November/December 2010 Issue
Civil Cases
FreecycleSunnyvale v. Freecycle Network,
2010 WL 4749044 (9th Cir. Nov. 24, 2010)
ABSTRACT
In evaluating whether a nonprofit recycling organization abandoned its trademarks through naked licensing, the Ninth Circuit left open the question of the degree of proof required for a finding of naked licensing, holding that the licensor had engaged in naked licensing, even under the stricter “clear and convincing” standard. The question of whether less stringent quality-control standards should apply to loosely organized nonprofit groups that share common public service-oriented goals was also left undecided, since the court found that the trademark owner had exercised no control over the services.
CASE SUMMARY
FACTS
Defendant The Freecycle Network (“TFN”) is a nonprofit organization that facilitates “freecycling,” the recycling of reusable goods through online networks in which members give items away to others so they can continue to be used for their intended purpose rather than disposing of them. TFN members moderate local freecycling groups through online service providers such as Yahoo! Groups and Google Groups. Since May 2003, TFN has used the trademarks THE FREECYCLING NETWORK, FREECYCLE, and the FREECYCLE logo depicted below to identify TFN’s services and to identify member groups’ affiliation with TFN:
TFN allows member groups to use its trademarks. Until 2004, the “etiquette” section of TFN’s website contained a few suggested guidelines for its member groups, including a “Keep it Free” rule (later expanded to “Keep it Free, Legal, and Appropriate for All Ages”). There were no specific rules or provisions, however, regarding the members’ use of TFN’s trademarks.
Plaintiff FreecycleSunnyvale (“FS”) became a member group of TFN in October 2003, following a brief e-mail and phone exchange with TFN’s founder, in which FS requested a logo for use on its group’s webpage. TFN replied that “you can get the neutral logo from www.freecycle.org, just don’t use it for commercial purposes.” This was the only direct communication between TFN and FS regarding the use of TFN’s trademarks.
In November 2005, TFN asked FS to discontinue using TFN’s trademarks, threatening to have Yahoo! terminate FS’s Yahoo! Group if FS did not comply. FS responded by informing Yahoo! that FS had a license from TFN to use the trademarks, and referred to the 2003 e-mail from TFN authorizing FS to use the logo. Nevertheless, Yahoo! terminated FS’s group after receiving TFN’s notice that FS was infringing its marks.
In January 2006, FS filed a declaratory-judgment action against TFN, alleging noninfringement of the trademarks and tortuous interference with FS’s business relations. TFN counterclaimed for trademark infringement and unfair competition under federal and state law. FS moved for summary judgment on the issue of whether TFN’s alleged “naked licensing” of the trademarks entitled FS to a finding of noninfringement as a matter of law. FS argued that TFN had abandoned its trademarks because it granted FS the right to use the trademarks without reserving the right to control, or actually exercising control, over FS’s use of the marks. The district court agreed, granting summary judgment to FS on the issue of naked licensing, and TFN appealed.ANALYSIS
In reviewing de novo the district court’s grant of summary judgment on the issue of naked licensing, the Ninth Circuit first addressed the appropriate evidentiary standard. Citing Barcameria International USA Trust v. Tyfield Importers, Inc., 289 F.2d 589 (9th Cir. 2002), the Ninth Circuit noted that a party alleging abandonment by virtue of naked licensing must meet a “stringent standard of proof.” Whether this standard requires a “preponderance” of the evidence or “clear and convincing” proof is unsettled, with only two circuit courts of appeals addressing the issue—and each applying a different standard. The Ninth Circuit determined, however, that it need not decide which standard of proof applies because, even applying the higher standard of clear and convincing evidence, FS had demonstrated that TFN abandoned the trademarks through naked licensing.
The court pointed out that trademark owners have a duty to control the quality of the goods or services sold by others under their trademarks. “Naked licensing” occurs when a trademark owner fails to adequately control use of its trademarks by others, which may result in the trademarks ceasing to function as indicators of source.
First, the court considered whether TFN retained an express contractual right to inspect and supervise FS’s operations. TFN conceded that there was no express license agreement between the parties, but argued that adequate quality-control measures were in place when it authorized FS to use the trademarks, but “[not] for commercial purposes.” The court determined that even if TFN’s October 9, 2003, e-mail constituted an implied licensing agreement, there was no genuine issue of material fact that TFN had not retained any express contractual right to inspect or supervise FS’s services, and no ability to terminate the license if FS did, in fact, use the trademarks for commercial purposes.
In the absence of an express contractual right to control the quality of FS’s services, the court then considered whether an issue of material fact remained as to whether TFN actually controlled the services offered under the marks. TFN claimed that it exercised actual control through (1) its “Keep it Free, Legal, and Appropriate” standard and incorporation of the Yahoo! Groups service terms; (2) the requirement that the trademarks not be used for commercial purposes, as set forth in the October 9, 2003, e-mail; (3) the etiquette guidelines listed on TFN’s website; and (4) TFN’s “Freecycle Ethos,” also posted on TFN’s website, which established policies and procedures for member groups. TFN also argued that loosely organized nonprofits that share common public-service goals should be subject to less stringent quality-control requirements.
The court disagreed that these steps were sufficient to establish actual control over FS’s services. First, it found that TFN’s licensees were not required to adopt the “Keep it Free, Legal, and Appropriate” standard, nor was it uniformly applied or interpreted by the local groups. The court also pointed out that the Yahoo! Groups terms of service apply to all Yahoo! Groups for purposes of regulating activity like spam and harassment, not to control the quality of services offered by the groups. The court further found that the noncommercial-use requirement did not relate to the quality of the services, and thus was not an actual control in the trademark context. Similarly, the etiquette guidelines were found to be voluntary and too amorphous to be considered actual control over the quality of the services. Finally, the court found that the “Freecycle Ethos” could not be considered a control because its central premise was local enforcement with local variations, which by its very nature would result in inconsistencies across member groups.
TFN’s final argument—that it justifiably relied on its member groups’ own quality-control measures—also failed to persuade the court. Such reliance requires that the parties have such a close working relationship that the licensor is familiar with the licensee’s own efforts to control quality. The court concluded that, in this case, TFN did not have a sufficiently close working relationship with FS to allow TFN to justifiably rely on FS’s own quality-control measures. Moreover, the court held that even if TFN could demonstrate reliance on FS’s quality-control efforts, such reliance alone would not be sufficient to overcome a finding of naked licensing without other indicia of actual control by TFN. Since TFN could neither show a close working relationship nor any exertion of actual control over FS, TFN could not rely solely on FS’s own quality-control efforts. CONCLUSION
This case illustrates the importance of both expressly retaining the right and, more importantly, actually exercising control over the use of one’s licensed trademarks by others. The harsh result of a finding of naked licensing—an abandonment of trademark rights—is a reminder of what can happen when a trademark owner permits the uncontrolled use of its marks. Moreover, this case leaves open the question of the standard of proof applicable to a finding of naked licensing, and suggests that it may be possible for a less-stringent standard to apply to loosely organized nonprofit organizations.
