Trademark law functions to protect brands as well as consumers from those trying to unlawfully exploit the goodwill and reputation of another company’s goods or services. As a result, restrictions are placed on trademark transfers that cause confusion among consumers. Two common prohibitions are “assignment-in-gross” and “naked licensing.” If a trademark owner is found to have engaged in either of these, they risk losing their trademark rights.
An assignment-in-gross is an assignment of a trademark without the mark’s corresponding goodwill (i.e., the reputation and name recognition of the mark among consumers) and other accompanying assets. Assignments-in-gross are prohibited because a trademark derives its value from the business it is associated with.
The public connects a logo, design or symbol to goods or services of a specific company. If a trademark is transferred separately from that business, then consumers are unable to associate the mark with the brand. To avoid this, a trademark transfer must include other related business assets such as company stock or trade secrets and be made with genuine goodwill.
Sometimes, it can be difficult to determine whether an assignment of a trademark is valid. Courts use a “substantial similarity” test to determine if the transfer was made with “genuine goodwill.” The test compares the quality and description of the goods or services before and after the transfer. The goods or services of the company that purchased the trademark (the assignee) must be “substantially similar” to that of the assignor, such that consumers would not be deceived by the assignee’s use of the mark. The assignee cannot use the mark for different types of goods or services or for the same type but lesser quality goods or services.
This analysis is fact-sensitive and even minor differences may be sufficient to invalidate the assignment if it would result in misleading or confusing consumers.
Another concern of trademark owners is naked licensing. This occurs when the owner fails to exercise adequate quality control over a licensee’s use of a licensed trademark.
Typically, naked licensing is raised by a potential infringer who is defending against the infringement action by showing that the owner has abandoned the mark by not sufficiently controlling use of the mark. A trademark owner can lose its rights if naked licensing is shown. Courts look at several factors in determining whether adequate quality control exists including whether the owner: (1) retained contractual rights over the quality of the use of the trademark; (2) actually controlled the quality of the trademark’s use; and (3) reasonably relied on the licensee to maintain the quality.
Trademark ownership comes with responsibilities. Talk with our experienced lawyers to learn how to best protect your rights.