Trademark & Copyright Licensing Nathan C. Belzer October 12, 2007

Trademarks: Who May License? Old Law Trademark owner cannot license use of its mark unless it used the mark as applied to those goods. American Broadcasting Co. v. Wahl Co., 121 F.2d 412, 413 (2d Cir. 1941) Modern Era Use is not a prerequisite for licensing; anyone may license Dawn Donut Co. v. Hart's Food Stores, Inc., 267 F.2d 358 (2d Cir. 1959)

Oral v. Written License Trademark licenses may be oral BUT, they should be reduced to writing Oral licenses may be construed as a “Naked License” because appropriate quality control may be difficult to prove without a written agreement

Quality Control and the Naked License

What is a Naked License? Definition: Licensing of a trademark without necessary controls over the quality of the goods or services associated with such trademark Why are they bad?: The grant of a naked license may result in the inadvertent abandonment of a mark

Naked License Theory Licensors have a duty to oversee the quality of a licensee’s goods and/or services Why? Because trademark laws not only protect trademark owners but also consumers Failure by a Licensor to police the quality of a Licensee’s products may ultimately harm the consumer

The Naked License Theory According to Colonel Sanders “Customers rely upon the owner's reputation when they select the trademark goods. If a trademark owner allows licensees to depart from its quality standards, the public will be misled, and the trademark will cease to have utility as an informational device. A trademark owner who allows this to occur loses its right to use the mark.” Kentucky Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2D 368, 387 (5th Cir. 1977)

Quality Control Doesn’t Necessarily Equal High Quality Barcamerica International USA Trust v. Tyfield Importers, Inc., 289 F.3d 589 (9th cir. 2002) Licensor argues essentially that because Licensee makes good wine, the public is not deceived by Licensee's use of the "Da Vinci" mark “It is important to keep in mind that ‘quality control’ does not necessarily mean that the licensed goods or services must be of ‘high’ quality, but merely of equal quality, whether that quality is high, low or middle.”

The Naked License Theory According to Navin R. Johnson Waiter: Would monsieur care for another bottle of the Chateau Latour? The Jerk: Ah yes - but no more Let's splurge! Bring us some fresh wine! The freshest you've got - this year! No more of this old stuff. Waiter: Oui monsieur. The Jerk: He doesn't realize he's dealing with sophisticated people here.

Bring us some fresh wine! Barcamerica v. Tyfield (Continued) The standard for abandonment is objective and the resulting forfeiture is involuntary – the trademark owner need not have had any subjective intent to abandon the mark. It is not necessary to show that consumers actually view the mark any differently due to the failure to exercise quality control, because courts view naked licensing as inherently deceptive.

Results of No Quality Control Naked licenses, where no quality control occurs, can result in the mark losing its function as an identifier of source and quality. Which would lead to… An abandonment of rights in the mark. “A mark shall be deemed to be ‘abandoned’… When in the course of conduct of the owner…causes the mark…to otherwise lose its significance as a mark.” Lanham Act §45(2). But, what about the Licensee?

How do I Get this “Quality Control” of Which You Speak The license agreement should have a mechanism for review and oversight of the licensee’s goods/services/operations and the licensor needs to follow through on whatever mechanism is adopted Quality control regimen should be integrated into the related effort that trademark owners should engage in to police their mark against infringement by others

Who Can do the Controlling? Licensor Licensee: Licensee’s internal quality control mechanisms may be sufficient, but they should be referenced in the license agreement so that it provides a sufficient basis from which to conclude that the licensor can reasonably rely on the licensee’s efforts Third Party… Outsourcing!

Inherent Quality Control Sufficient control may exist despite the absence of any formal arrangements. Control may also be adequate where the licensor justifiably relies on the integrity of the licensee to ensure the consistent quality of the services performed under the mark. Woodstock's Enterprises, Inc. (California) v. Woodstock's Enterprises, Inc. (Oregon), 43 U.S.P.Q.2d 1440, 1446 (TTAB 1996)

License v. Franchise: The Problem of too Much Control Depends upon both Federal and State Laws Federal Trade Commission Rule: –A business arrangement in which the ‘franchisee’ sells goods identified by a trademark –The ‘franchisor’ exerts or has authority to exert a significant degree of control over the franchisee’s method of operation; and –The ‘franchisee’ is required, as a condition of obtaining or beginning the franchise operation, to make a payment or commitment to pay the ‘franchisor.’

Anti-Trust Concerns: The Problem of Way too Much Control May a licensor tell a licensee what to charge for its goods/services? Until recently, the answer was “NO!” – a per se violation of the Sherman Act New Rule: vertical price restraints are to be judged by the rule of reason. Leegin Creative Prods., Inc. v. PSKS, Inc., No (June 28, 2007). Under the rule of reason, a vertical price restraint will be found to violate federal antitrust law only if, after weighing all the circumstances, a fact-finder concludes that its anticompetitive impact outweighs its procompetitive effects.

Exclusive License Considerations Unless qualified, a grant of an exclusive trademark license allows only the licensee to use the mark on the goods/services identified in the license -- to the exclusion of even the licensor However, exclusive licenses are typically limited (e.g., by territory, subject to prior license grants, trade channels, field of use) Typically include a minimum royalty and/or diligence provisions

Show Me the Money Up front royalty Running royalties Fixed payments Incentives for meeting certain sales goals Audits and reporting Net sales v. gross sales; but, how to define “net sales”

Sublicensing Absent an express authorization to sublicense, a licensee does not enjoy sublicense rights Sublicense Rights v. “Have Made” Rights: –a third party sublicensee typically has the same rights as the licensee –But, a third party manufacturer may only manufacture licensed products for the licensee –The “have made” manufacturer cannot sell products bearing the licensed trademark to anyone other than the licensee Do the sublicensee's rights continue after termination of the licensee’s rights?

Co-Branding Agreements A marketing arrangement that associates a single product or service with more than one brand name. The object: combine the strength of two brands in order to… –increase the premium consumers are willing to pay –make the product or service more resistant to copying by private label manufacturers –or to combine the different perceived properties associated with these brands with a single product.

Copyrights Copyright = a bundle of rights. E.g., –Reproduction –Public display –Derivative works –Public performance Each right can be licensed separately or together Must be creative in devising language of the copyright license grant

Exclusive v. Non-Exclusive Licenses Exclusive license = transfer of ownership for the particular rights involved. Thus, exclusive licensee = assignee. –See 17 U.S.C. §201(d)(2) –Exclusive license may be recorded at the copyright office provided an application for the underlying work has been submitted –Must be in writing Non-exclusive license –No transfer of ownership –Do not need to be reduced to writing

Conflicts Over Transfers Nonexclusive Licensee v. Transferee Licensee prevails if: - transfer is made after license is signed or - if transfer is made before license, but only if a) license executed before recordation of the transfer and b) licensee entered into license in good faith

Duration of the License If unstated, license will last for the period of the copyright If for a particular use (e.g., publication), license will be limited to that type of use only “Termination Right” of Author: an author may terminate a transfer and “recapture” the copyright between 35 and 40 years after transfer is made. But, technical formalities make this difficult in practice

Show Me the Money -- Revisited Royalty payments under a copyright license will continue so long as the work is exploited, unless expressly limited to the term of the copyright

Implied Covenants -- Grantor Negative covenant not to do any damage to the rights licensed to licensee. 1. Does not apply where competitive medium was known at the time of the license (stage v. movie) 2. Does not apply where rights are expressly reserved 3. Unless limited, licensee may grant its own licenses to the work Obligation to share proceeds of litigation on licensed work

Implied Covenants -- Grantee Negative covenant to do no damage to rights in the work Will make no use that reduces the value to licensor Where royalties are based on licensee’s exploitation of work: 1. Use of work must be as productive as circumstance warrants 2. Will not create a new work based on a prior version of work 3. Will not create a similar work, even if a third party could do so. Where licensor reserves a right, licensee will take all steps to preserve the rights reserved

Detailed Review of Hamer v. Sidway

Essential Elements of License Agreements Licensed intellectual property – what is being licensed License grant – what is the licensee permitted to do Territory Field of Use/Trade Channel limitations Exclusive v. Non-exclusive –Exclusive, but with limitations Consideration (Show Me the Money Re-re-visited) Term and termination –Consequences of termination?

Essential Elements of License Agreements (cont.) Warranties and warranty disclaimers Indemnification –Licensor to Licensee –Licensee to Licensor Limitation of liability Infringement of licensed intellectual property by third parties Infringement of third party intellectual property Assignment

Thank You Nathan C. Belzer Belzer PC