McHale Slavin NewsletterMchale Slavin

April 2011

How to Destroy a Trademark Without Even Trying!

     Did you know that when the owner of a trademark fails to exercise sufficient quality control over a licensee's use of the trademark, the trademark can be rendered unprotectable?

     While facts vary from case to case, when naked licensing is found, the trademark owner can be found to have lost its ability to enforce a trademark against a licensee. A recent Ninth Circuit decision involving a not-for-profit entity involved in finding new uses for old items learned the hard way that failing to exercise sufficient quality control over a licensee is considered naked licensing.

See Freecyclesunnyvale v. The Freecycle Network, 626 E 3d 509 (9th Cir. 2010).

BACKGROUND
      In March of 2003, an entity entitled the Freecycle Network was formed. The Freecycle Network created a website at www.freecycle.org which provided a directory of member groups and various resources for the groups, including etiquette guide-lines. The Freecycle Network maintained a leadership structure through its member groups called the "Freecycle Ethos." The Freecycle Network claimed the rights to the trademarks “Freecycle,” “The Freecycle Network,” and a logo. These trademarks served both to identify The Freecycle Network's services and affiliated member groups.

     In October of 2003, an entity entitled Freecyclesunnyvale was formed. Contact was made with The Freecycle Network about using The Freecycle Network's logo in connection with Freecyclesunnyvale's activities. A single e-mail message was sent to Freecyclesunnyvale regarding the inquiry.

     A Freecycle Network representative responded to Freecyclesunnyvale's query as
follows: "You can get the neutral logo from www.freecycle.org, just don't use it for commercial purposes or you [sic] maybe Mark or Albert can help you do you [sic] own fancy schmancy logo!"

     Freecyclesunnyvale then added to The Freecycle Network's list of online recycling groups displayed on The Freecycle Network's Web site. In addition, Freecyclesunnyvale received an allmembers e-mail from The Freecycle Network welcoming Freecyclesunnyvale to The Freecycle Network. The e-mails did not include any restrictions or guidance on the use of the trademarks.

     In 2004, The Freecycle Network, adopted the rule "Keep It Free, Legal and Appropriate For All Ages." Apparently there was no clear understanding between member groups about what the rule meant so the rule’s definition and application varied from group to group.

     In 2005, relations deteriorated between The Freecycle Network and Freecyclesunnyvale. The Freecycle Network sent cease and desist e-mails demanding that Freecyclesunnyvale cease using the Freecycle name and logo and threatening to have Yahoo! terminate Freecyclesunnyvale's Yahoo! Group if Freecyclesunnyvale did not comply.

     Freecyclesunnyvale disputed The Freecycle Network's ability to prevent Freecyclesunnyvale's continued use of The Freecycle Network's trademark, The Freecycle Network ultimately succeeded in terminating Freecyclesunnyvale's Yahoo! Group.

     In 2006, Freecyclesunnyvale filed a declaratory judgment action against The Freecycle Network in the U.S. District Court for the Northern District of California. The Freecycle Network responded by filing a counterclaim for trademark infringement and unfair competition. Freecyclesunnyvale then moved for summary judgment arguing that The Freecycle Network had engaged in naked licensing by allowing Freecyclesunnyvale to use The Freecycle Network's trademarks without either: 1) a contractual right to control Freecyclesunnyvale's activities, or 2) the exercise of any actual control over Freecyclesunnyvale's activities. The district court granted Freecyclesunnyvale's summary judgment motion, holding as a matter of law that The Freecycle Network had engaged in naked licensing.

The Freecycle Network appealed the district court's decision to the Ninth Circuit regarding the naked licensing finding. The Ninth Circuit set forth three factors:

     1) Did The Freecycle Network retain express contractual control over the trademark activities during Freecyclesunnyvale's use of the trademarks?

     The Court addressed this first factor by noting that the absence of an express license agreement between The Freecycle Network and Freecyclesunnyvale. The Freecycle Network argued that the October 2003 e-mail cautioning Freecyclesunnyvale about using The Freecycle Network's logo commercially constituted an implied license.

     The court rejected this argument. The court held that the purported prohibition on commercial use was insufficient, in part because the prohibition failed to include a contractual right to inspect or supervise Freecyclesunnyvale's services or to terminate the license in the event that Freecyclesunnyvale violated the prohibition.


      2) Did The Freecycle Network provide sufficient evidence of actual control over Freecyclesunnyvale's activities?

     The Freecycle Network asserted that it exercised actual quality control by the "Keep It Free, Legal And Appropriate For All Ages" standard; incorporation of the Yahoo! Group's service terms, the e-mail's commercial purposes prohibition; the etiquette guidelines listed on The Freecycle Network's Web site; and the Freecycle Ethos.

     The Ninth Circuit disagreed stating that The Freecycle Network lacked actual control over any of its member groups, the member groups were not required to adopt any of the standards and, more importantly, the member groups did not apply or interpret the standard. Further, incorporation of the Yahoo! Group's service terms did little more than regulate generic online activity and could not be considered as evidence of actual quality control over the trademarks.

3) Did The Freecycle Network reasonably rely on Freecyclesunnyvale's own quality control measures to satisfy the quality control requirement?

     As to The Freecycle Network's reliance on its Web site etiquette guidelines, because member groups were free either to adopt these guidelines or refrain from adopting them, and because the guidelines were amorphous at best, the court reasoned that they could not be considered to be adequate quality controls. Finally The Freecycle Network argued that the court's assessment of the foregoing factors should be less stringent because of their nonprofit entity.

     The Ninth Circuit further held The Freecycle Network was not reasonable in relying upon Freecyclesunnyvale's own quality control measures to satisfy the quality control requirement, such reliance was only appropriate in situations in which the licensor and licensee had a close working relationship, which was clearly absent. The court rejected the nonprofit leniency argument stating that a holding of naked licensing was still appropriate because of the absence of the exercise by The Freecycle Network of any quality control over the member groups.

Summary

     Naked licensing is a good way to destroy an otherwise protectable trademark. Naked licensing has been stated as being “inherently deceptive” and constitutes abandonment of any rights to the trademark by the licensor. (See Baramerica Int’l
USA Trust v. Tyfield Importers, Inc., 289 F. 3d 589, 598 - 9th Cir. 2002).
It is imperative that the trademark owner takes adequate steps to ensure that its license agreement spells out the licensee's quality control obligations and maintain a record as to its efforts to ensure those obligations are being followed. By not enforcing the terms of the trademark’s use, the licensor may forfeit his rights to enforce the exclusive nature of the trademark.


By: Michael A. Slavin
Registered Patent Attorney