In addition to using a trademark to market their own products or services, trademark owners routinely license their trademarks to others. In furtherance of a licensing deal, a trademark owner will contract with another party, which will gain the ability to use those trademark(s) in exchange for an agreed payment (usually, a lump sum and a royalty), giving the licensee rights in the trademarks without transferring ownership of the marks.
A critical responsibility of the licensor in such a licensing scenario is engaging in adequate quality control over a licensee’s use of a licensed trademark(s) to ensure that the licensee’s use of the trademark(s) does not depart from the quality of a product or service that consumers have come to expect. A lack of such quality control refers to naked licensing, and a trademark owner may lose the rights to their trademark if the licensee’s products or services fail to meet quality standards. (Justia)
Key factors in determining whether adequate quality control exists include: (1) whether a trademark owner retained contractual rights over the quality of the use of the trademark; (2) whether a trademark owner actually controlled the quality of the trademark’s use; and (3) whether a trademark owner reasonably relied on the licensee to maintain the quality. (Finnegan)
A key decision in the realm of naked licensing comes by way of the Ninth Circuit in Freecycle Sunnyvale v. The Freecycle Network, in which the federal appeals court determined that a trademark owner engaged in naked licensing by failing to adequately control the use of its trademarks by members of its non-profit organization. Based on its analysis, the Court invalidated the trademarks.