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Loss of Trademark Rights from Naked Licensing

LES Insights
January 17, 2011

Paul, John C., Kacedon, D. Brian , Tull, Susan Y.

Article

Authored by D. Brian Kacedon, John C. Paul, and Susan Y. Tull

Trademark owners may forfeit their trademark rights by engaging in "naked licensing" and failing to exercise adequate quality control over a licensee's use of a licensed trademark such that the trademark no longer represents the quality of a product or service that the consumer has come to expect. Thus, naked licensing can be a defense to trademark infringement.

Key factors in determining whether adequate quality control exists include: (1) whether a trademark owner retained contractual rights over the quality of the use of the trademark; (2) whether a trademark owner actually controlled the quality of the trademark's use; and (3) whether a trademark owner reasonably relied on the licensee to maintain the quality.

A recent Ninth Circuit decision, FreecycleSunnyvale v. The Freecycle Network, No. 08-16382 (9th Cir. Nov. 24, 2010), found that a trademark owner engaged in naked licensing by failing to adequately control the use of its trademarks by members of its non-profit organization. Based on its analysis, the Court invalidated the trademarks.

The Freecycle Decision

In Freecycle, the Ninth Circuit considered whether a trademark owner had adequately controlled its licensees' use of marks so as to prevent naked licensing. FreecycleSunnyvale ("FS"), was a member of The Freecycle Network, a non-profit organization engaged in a form of recycling known as "freecycling." The Network relied on internet groups created by local volunteers to establish freecycling in different areas.  Members of The Network were not required to use any specific internet group to coordinate their activities, but many did. The Network maintained its own website, which provided etiquette guidelines, and it relied on the local volunteer group moderators to enforce its rules and policies, allowing flexibility in enforcement. The Network also owned the rights to three trademarks.

FS, which was founded without The Network's knowledge, adopted The Network's etiquette guidelines and instructions from another Network member's website. FS later contacted The Network and requested use of The Network logo. The request was granted and FS was added to the list on The Network's website. The only caution FS received was that "[y]ou can get the neutral logo . . . just don't use it for commercial purposes or you . . . can . . . do your own fancy schmancy logo." FS was not given any restrictions or guidelines on the use of The Network's trademarks.

The Network and its member groups later voted that all items recycled be free, legal, and appropriate for all ages. Subsequently, The Network sent FS cease and desist notifications regarding The Network's logo and trademarks. FS then filed for declaratory judgment in the United States District Court for the Northern District of California. Once in court, FS moved for summary judgment on whether The Network engaged in naked licensing.

The district court found that The Network had failed to exercise adequate control over the use of its trademarks and thus forfeited the exclusive rights to those trademarks. The Ninth Circuit affirmed, finding that The Network had, indeed, engaged in naked licensing.

The Network had admitted that it did not have an express license agreement with FS, and thus no express contractual rights to inspect or supervise FS. The lack of such an express right, however, was not conclusive evidence of lack of control. A licensor may, in the alternative, demonstrate actual control through supervision or inspection.

Here, the Ninth Circuit found that The Network had failed to exercise actual control. Although The Network instituted its "Keep it free, legal and appropriate for all ages" standard, there was no evidence that The Network enforced that standard. The Network's licensees were not required to adopt the standard, nor was it uniformly applied or enforced by the member groups. The standard further failed to inform the quality of the services provided, and thus did not establish a control requiring member groups to maintain consistent quality. The amorphous policies and practices exercised by each individual member group likewise failed to indicate that The Network maintained control over its trademark. The overall lack of quality control or enforcement of quality standards supported a finding that The Network engaged in naked licensing, in essence, abandoning its trademark.

The court recognized that loosely organized non-profit organizations that share common goals may be held to a less stringent quality control requirement for trademark purposes, but found that The Network still failed to meet even that less stringent standard. The licensor must still monitor and control its licensees, which The Network failed to do. Likewise, the court recognized that while a licensor may reasonably rely on the efforts of its licensee, the two must be in a close working relationship and the licensor must possess some other indicia of control. The Network and FS did not share such a relationship nor did The Network retain any control over actions by FS. The Ninth Circuit thus found that The Network had engaged in naked licensing, resulting in forfeiture of its marks.

Strategy and Conclusion

This case illustrates how trademark rights can be attacked and what trademark owners can do to protect their trademark rights.

First, use a legally-binding trademark license agreement that contains quality control provisions. At minimum, those provisions should obligate the licensee to maintain the quality of the licensed goods and services, and should give the licensor the right to monitor quality and cancel the license if the quality standards are not maintained. Ideally, the license will spell out when and how the trademark owner may exercise control over their licensees' use of the trademark and the quality of the products or services. 

Second, the licensor should, whenever possible, exercise actual control, in the form of inspection of or supervision over the use of the trademark and the quality of products or services associated with the trademark. 

Copyright ©Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.