Friday, June 17, 2011

Naked Licensing: Not Sexy at All

Dear Rich: What is a naked license? A trademark owner who fails to supervise a licensee and maintain quality control over the licensed products or services has created a “naked license.” A naked license may cause the owner to lose rights in the mark, a process known as "abandonment." And that's exactly what happened to the family that owned the "Eva's Bridal" trademark (Eva's Bridal Ltd. v. Halanick Enter., Inc.). The family licensed the trademark to two people to open a Chicago store. After the license expired in 2002, the owners of the store continued to use the mark but stopped paying the trademark license fees. The store owners claimed that they didn't need to pay; the mark had been abandoned because the owners had not maintained quality control (it was a naked license).
High quality vs. consistent quality. The trademark owners claimed they didn't need to supervise or maintain quality control because the bridal gowns at the store were of the same high quality (and from the same suppliers) as the other Eva's Bridal shops. In other words, quality control wasn't necessary because the store's goods were of high quality. The court responded that it wasn't "high" quality that was demanded; it was consistent quality -- for example, the kind of supervision that guaranteed the dressing rooms were clean and that the customer experience was consistent across the franchise. As the judge stated (cites omitted):
The trademark's function is to tell shoppers what to expect—and whom to blame if a given outlet falls short. The licensor's reputation is at stake in every outlet, so it invests to the extent required to keep the consumer satisfied by ensuring a repeatable experience
Takeaway Points Dept. A trademark license agreement should contain language assuring quality control and permitting the trademark owner to inspect products and services -- for example, many toy licensors require pre and post production samples. In addition, the trademark owner of a franchise operation, should perform personal inspections to guarantee consistency. (BTW, some other recent naked licensing cases are discussed here.)
How many times was the word naked used in the decision? On a Beavis and Butthead level, we counted three times (and we are hoping that word drives some additional organic searches to our blog).