim.
- Your business could lose a valuable intellectual property asset that took years to establish.
- Existing licensing arrangements and future revenue opportunities could be jeopardized.
The best protection starts with a carefully drafted trademark licensing agreement. It should establish clear quality standards, give the trademark owner appropriate inspection and oversight rights and provide remedies when the licensee fails to meet those standards.
More importantly, those provisions shouldn’t exist only on paper. Businesses should actively monitor compliance and document their quality control efforts. A skilled IP attorney can help businesses structure licensing agreements, address violations and resolve conflicts before valuable trademark rights are threatened.