The passive licensor can find itself on the receiving end of a huge strict liability judgment. Or not. Strict liability means if you’re anywhere in the chain of commerce of a defective product, you’re liable for damages caused by it. This can be really harsh for passive trademark licensor who does nothing more than license a name of the product. Tort reform has been trying to find ways to lessen the hit on anyone who is in the chain of commerce but really had nothing to do with the design or manufacture of the product. The defendant in Shukrullo Dzhunaydov v. Emerson Elec. Co., et al., licensed the trademark of what turned out to be a defective product. The license allowed the defendant/licensor to inspect the use of the trademark and have some control over the product. But it didn’t exercise those rights. The court held that the defendant/licensor wasn’t liable for damages caused by the defective product.

WHY YOU SHOULD KNOW THIS. A trademark license has to give the licensor some sort of quality control over the use of the licensed product or service. Otherwise it’s a “naked license”. A naked license will cause the licensor to lose rights in the trademark. Here’s the problem. The trademark licensor must exercise sufficient control over the product to protect trademark rights, but not have sufficient control over the product to be liable under a strict liability theory. The defendant/licensor in Shukrullo Dzhunaydov had the ability to exercise control of the product but didn’t. That’s risky for the licensor’s trademark rights although it certainly helped on the strict liability issue. A carefully drafted license agreement should help balance the risks.