When a trademark licensor fails to supervise its licensee and allows the licensee to depart from the licensor's quality standards, it may be deemed “naked licensing” that results in abandonment of the trademark. Groucho's Franchise Sys., LLC v. Grouchy's Deli, Inc., 683 F. App′x 826, 830 (11th Cir. 2017) (“the abandonment of a mark by ‘naked licensing' occurs when the owner of a mark fails to supervise its licensee and allows the licensee to depart from the licensor's quality standards”); Vineyard House, LLC v. Constellation Brands U.S. Operations, Inc., 515 F. Supp. 3d 1061, 1079 (N.D. Cal. 2021) (“The purpose of ‘controlling' the ‘quality of goods' is to protect the trademark.”).

The rationale against naked licensing is that the public has a right to expect a consistent quality of goods or services associated with a trademark. FreecycleSunnyvale v. Freecycle Network, 626 F. 3d 509, 615 (9th Cir. 2010) (“naked licensing is inherently deceptive”).

A trademark licensor should retain an express contractual right to inspect and supervise the licensee's operations for quality control. And failing to so supervise a licensee could lead to a conclusion of abandonment from naked licensing.

How much control by the licensor is enough? “How much [licensor] authority [over quality] is enough can't be assessed generally; The nature of the business, and the customers' expectations (questions of fact) both matter.” Eva's Bridal, Ltd. v. Halanick Enterprises, Inc., 639 F3d 788 (7th Cir. 2011); see also Kentucky Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368, 387 (5th Cir. 1977) (“We must determine whether Kentucky Fried has abandoned quality control; the consuming public must be the judge of whether the quality control efforts have been ineffectual.”); Freecycle, 626 F.3d at 598 (“the standard of quality control and the degree of necessary inspection and policing by the licensor will vary with the wide range of licensing situations in use in the modern marketplace”). But the flip-side is that having too much control (such as control over business methods) may wind up creating an inadvertent franchise agreement. See Grand Light Supply Co. v. Honeywell, Inc., 771 F.2d 672 (2d Cir. 1985) (noting indicia of control includes “establishing of sales quotas and management training” (citing Consumers Petroleum of Connecticut, Inc. v. Duhan, 38 Conn. Sup. 495, 498–99, 452 A.2d 123, 125 (Conn. Super. Ct. 1982)); see also Rochelle Spandorf, Structuring Licenses to Avoid the Inadvertent Franchise, 2:4 Landslide 35 (Mar./Apr. 2010).

Trademark abandonment from a naked license typically must be proven by “clear and convincing” evidence. Freecycle Sunnyvale v. The Freecycle Network, 626 F3d 509, 514.15 (9th Cir. 2010). Dial-A-Mattress Operating v. Matthews, 841 F. Supp 1339, 1355 (E.D.N.Y. 1994); Element LLC v. Egg Harbor, LLC, 84 F. Supp 26 556, 564-65 (D.N.J. 2000).

Naked License Agreement

In Blue Mountain Holdings Ltd. v. Bliss Nutraceticals LLC, No. 22-13441, — F. App′x — (11th Cir. Aug. 11, 2023) (unpublished), Lighthouse, a Barbados company, purchased the VIVAZEN brand from Simply Marketing, Inc. A few years later, Lighthouse entered into a so-called brand sale agreement for the VIVAZEN brand with Blue Mountain, where Blue Mountain made payments to Lighthouse in exchange for the ability to market VIVAZEN-branded products. Both Blue Mountain and Lighthouse were plaintiffs in the lawsuit.

Lighthouse, however, apparently retained an equitable interest in the VIVAZEN brand, but exercised no quality control over the VIVAZEN-branded products.

The defendants alleged that the so-called brand sale agreement was a naked license that resulted in the abandonment of the VIVAZEN trademark.

No Meaningful Supervision

The Court found that Lighthouse engaged in no meaningful supervision or inspection of products bearing the VIVAZEN mark based on deposition testimony from top Lighthouse and Blue Mountain officials who had asserted “unequivocally that Lighthouse has never supervised Blue Mountain's production, marketing, or sale of VIVAZEN products.”

That is more than enough to find that Lighthouse abandoned quality control, and thus abandoned its trademark altogether.

If this had been an assignment of the entire interest in the trademark such that the assignee would be the new owner, then Lighthouse would have no need to supervise the quality of the branded products.

Thomas P. Howard, LLC is experienced in trademarks nationwide including in Colorado.