Nike, Inc. (“Nike”) recently filed a motion that, if granted, would dispose of a trademark infringement litigation pending in federal district court in South Carolina. The lawsuit, filed in 2012 by Fuel Clothing Company (“Fuel Clothing”), alleges that Nike has infringed its federally-registered “FUEL” trademark for clothing by using the marks “NIKE+FUELBAND” and “NIKEFUEL” in connection with a wearable sports bracelet that measures physical activity through a built-in motion sensor. The case is Fuel Clothing Company, Inc. v. Nike, Inc., Civil Action No. 3:12-cv-0555-MBS (D.S.C.).
In its motion, Nike seeks dismissal of the case on several grounds, including that Fuel Clothing has abandoned its “FUEL” trademark by engaging in “naked licensing.” Few scenarios have more perilous consequences for trademark licensors than being caught in the act of naked licensing. Trademark owners have the duty to control the quality of goods and services bearing their trademarks. Naked licensing occurs when a trademark owner grants a license without retaining adequate quality control over licensed products produced by the licensee. Should a court determine that the licensor has not retained adequate quality control, the court may deem the trademarks to have been abandoned, in which case the trademark owner will have lost its rights in the marks.
A proper trademark license agreement will expressly retain for the licensor certain rights to control quality, including, but not limited to, the right to: 1) inspect the licensed products; 2) inspect the facilities where licensed products are produced; 3) regularly review and approve samples of the licensed products and their packaging; 4) approve the manner in which the trademarks are used and displayed; and 5) terminate the license if the licensee fails to comply with these provisions.
In its motion for dismissal, Nike alleges that Fuel Clothing granted several naked licenses that failed to exercise adequate quality control over products bearing the “FUEL” trademark. In one instance, Nike alleges that the licensee was permitted to use the trademark in any manner so long as it continued to pay royalties. As other grounds for dismissal, Nike claims that Fuel Clothing failed to police its mark, thereby weakening the mark to the point where it is entitled only to a narrow scope of protection. For example, Nike claims that Fuel Clothing did not contest its prior use of the slogans “FUEL IT UP” and “FUEL THIS” in connection with t-shirts.
As this case demonstrates, trademark licensors should: (i) insist on written license agreements that set forth in detail their rights to inspect licensed products and approve of their quality prior to sale, (ii) actively participate in the regular inspection and approval of licensed products so they will be able to demonstrate actual control over quality if such control is challenged, and (iii) police the marketplace for infringing uses of their trademarks, taking action to enforce their trademark rights where infringement is found.
