Companies that license their trademarks should be aware that their licensed trademarks may be declared abandoned and unenforceable if they engage in what is known as “naked licensing.” Naked licensing occurs when a licensor fails to exercise adequate quality control over a trademark licensee’s use of the licensed trademark. When courts find naked licensing, the nearly inevitable result is a judicial declaration of trademark abandonment.
Case in point, the recent decision in Eva’s Bridal Ltd. v. Halanick Enterprises, Inc. provides a cautionary tale for trademark owners regarding the rigid manner in which the naked licensing rule is often applied. In this case, the 7th Circuit affirmed a district court’s finding of trademark abandonment due to naked licensing, thereby blocking the trademark owner’s infringement suit and invalidating its trademark, which had been in continuous use by the trademark owner and its predecessors in interest for nearly 50 years.
But how much control should be asserted to avoid a finding of naked licensing? The court only commented that it depends on the surrounding circumstances and, in this case, the plaintiff admitted that it exercised no quality control, making the court’s conclusion that the license was a naked license nearly inevitable.
The court was concerned that a consumer who visited plaintiff’s Eva’s Bridal shop and defendant’s Eva’s Bridal shop “might not find a common ambiance or means of doing business,” despite the stores’ use of the same trademark. The language “might not” signal an important point regarding the quality control requirement. Courts that declare trademarks abandoned due to naked licensing generally do not attempt to evaluate whether the trademark has actually lost its ability to function as a mark in the marketplace. Instead, the courts evaluate whether the license itself provided for sufficient quality control and/or whether, in the court’s view, sufficient control was exercised by the licensor—end of analysis. There is generally no inquiry into whether the licensee’s goods and services were, in fact, consistent with consumer’s expectations for the brand. If the licensor allowed the possibility of a lack of consistency to exist through inadequate quality control, that is enough for a finding of naked licensing.