Trademark licensing is an extremely popular and efficient way to diversify revenue streams. You can find licensed trademarks in almost any industry, including clothing, toys, jewelry, home goods, tools, textiles, autos, video games, even the alcohol industry.
But trademark licensing is actually fairly complex. Failure to adhere to required standards can cause damage to your brand, or even result in losing your trademark.
One of the biggest potential pitfalls? Naked Licensing.
What Is Trademark Licensing?
Trademark licensing refers to an agreement where a trademark owner grants permission to another person or entity, known as the licensee, to use the trademark in connection with certain goods or services. In exchange for the right to use the trademark, the licensee typically pays the trademark owner a licensing fee.
Trademark licensing allows the trademark owner to generate additional revenue by licensing their trademark to others. It also allows the licensee to benefit from the reputation and goodwill associated with the trademark, which can help them attract customers and increase sales.
Example: Wal Mart has an existing base of customers and relationships with clothing manufacturers. A film studio– let’s say Marvel– can license its beloved characters to Wal Mart to produce clothing with the characters on it (here’s an example). Both Wal Mart and Marvel benefit from increased revenue– Wal Mart from sales driven by people who love those characters, and Marvel from the licensing/ royalty fees (however they structure the payments). Wal Mart also benefits because it doesn’t have to develop and market its own characters; Marvel benefits as it can sell products without entering into the manufacturing space. It’s a symbiotic relationship!
What is a Naked License?
Naked trademark licensing, also known as “naked licensing,” refers to a situation where a trademark owner licenses their trademark to another party without maintaining adequate control over the quality of the goods or services being offered under the licensed trademark.
When a trademark owner licenses their trademark to another party, they grant the licensee the right to use the trademark in connection with certain goods or services. However, the trademark owner has a duty to control the quality of the goods or services being offered under the licensed trademark. If the owner fails to do so, their trademark may become vulnerable to attack, cancellation, or losing its protection.
In a naked licensing scenario, the licensee is granted the right to use the trademark, but the licensor does not monitor or control the quality of the goods or services being offered by the licensee. This can lead to a situation where the licensee offers substandard goods or services, which can harm the reputation and goodwill associated with the trademark.
Why is naked licensing bad?
A Naked license can lead to a loss of trademark rights, as it can damage the reputation and goodwill associated with the trademark. For example, if a licensee offers substandard goods or services under the licensed trademark, it can harm the reputation of the trademark owner and cause confusion among consumers.
How to avoid a naked license
To avoid naked licensing, trademark owners should take steps to maintain control over the use of their trademark by licensees.
One of the most important steps is monitoring the quality of the goods or services being offered under the licensed trademark. This can be achieved by setting quality control standards and monitoring compliance with those standards.
Trademark owners should also include quality control provisions in the licensing agreement, which outline the licensee’s obligations to maintain the quality of goods or services offered under the licensed trademark. These provisions should set forth the specific quality control standards that the licensee must adhere to and provide for regular monitoring of compliance with those standards.
It is also important for the trademark owner to reserve the right to terminate the licensing agreement if the licensee fails to comply with quality standards. This gives the trademark owner the ability to take action if the licensee fails to maintain the quality of goods or services offered under the licensed trademark.
Trademark owners should avoid naked licensing at all costs. By taking steps to maintain control over the use of trademarks by licensees, trademark owners can help ensure that they maintain their rights to the trademark. This can help protect the reputation and goodwill associated with the trademark, which is critical to the success of any brand or business in our digital, brand-driven age.