Editor’s Note: José Cortina is a member of the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A.

RESEARCH TRIANGLE PARK, N.C. – In order to understand trademark licensing, it is important to first answer the question: What is a trademark?

Generally speaking, a trademark is a word, slogan, symbol, design, or combination of the aforementioned elements, which identifies and distinguishes the goods and services of one party or company from those of other parties or companies. In short, a trademark is an identifier of origin.
In general, trademark laws serve to prevent unfair competition by applying a test of “likelihood of consumer confusion.” The purpose of this test is to ensure a consumer can be confident that when buying a product or service bearing a trademark, that the product or service received, including its quality, is what was expected.

Trademarks are distinguished from business names or trade names. More specifically, business names or trade names identify a business for non-marketing purposes whereas trademarks are identifiers of commercial products or services. In the U.S., the owner of the trademark is the first to use the mark, and in particular, for Federal purposes, (with some procedural exceptions) the first user in interstate commerce. In addition, trademark ownership can only be maintained through continuous use in commerce.

While trademarks can be created at common law in smaller or larger regions of the country, or protected through registration in state trademark registries, the best form of protection for a trademark is through a Federal trademark registration. Registration allows a trademark owner to identify its use of the trademark with ® and it serves notice to all of the trademark rights.

Prior to registration, a trademark owner can use the symbols “TM” or “SM” to provide additional notice to the general public that the trademark owner intends to use the particular term as a trademark and is claiming rights in the trademark. However, such marking is optional and any prominent use of the trademark, particularly in connection with goods or services such as by expressing the trademark in bold lettering or capital letters, should suffice to provide consumers with notice of the trademark owner’s intent to claim rights in the trademark.

Proper Use Is Crucial

In addition, proper use of a trademark is important for its protection. For example, trademarks should never be used as a noun, and should not be used as a generic term, each of which could lead to loss of rights in the trademark and the trademark could end up becoming a generic term in the public domain.

In the commercial world it is often the case that the owner of a trademark and seller of goods or services associated therewith, may not have the capacity to sell goods or services at a desired volume. Often such an owner of a trademark may reach an agreement with another company, having greater capacity, for that company to manufacture and sell products under the owner’s trademark. In such cases, companies should enter into a trademark license agreement with the trademark owner becoming the licensor and the party manufacturing and selling the goods or services under the trademark becoming the licensee. In this context, it is important to appreciate that trademark licenses present unique challenges and can lead to a trademark owner’s loss of its rights in a licensed trademark.

More specifically, licensors of trademarks have a duty to exercise sufficient control over the quality of their licensee’s products. The Lanham Act (which is the Federal law covering trademarks) states in part that:

“Where a registered mark or a mark sought to be registered is or may be used legitimately by related companies, such use shall inure to the benefit of the registrant or applicant for registration, and such use shall not affect the validity of such mark or of its registration, provided such mark is not used in such manner as to deceive the public.”

In short, the law permits a trademark owner to license its trademarks as long as the owner controls the nature and quality of the goods or services with which the trademark is associated. If a trademark owner enters into a license agreement that does not provide adequate quality control, it can result in the involuntary abandonment of the trademark; such a license agreement is generally referred to as a “naked license.”

Quality Control Is Important

However, although courts in the past were traditionally resistant to the idea of a trademark owner intentionally abandoning its mark through the use of a naked license, and a party claiming abandonment had a high hurtle to clear before a court would rule that abandonment has occurred, this is not the case today. More recently there has been a change in the approach taken by courts, and recent cases have resulted in abandonment of a trademark through license agreements that lacked effective quality control. Thus, today the issue of quality control has become more important.

In fairness to licensors, it should be noted that quality control has traditionally been a very difficult issue to deal with in agreements because one cannot define in the abstract exactly how much control and inspection is needed to satisfy the requirement. In this context, in the event detailed quality control provisions are not spelled out in an agreement, one way to mitigate against this problem, but which may be difficult to achieve through agreement, is to include provisions in the license allowing the licensor to terminate immediately if in the licensor’s opinion adequate quality standards are not being met.

Thus, while many complex transactions between companies often include nominal trademark license provisions, one should appreciate that it is better to have a stand-alone license agreement, perhaps as an incorporated attachment to the more comprehensive agreement, dealing with specific trademark issues in a manner designed to provide control and avoid loss of trademark rights on the part of the trademark owner.

A. José Cortina is a registered patent attorney with the law firm of Daniels, Daniels & Verdonik, P.A. He focuses his practice on the intellectual property needs of small to large technology companies, including providing patent, trademark, copyright, counseling, licensing, conflict resolution and transactional services. He is experienced in a broad range of technologies, including electronics, communications, computer hardware and software, biomedical, materials, and selected chemical and chemical engineering technologies.