• Avoid a Common Trademark Pitfall: Valid Sublicensing in the Absence of Express Licensor Consent
  • December 13, 2009
  • Law Firm: Much Shelist Denenberg Ament & Rubenstein, P.C. - Chicago Office
  • Take a minute and imagine you, as licensor of a trademark, just retrieved this voicemail message from a licensee of one of your marks: "I understand you are threatening to claim default of our licensing agreement and sue me for trademark infringement because I sublicensed your mark abroad without your consent. How can that be when I’m your worldwide exclusive licensee?"

    Does your licensee have a solid defense, or will you be able to prevail in an infringement action? Not surprisingly, the answer varies depending on the circumstances. Whether you are a trademark licensor hoping to better understand the defenses available to your licensee, or a licensee whose licensor has threatened to assert default and bring a suit against you, it is important to be familiar with the finer points of trademark protection.

    A licensing agreement enables the trademark owner (licensor) to give the right to the production or marketing of products or services, as well as the right to use of the mark affixed to that good or service, to a person or company (licensee) that is not the primary holder of those rights. The right to sublicense allows that licensee to give those rights to yet another party (sublicensee) that was not part of the original agreement. When express permission exists, there are normally no issues between the licensor and licensee, and the right to sublicense is relatively clear-cut. Disputes often arise, however, in the context of a licensing agreement that is silent or ambiguous on the sublicensing issue.

    How can a licensee assert its right to sublicense a trademark outside of the various corners of the licensing agreement and any related amendments?

    Let us count the ways…

    Licensor's Federal Statutory Duty to Police a Mark

    A trademark owner has a federal statutory duty under the Lanham Act (15 USC § 1051 et seq.) to supervise and control the licensee's use of its mark in order to protect the public's expectation that all products sold under a particular mark derive from a common source and are of like quality. Common sense suggests that if a licensee could sublicense a mark without notifying or obtaining licensor consent, then a licensor would lose the ability to police the mark. According to this rationale, unauthorized sublicensing of a trademark would undermine the licensor's right and obligation to control the nature and quality of goods and services offered under the licensed mark. Moreover, the licensor would thereby risk forfeiture of its legal rights to the mark through abandonment.

    The overriding majority of case law to date has held that a trademark licensee—even an exclusive licensee—may not sublicense a mark to a third party without first obtaining the licensor's express consent.

    The Naked License Defense

    But what happens if a trademark owner fails to police a mark? That failure could result in a so-called “naked license,” meaning that the licensor has lost all ownership rights in its mark and cannot sue either the licensee or a third party for infringement. Because a “naked license” defense is accepted by a majority of courts, a licensee in possession of a "naked license" may freely sublicense the mark without any fear of suit for infringement brought by the licensor.

    Although there is no single judicially accepted standard for what constitutes “sufficient control” by the licensor to protect its mark, courts have held the following as insufficient:

    1. The licensor exercised no control over the licensee's activities for a period of 12 years;
    2. The licensor made occasional visits to the licensee's business establishment;
    3. The licensor had familiarity and prior business dealings with the licensee; and
    4. The licensor made infrequent, irregular, superficial and uninformed efforts at quality control.

    To prevent a "naked license" defense, a licensor should make frequent visits to the licensee's business and make informed efforts at quality control of the product bearing the mark.

    The vast majority of courts, however, have held that only a third party—and not an actual licensee—can generally raise a "naked license" defense. Known as "licensee estoppel," this concept has been well accepted in the context of license agreements where payment of royalties has existed for many years. Under Illinois law, by freely entering into a license agreement and paying royalties, a licensee effectively recognizes that the licensor possesses a valid trademark and therefore is estopped from claiming ownership or disputing the validity of the trademark—even after years have passed since execution of the license agreement.

    Waiver by Acceptance of Benefits

    On the other hand, a licensor may be estopped from claiming a violation of a licensing agreement if it knowingly accepts royalties from sources not contemplated by the agreement between the parties, also known as “waiver by acceptance of benefits.” In other words, if a licensor is aware that a licensee is in breach of the license agreement, the licensor can either terminate the license altogether or choose to continue it in force and receive ongoing royalty payments as they accrue, thus waiving the right to later claim infringement.

    Waiver by acceptance of benefits may occur in various other circumstances as well. For example, if a licensor knowingly accepts royalty payments for certain alleged unauthorized goods, a licensee can assert that the licensor implicitly authorized, acquiesced or ratified the manufacture and distribution of those goods.

    To prevent this sort of waiver, a licensor should not accept any benefits or royalties not contemplated by the parties to the licensing agreement.

    Other Types of Waiver

    Legal concepts outside the area of intellectual property can also support a licensee's defense. For example, if neither the licensing agreement nor its amendments contain a non-waiver provision, a licensor may waive its right to assert default and/or trademark infringement through certain conduct or failures to act. It is important to understand that waiver is the intentional relinquishment of a known right, requiring both knowledge of the existence of the right and intention to relinquish it. Waiver may be implied from the acts, omissions or conduct of one of the parties to a contract. Silence may also constitute waiver, but only when there is a duty to speak or otherwise take action. Mere silence, acquiescence or inactivity is not waiver.

    Under the Lanham Act, a licensor is under a constant federal statutory duty not only to police its mark but also to speak and act in response to a perceived breach of contract. In other words, if a licensor is aware that a licensee is sublicensing its mark abroad and fails to object, the licensor will be estopped from claiming breach of the licensing agreement. Further, if a licensor in any way fails to adequately police the quality and nature of the goods to which the mark was affixed, then a licensee can claim that the licensor failed to act to protect its mark, thereby waiving its rights to claim default under the licensing agreement or accuse the licensee of trademark infringement under the Lanham Act.

    This is yet another reason why licensors should make frequent site visits for quality control purposes.  Further, to avoid waiver by silence, a licensor should immediately and expressly object in writing to any breach of the licensing agreement.

    Contract Modifications Implied through Conduct

    Parties may mutually modify contractual undertakings in several ways. It is not always necessary to prove a written or oral change because modification of a written contract can be implied from the conduct of the parties. For example, if a party has knowledge of altered payments and chooses to accept them without objection, that action constitutes tacit approval. It should be noted that licensing agreements that are silent with respect to trademark sublicensing are not subject to implied modifications. If the licensing agreement is ambiguous with respect to sublicensing rights, however, that ambiguity may be cleared up through contractual modification implied by the parties’ course of conduct.

    To avoid any inadvertent contract modifications, a licensor should immediately make written objections when appropriate.

    Waiver by Estoppel – Licensee's Detrimental Reliance

    Yet another defensive legal tool at a licensee’s disposal is "waiver by estoppel," which depends not so much on the intention of the waiving party (licensor) as upon the reliance of the nonwaiving party (licensee). A waiver is implied where the licensor’s conduct is inconsistent with any other honest intention than an intention of such waiver, provided that the licensee has been induced by that conduct to act upon the belief that there has been a waiver and has incurred the trouble or expense thereby. A licensor may waive a right by conduct or acts that indicate an intention to relinquish the right, or by such a failure to insist upon the right that the licensor is precluded from ever raising it against his or her adversary licensee.

    Yet again, a licensor should immediately and unequivocally object before the licensee detrimentally relies on a perceived waiver by the licensor and invests time and money in objectionable activities.

    An Ounce of Prevention

    We have seen various ways in which a licensee may defend against allegations supporting a claim of default and/or suit based upon unauthorized sublicensing. Which legal tool is available is highly dependent on the specific facts of each case and the licensee’s jurisdiction.

    In the end, there is a great deal more at play in determining the rights and obligations between a licensor and licensee than meets the eye. Therefore, licensors would be well advised to:

    1. Frequently police and control the quality of the products that bear their mark by making frequent site visits;
    2. Refrain from accepting any benefits or royalties from sources outside those contemplated by the licensing agreement; and
    3. Immediately and expressly object in writing to any perceived breach of the licensing agreement by a licensee, especially prior to the licensee's investment in activities outside the scope of the agreement and any of its amendments.