Lex Indicium

Does the Emperor Really Have No Clothes?

December 11, 2017


A Teachable Moment in the Way of the TRUMP Brand and Naked Licensing of Trademarks


The current POTUS has a lot of things on his plate right now, and the status of his trademark rights (or, perhaps, more appropriately, the trademark rights of the Trump Organization) around the globe shouldn’t be top of mind. That said, the Trump Organization’s pattern of not controlling the quality of services that are provided under the TRUMP brand provides a teachable moment in the world of trademarks and branding.

The news media have reported repeatedly about the Trump Organization’s penchant for distancing itself from TRUMP-branded projects that have failed, including those in Baja California, and Tampa and Fort Lauderdale, Florida, as well as developments outside the U.S. in Panama and Azerbaijan, among others. While the details of these projects vary, all of them follow a similar narrative. The Trump Organization involves itself in the promotion of an upcoming TRUMP-branded real estate development, and then, despite hype and ample purchases by willing consumers and investors seeking to own a piece of TRUMP real estate, the project never properly gets off the ground, the developers flee with the deposits, and the purchasers lose their savings. Complaints and lawsuits often ensue, and in response, the Trump Organization declares that it had no role in the projects – “other than as a licensor of the Trump name.” Essentially, the Trump Organization is saying it took money to license a name, but never oversighted the work or the administration of the projects.

The Trump Organization’s claim to be uninvolved, which likely helps to shield it from the fallout and fraud claims that follow failed developments, also provides a high-relief illustration of how a valuable brand can be weakened (and, potentially, even abandoned) by failing to look after the quality of services provided by licensees.

Simply put, trademarks typically are not licensed in a void. Rather, brands are licensed for use in connection with some particular product or service. The TRUMP mark licensees intended to provide a development or development-management service, and certainly the Trump Organization insisted in its license agreements that those services be provided with a degree of quality commensurate with the reputation accompanying the name TRUMP. Indeed, news stories about these developments are replete with quotes from purchasers saying they never would have invested without, or were attracted to the project because of, the TRUMP association. Certainly, the consumer expectation that accompanies the brand is that some exercise of quality underlies the project. While any flaws in delivering those services, or in seeing to the successful completion of a development, may not have been the fault of the Trump Organization itself, it still, as licensor, has an obligation to oversight the licensee for its own quality of services.

In fact, it is black letter law that uncontrolled licensing of a mark – whereby a trademark owner either accidentally or deliberately fails to manage or control the quality of goods or services provided under its mark – may result in profound damage to the brand, and even its abandonment.

The court in the seminal trademark case, Dawn Donut Co. v. Hart’s Food Stores, Inc., stated:

If the licensor is not compelled to take some reasonable steps to prevent misuses of his trademark in the hands of others, the public will be deprived of its most effective protection against misleading uses of a trademark. The public is hardly in a position to uncover deceptive uses of a trademark before they occur and will be at best slow to detect them after they happen. Thus, unless the licensor exercises supervision and control over the operations of its licensees, the risk that the public will be unwittingly deceived will be increased, and this is precisely what the [trademark law] is in part designed to prevent … Clearly the only effective way to protect the public where a trademark is used by licensees is to place on the licensor the affirmative duty of policing in a reasonable manner the activities of licensees.

The Pitfalls of an Uncontrolled Use of Branding

The failure to police the quality of the services provided by licensees can result in abandonment of rights. There is terminology for this phenomenon in the trademark field. It’s referred to as “naked licensing” – a circumstance where the failure to monitor the activities of licensees results in a reduction of brand value because of product-quality corrosion or substandard service, as compared with the quality associated with brand in the mind of the consumer. Over time, because the quality is no longer consistent, the law presumes the licensor has lost its right to enforce the brand. Restatement Third, Unfair Competition summarizes:

An uncontrolled or “naked” license authorizes use of the trademark on goods or services for which the trademark owner cannot offer a meaningful assurance of quality. When the trademark owner fails to exercise reasonable control over the use of the mark by a licensee, the presence of the mark on the licensee’s goods or services misrepresents their connection with the trademark owner … [and] the courts have traditionally treated an erosion of the designation’s capacity for accurate identification [that results] from uncontrolled licensing as a loss of trademark significance … subjecting the owner of the mark to a claim of abandonment.

Imagine a scenario under which a hypothetical luxury watch manufacturer, “Rollex Watch,” the owner of the (hypothetical) ROLLEX brand, decides to license the name to another watchmaker without ensuring that the watches were built to Rollex Watch’s standards for quality. Now imagine that you purchased this watch from a licensee, and despite your expectations for ROLLEX quality, the timepiece fails. Upon inquiry, you learn from the manufacturer: “Oh. We just licensed the name. Rollex Watch isn’t involved in our manufacturing.” Now suppose Rollex Watch, as the licensor, did that repeatedly – licensing its famous brand to multiple bogus watchmakers who each paid a small tithe to use ROLLEX on their watches, but whose wares never lived up to the quality of the brand.

Under this scenario, after a short time, the once-famous ROLLEX brand that had been associated with quality and prestige would become meaningless in the consumer market, and, in fact, would become associated with mediocre watches that anyone can buy anywhere. Once that happens, the owner of ROLLEX would be sorely challenged to enforce the mark against others, since any adopter of the mark would defend simply by saying that the hypothetical Rollex Watch company had failed to maintain the quality of its brand, and so had frittered away its right to maintain exclusivity over it.

How Much Quality Control Is Enough To Keep the Brand’s Clothes On?

As with so many areas of the law, the amount, consistency and subject matter of quality control adequate to maintain a brand’s protectability cannot be simply defined. It will vary on a case-by-case basis. However, the weight of the cases that evaluate licensors’ control clearly indicate that at least “some control” must be exercised, and that the control has to be sufficient to ensure that the quality of the products and/or services sold under the mark is commensurate with the reputation of the brand. Most licensors will insert quality-control provisions into a license, setting out specifications or standards of quality and providing for inspection and approval rights. But merely having such provisions in the contract may not suffice, if the licensor never exercises or only casually exercises oversight. Indifferent and careless licensors are the most common victims of a finding of abandonment.

One would think the same fate could befall the Trump Organization. Having worked hard to distance itself from failed projects with the excuse of “we didn’t oversight it,” or “we only licensed the name, we didn’t manage it,” could lead to a scenario where the TRUMP brand is subject to a “naked license” defense. I’m confident that the Trump Organization has ample legal support to ensure that its licenses are well-crafted and protective. But as an outside observer looking in, it would seem that its assertions of lack of control over the services and/or the management of TRUMP-branded projects could be damaging to the TRUMP brand in the long run.

receive news & alerts

Yes, I’d like to receive updates with firm news and insights that are relevant to me.