I am often amazed about the number of agreements (of course none that I drafted) I encounter that grant trademark rights (or fail to grant trademark rights when they should) without any corresponding use restrictions or requirement to comply with quality control standards. It is an essential requirement of a trademark license that the trademark owner must exercise quality control over the products and services offered under the mark to avoid abandonment of the mark. A trademark license lacking in quality control is commonly referred to as a “naked license.” The underlying rationale for this requirement is that consumers could be mislead and the trademark will cease to have any utility as an indication of the source of the product or service if the licensee is allowed to depart from the trademark owner’s quality standards. Failing to exercise quality control can have serious consequences to trademark owners. The most devastating consequence of course is the loss of trademark rights that may result from abandonment of the trademark.
But there are other “less severe” consequences that still create serious and often expensive problems for trademark owners particularly when there are no use restrictions or guidelines to govern how and where the mark should be used.
Too often such essential terms tend to be overlooked in other "non trademark" agreements that include or should include a trademark license with appropriate use restrictions including Value Added Product Reseller Agreements, Distribution Agreements, Technology License Agreements, and Software License Agreements to name just a few. Failing to include trademark use restrictions and guidelines not only may result in a potential loss of rights in the mark, but could lead to disputes over the ownership of the mark and the continued use and registration of the mark and related domain names incorporating the mark after termination of the Agreement.
Brand managers are tasked with making important and sometimes difficult decisions in selecting the “right mark” to convey the perfect image for their products and services. The selection of a new mark often comes with a significant investment of time and money by the company to launch a new product. Such important considerations underscore the importance of the legal, business, and marketing groups to collaborate to develop a branding strategy that will take into consideration where the marks should be registered and how the marks should be used to avoid the pitfalls encountered in the various licensing arrangements that can sometimes result in a loss of trademark rights.
Perhaps in response to some of the pitfalls noted above, the software industry has become increasingly aware in recent years of the need to require appropriate trademark license restrictions, guidelines, and quality control standards to protect their marks and thereby avoid common pitfalls. For example, take a look at Apple's Quick Time Distribution Agreement. Software vendors also use Trademark Use Guidelines and quality control standards to ensure their marks are used properly used. Other high tech industries that license their brands to multiple licensees also have a well thought out Trademark License Program.
We have only scratched the surface of the myriad of pitfalls that lurk in the various trademark licensing scenarios. Stay tuned for my next entry where I will discuss other trademark license issues that can create an “unintended franchise.”
