Trademark Licensing and Quality Control

By Hank FasthoffJuly 6, 2026

A trademark license is a contractual grant of permission to use a mark in connection with specified goods or services, without transferring ownership. Licensing allows a brand owner to expand into new markets, new product categories, and new territories by authorizing a third party to manufacture, sell, or distribute products bearing the licensor's mark, in exchange for royalties or other compensation.

Licensing generates revenue and extends brand reach, but it creates a risk that many licensors don't appreciate until a court tells them their mark has been abandoned. Under the Lanham Act, a trademark must continue to indicate a single, controlled source of quality, even when multiple parties use it. If the licensor grants a license without retaining and exercising control over the quality of the licensee's goods or services, the license is "naked," and the mark can be declared abandoned, making it unenforceable against anyone, including the licensee. A licensing program without quality control is a way to lose the mark entirely.

Types of Licenses

An exclusive license grants the licensee the sole right to use the mark for specified goods or services in a defined territory. During the term, the licensor agrees not to grant any other licenses to use the same mark in connection with the same goods or services in the subject territory and, in many exclusive arrangements, agrees not to use the mark itself within the licensed territory.

A sole license is a hybrid grant of rights where the licensor retains the right to use the mark alongside the licensee, but agrees not to grant licenses to any other third parties for the same goods or services in the same territory.

A nonexclusive license allows the licensor to grant similar rights to multiple licensees in various territories. Nonexclusive licenses are more common for merchandise, co-branding, and promotional uses where the licensor wants to maximize distribution without committing to a single partner.

The exclusive versus nonexclusive license decision has practical consequences for enforcement. Under federal law, exclusive licensees may have standing to sue for infringement (though the licensor must typically be joined as a necessary party). Nonexclusive licensees generally don't have independent standing to sue, because they can't demonstrate exclusive rights that a third-party infringer is violating.

If an agreement transfers all substantial rights in the mark, including the right to sublicense, the right to sue for infringement, and control over quality, courts may recharacterize the transaction as an assignment regardless of how the parties labeled it. An assignment requires different formalities and, critically, transfers ownership rather than granting temporary permission to use the mark.

The Quality Control Requirement

Quality control is the single most important obligation in any trademark license. Under 15 U.S.C. § 1055, use of a mark by a "related company" (any entity whose use is controlled by the registrant with respect to the nature and quality of the goods or services) inures to the benefit of the registrant. This means a properly licensed use is treated as the registrant's own use, which supports the registration. When the licensor doesn't control the licensee's use, the arrangement becomes what courts call a naked license, and the consequence is severe. A naked license can result in a finding that the licensor abandoned the mark, which strips the licensor of the right to enforce it against anyone, including the licensee who was using it. Two cases show how that plays out.

In FreecycleSunnyvale v. Freecycle Network, 626 F.3d 509 (9th Cir. 2010), a nonprofit that ran a network of local recycling groups allowed a member group to use its FREECYCLE marks. The permission came through a brief email exchange with no written license agreement and no quality standards beyond a suggested guideline to keep the service free, legal, and appropriate for all ages. When the nonprofit later demanded that the member group stop using the marks, the group filed a declaratory judgment action arguing that the arrangement was a naked license. The Ninth Circuit agreed and affirmed summary judgment against the licensor. The court held that the nonprofit had retained no contractual right to control quality, had exercised no actual control, and couldn't reasonably rely on the licensee's own quality efforts because the two organizations had no close working relationship. The marks were abandoned, and the licensee was free to keep using them.

In Eva's Bridal Ltd. v. Halanick Enterprises, Inc., 639 F.3d 788 (7th Cir. 2011), the owners of a Chicago-area bridal shop licensed the EVA'S BRIDAL mark to a relative's company for $75,000 per year. The written agreement didn't require the licensee to operate the store in any particular way and gave the licensor no power of supervision. The licensor conceded it never tried to control any aspect of the licensee's operations. When the license expired and the licensee kept using the mark without paying, the licensor sued for infringement. Writing for the Seventh Circuit, Judge Easterbrook affirmed the dismissal, rejecting the licensor's argument that supervision was unnecessary because it trusted the licensee's standards. Quality control doesn't mean high quality, he explained, it means consistent and predictable quality, because a trademark's function is to tell shoppers what to expect and whom to blame when an outlet falls short. The mark was abandoned, and the former licensee could continue using it for free.

Quality control isn't satisfied by contractual language alone. Courts evaluate whether the licensor took action: inspecting goods, testing products, reviewing marketing materials, approving packaging, visiting the licensee's operations, or conducting periodic audits. A quality control clause that exists only in the contract and was never exercised may not prevent a finding of naked licensing.

For licensors, quality control should include written quality standards that the licensee must meet (specifications for materials, manufacturing processes, packaging, labeling, and customer service), approval rights over the licensee's use of the mark in marketing materials, product packaging, and advertising, periodic sampling or inspection of the licensee's goods or services, the right to conduct on-site audits of the licensee's operations, and the right to terminate the license if quality standards aren't maintained.

What a License Agreement Should Include

A typical trademark license should include the following terms:

• Licensed mark identification: Identify every mark being licensed with specificity, including word marks, logos, design marks, and any specific versions that are included or excluded. If trade dress is included, describe it. Reference the registration numbers for federally registered marks.
• Licensed goods and services: Define what the licensee is authorized to sell, manufacture, or distribute under the mark. A license for "apparel" doesn't specify whether it covers footwear, accessories, or headwear. Specificity prevents scope disputes.
• Territory: Define where the licensee can use the mark. A license for North America, a license for Texas only, or a worldwide license each create different obligations and different revenue expectations. If the licensee can sell online, address whether online sales outside the territory are permitted and how digital distribution is treated.
• Exclusivity: State whether the license is exclusive, sole, or nonexclusive in the defined territory and for the defined goods. If exclusive, specify whether the licensor retains the right to use the mark itself in the territory.
• Royalties and compensation: Define the financial structure. Common models include a percentage royalty on net sales, a flat annual fee, a minimum guaranteed royalty with a percentage-based true-up (the licensee pays the greater of the minimum or the calculated royalty), or a combination of upfront payment and ongoing royalties. Define "net sales" with precision, specifying what deductions are permitted (returns, allowances, shipping, taxes) and what deductions aren't (marketing costs, overhead, internal charges).
• Duration and renewal: Fixed-term licenses with defined renewal conditions are safer than open-ended arrangements. A license without a defined term may be treated as terminable at will or, in some jurisdictions, as perpetual, an ambiguity that produces litigation. Tie renewal to performance benchmarks (minimum sales thresholds, quality compliance, timely royalty payment) so the licensor can decline renewal if the licensee isn't performing.
• Quality control provisions: Specify the quality standards, approval processes, sampling and inspection rights, audit rights, and the consequences of non-compliance (cure period, license suspension, termination). Don't treat quality control as boilerplate. These are the provisions that determine whether the license protects the mark or destroys it.
• Sublicensing: Address whether the licensee can sublicense the mark to third parties (manufacturers, distributors, retailers). If sublicensing is permitted, require the licensor's prior written consent, require the sublicensee to comply with the same quality control provisions, and specify that sublicenses terminate when the primary license terminates.
• Infringement enforcement: Specify who has the right (and the obligation) to enforce the mark against third-party infringers. Licensors typically retain the right to control enforcement, with the licensee obligated to notify the licensor of any suspected infringement and to cooperate in enforcement proceedings. If the licensee has standing to sue (exclusive license), specify whether the licensee can initiate enforcement independently or only with the licensor's consent.
• Termination: Define grounds for termination (material breach, failure to meet quality standards, failure to pay royalties, change of control), the cure period (if any), and the consequences of termination (cessation of all use of the mark, disposition of remaining inventory bearing the mark, wind-down period, survival of confidentiality and indemnification obligations). A clause that terminates the license because the licensee files for bankruptcy generally isn't enforceable once the bankruptcy case begins, so tie termination to the payment and quality defaults that usually accompany financial distress rather than to the filing itself.
• Royalty Audits: Royalty-based licenses should include an audit clause giving the licensor the right to inspect the licensee's financial records to verify royalty calculations. A standard audit clause allows one audit per year, at the licensor's expense, with a lookback of two to three years. If the audit reveals an underpayment exceeding a threshold (typically 5 to 10 percent of royalties owed), the licensee reimburses the licensor's audit costs. Without audit rights, the licensor relies entirely on the licensee's self-reported sales figures, which may not be accurate.

Practical Recommendations

Below are a few practical recommendations to consider when evaluating how to structure and manage a trademark license:

• Exercise quality control, because a quality control clause in the license isn't enough on its own. Inspect goods, review marketing materials, approve packaging, and document every quality review. If you license the mark and never check what the licensee is doing with it, a court may treat your mark as abandoned regardless of the contract's language.
• Define "net sales" in the royalty provision with enough precision that both parties can calculate the royalty from the same set of numbers. Ambiguous definitions produce disputes about whether the licensee's deductions were authorized, and those disputes consume the relationship.
• Use fixed-term licenses with performance-based renewals. A perpetual license or an automatically renewing license provides the licensor limited ability to exit the relationship if the licensee's performance or quality declines. A fixed term with renewal conditioned on meeting minimum sales and quality benchmarks preserves the licensor's flexibility.
• Don't license the mark without a written agreement. Verbal trademark licenses are enforceable but nearly impossible to prove and provide no documented quality control framework. Every trademark license should be in writing, signed by both parties, before the licensee begins using the mark.
• Include a post-termination wind-down provision. When the license terminates, the licensee may have inventory bearing the mark in warehouses, on retail shelves, and in distribution channels. A wind-down provision (typically 30 to 90 days to sell through remaining inventory, with no new production) allows the transition without forcing the licensee to destroy unsold goods while protecting the licensor from indefinite post-termination use.