Why Quality Control is Essential in Trademark Licensing

Licensing a trademark can be a smart business strategy for restaurants looking to expand their reach and increase revenue. By allowing another party to use their trademark to sell products or services, food service businesses can tap into new markets and customers without having to invest directly in new operations, real estate, or staff.

However, licensing a trademark can come with risks. The New York Times recently ran an article that can be read as a cautionary tale for restaurant owners who are venturing into the brand licensing realm. The owner of the popular New York City Chinese restaurants Shun Lee Palace and Shun Lee West licensed its trademark to someone to open a new location not far from Shun Lee West on the Upper West Side of Manhattan. The new location was called Shun Lee Café, and there was great initial excitement about Shun Lee’s expansion. However, customers visiting the new location quickly began to complain that the licensee's restaurant was very different from the original Shun Lee locations in terms of menu, service, and quality.  

Gripes about the new restaurant began to appear on social media, potentially tarnishing the Shun Lee brand and damaging its reputation. While some reviews were favorable, others made clear that it did not meet their expectations: one Yelp reviewer said, “This is not the Shun Lee New Yorkers know and love.  It has the name, but not the decor or the food.”  

The situation in which Shun Lee found itself highlights the importance of exercising quality control in trademark licensing. When a restaurant (or any business) licenses its trademark to another party, it is essential to ensure that the licensee’s products or services associated with the trademark meet the same quality standards as those of the original. The restaurant owner’s failure to do so can result in reputational damage that can be difficult, if not impossible, to repair.

There is a significant reason why quality control is so essential in trademark licensing: a trademark is much more than just a logo or a name. A restaurant’s trademark represents the restaurant’s reputation, goodwill, and value.  Moreover, under United States trademark law, trademark licensors have an obligation to ensure that the products or services associated with their trademarks meet certain quality standards, and trademark owners can even be held liable for damages resulting from the use of their trademark if they fail to take reasonable steps to ensure that the products or services associated with the trademark meet these standards. A trademark license that does not include the licensor’s quality control over the licensee, known as a “naked license,” can even lead to a business’s loss of trademark rights and the inability to pursue infringers of the trademark. 

In order to avoid reputational damage and legal liability, restaurant owners should implement best practices for quality control when licensing their trademarks. Here are some tips:

• Conduct due diligence on potential licensees: Before entering into a licensing agreement, trademark owners should research potential licensees thoroughly. This includes assessing their financial stability, operational capacity, and track record.
• Set clear quality standards: Trademark owners should define the quality standards that must be met by the licensee's products or services. These standards should be clearly stated in the licensing agreement and should be based on objective criteria.  In the case of a restaurant, the standards can include food quality and sourcing, décor, and use of brand names and logos, among other standards.
• Monitor compliance: Trademark owners should monitor the licensee's compliance with the quality standards through regular inspections and audits. This can help identify any issues early on and prevent reputational damage and is an important element under US law when it comes to maintaining the licensor’s rights in the brand.
• Be careful to avoid unwitting franchising: in some states, a trademark license that gives the trademark owner a significant degree of control and ability to dictate the operations of the business can be considered a franchise agreement and can therefore subject the trademark owner to the laws and regulations that apply to a franchisor, despite the parties’ intentions. 
• Work with a qualified attorney who is experienced in trademark licensing and can guide you through the appropriate strategies to protect your brand and reputation. An attorney can also provide advice on how to avoid the accidental franchising scenario mentioned above. 

With strategic planning and the right guidance, trademark licensing can be a lucrative way to grow your restaurant business and revenue. Licensing your restaurant trademarks can also heighten brand awareness, and by taking steps to avoid risks, you can aim to ensure that the increased brand awareness will be positive.