There are two main considerations regarding trademark licensing: (1) whether the license would be deemed “naked” and (2) whether the trademark license would effectively become a franchise.
Quality Control in Trademark Licensing
Imagine if you could pay $1,000 to get a trademark license to the COCA COLA trademark with no strings attached. You would bottle your own concoctions and then label them COCA COLA. You would probably sell a tremendous amount of product at first. However, consumers would soon realize that the taste, quality and ingredients of your product are different. Consumers would then lose faith that the bottle of COCA COLA they purchase will taste the same every time. Thus, if a trademark is licensed without quality control over the end product, then the license is deemed “naked” and such activity constitutes grounds that the trademark has gone abandoned. As the Ninth Circuit stated:
The licensor owes an affirmative duty to the public to assure that in the hands of his licensee the trademark continues to represent that which it purports to represent. For a licensor, through relaxation of quality control, to permit inferior products to be presented to the public under his licensed mark might well constitute a misuse of the mark.
Siegel v. Chicken Delight, Inc., 448 F.2d 43, 171 U.S.P.Q. 269 (9th Cir. 1971), cert. denied, 405 U.S. 955, 31 L. Ed. 2d 232, 92 S. Ct. 1173, 172 U.S.P.Q. 577 (1972).
Is the Trademark License a Franchise?
The three elements of a franchise are: (1) initial fee in excess of $500.00; (2) licensing of a trademark; and (3) providing substantial assistance or control. Because the courts have overwhelmingly required a trademark licensor to exercise quality control over the licensee’s products, two of the three elements of a franchise are already met.
Virtually all trademark licenses initially contemplate an up-front license fee in excess of $500. Therefore, the question to ask is whether your trademark license is, in reality, a franchise.