Tuesday, June 7, 2011

Trademark Licensing: It’s OK to Strip Down, But Don’t Get Naked

A recent decision of the Seventh Circuit Court of Appeals is a good excuse to bring up a delicate subject:  Naked licensing.

No, this has nothing to do with Anthony Weiner’s Twitter account.  If your children are interested in trademarks and branding, it’s safe for them to read this blog post.

The facts of the case and the result are easy to summarize.  Eva Sweis started a bridal shop in Chicago in 1966 and called it Eva’s Bridal.  That established trademark rights.  She then let various relatives open “Eva’s Bridal” shops in Chicago suburbs.  She had no ownership and didn’t impose any controls on how they used the mark or conducted the business.  That eliminated the trademark rights.

That’s right.  If you grant a naked license to your marks, you lose your trademark rights.  Don’t let this happen to you.

Some quick background on trademark and why naked licensing is such a bad thing:

Your trademarks – your legal rights to your brands – are the odd man out of intellectual property.  The core purpose of patent, trade secret and copyright is to allow innovators to protect themselves against imitators.  There is an important element of that policy in trademark.  It protects someone who builds up the reputation of a brand (for quality, low price, cutting edge design etc.) against freeloaders.  But trademark has a second overriding policy:  protecting the public from confusion.  Trademark protection is meant to allow the public to rely on a brands to indicate accurately the source of goods and services.  That’s why trademark protection is always “use it or lose it.”  You can’t start federal registration of a trademark if you don’t plan to use it, you can’t finish registering a mark without showing actual use, and you lose your rights to the mark unless you keep using it.

The public protection aspect of trademark explains the problem with “naked licensing” – letting someone else use your trademark without exercising some ongoing control over its use.  The idea is simple:  We protect trademarks because they help the public distinguish who is providing goods and services.  So the brand owner effectively defrauds the public if it allows someone else to use the brand with no constraints.  The public thinks it’s getting the branded goods and services from the brand owner, but the brand owner, in fact, has nothing to do with them.

Naked licensing usually isn’t a problem.  Most brand owners care a lot about how others use their brands, so trademark licenses often impose detailed restrictions.  For example, licenses may require compliance with a “brand manual” and require the licensee to send samples of all proposed uses to the brand owner for pre-approval.  But it doesn’t have to be that difficult.  A simple requirement that the licensee get approval for uses of the licensed marks is enough.

There are lots of ways to make so-called “quality controls” softer and more practical.  For example, licenses often prohibit the licensor from unreasonably refusing approval.  Another common provision deems a use approved after a fixed period of time if the licensor doesn’t object.  There are many other variations.  There’s no need to impose an impractical setup and it’s unwise to pretend that you’re going to exercise controls that you really won’t (that can also put your rights at risk).  But there have to be real controls or both parties to the license risk evaporating the valuable marks they’re both counting on to advance their businesses.

You would think this would not be an issue in sophisticated transactions, but don’t be so sure.  A few months ago, I was negotiating a software license for a client (the owner of the software).  Although the main point was to license the code, a trademark license was included, as well, since the licensee would be distributing the software to third parties.  So I put a standard, innocuous provision requiring the licensee to get my client’s permission for its uses of the client’s marks.  On the next draft, the licensee’s (big firm) lawyers had deleted that provision, apparently thinking that any restriction on their client was against their client’s interest and should be eliminated.  When I reminded them that their draft would destroy the marks their client was trying to license, they restored the language.  That shouldn’t happen, but it does.

So keep “naked licensing” in the back of your mind.  Luckily, it’s a titillatingly suggestive term.  So it’s easy to remember.