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.
Patent Term Adjustment (PTA)
Patent Term Adjustment (PTA) is a process of providing the patentee adjustment to the 20 year term in response to prosecution delays (35 U.S.C. § 154). The following are four common strategies which should help an Applicant optimize the amount of PTA awarded:
1. Minimize delays in filing a reply to a notice/action by the USPTO regarding a rejection, objection, argument, or other request. To ensure timely filing, it is imperative that the Applicant review the notice/action sent to them and discuss response strategies with their attorney as soon possible. While responding after 3 months may be timely by payment of extensions of time, delay in response could be harmful to the Applicant if it results in PTA reduction.
2. Minimize filing supplemental responses or preliminary amendments. Submission of a supplemental reply other than a supplemental reply requested by the examiner after a reply has been filed is considered an Applicant failure.
3. Eliminate filing Information Disclosure Statements (IDS) after first office action. Applicants must ensure that attorneys are aware of all relevant prior art known to the Applicant. For prior art other than U.S. patents or publications, providing the attorney with hard copies during the drafting process will ensure that the completed IDS is filed prior to the first office action.
4. Eliminate submission of an amendment or other paper after a notice of allowance has been given or mailed. Certain papers such as formal drawings, letters related to biological deposits, or oaths/declarations which are submitted after notice of allowance are considered a failure by the Applicant.
Prior to the current 20 year patent term, U.S. Patent Law provided a patent term of 17 years from the date of issue. The ability of the patentee to enforce their rights for the duration of the patent term would not be in jeopardy as a result of prosecution delays because the term was as measured from the date the patent issued. In order to comply with international treaties, the Patent Laws were amended to provide a 20 year patent term measured from the date on which the application was first filed. Concerned that prosecution related delays would be disadvantageous to patentees, Congress provided day-for-day credits, or adjustments, to the 20 year term as a result of USPTO prosecution-related delays. For some industries, the full 20 year patent term may not be important as the technology is so dynamic that patentees obtain most of the financial benefits early in the life of the patent term. For those patents that provide market dominance or for technologies which obtain financial benefits deeper into the 20 year patent term, extending the competitive advantage for longer than the 20 year patent term would be beneficial.
While the USPTO is under an obligation to act within a timely manner, any PTA awarded is subject to reduction by a period equal to the period of time during which the applicant delays. What constitutes Applicant delay? There is no exhaustive list and according to USPTO there exists a “myriad of actions or inactions that occur infrequently” which could result in prosecution delay. In practice, however, there are a range of actions during prosecution which have been clearly defined as Applicant delay. Avoiding these actions should ensure maximum PTA allowed.
PTA is calculated by subtracting Applicant delays from USPTO related delays known as “A-delays,” “B-delays,” and “C-delays.” Negative PTA is not allowed. Therefore, if there are no USPTO delays or more delays than USPTO related delays, PTA cannot be utilized by the USPTO to take away any portion of the 20 year statutory patent term. Under “A-Delay,” PTA is granted to Applicants based on USPTO failure to act in certain situations, known as the “14-4-4-4” rule. The USPTO must provide notification, i.e. office action, within fourteen months after the date on which the application is filed. Once the Applicant responds to a notice, the Office must respond within four months from the reply date. The USPTO must act on an application within four months after a decision from the USPTO Board of Appeals or Federal Court where at least one allowable claim remains in the application. Finally, the USPTO must issue a patent within four months after the date on which the issue fee was paid and all outstanding requirements were satisfied.
Under B-Delays, applications pending more than three years after the actual filing date of the U.S. application or entry into the U.S. national stage of an international application are entitled to one day for each day PTA until the patent issues. Any time associated with interference proceedings, secrecy orders, or successful appeals that result in the application remaining pending past the three year time period is not counted under the B-Delay. However, such time could be recovered by the Applicant under “C-delay” counting.
Congress, wary of windfall extensions as a result of counting A-Delays, B-Delays, and C-delays that overlap, provided the limitation that to the extent periods of A-Delays, B-Delays, and C-delays overlap, PTA cannot exceed the actual number of days the issuance was delayed. The manner in which the USPTO determines “overlap” is currently being challenged in the Federal Courts, Wyeth v Dudas (580 F. Supp. 2d 138), as the plaintiffs challenged USPTO interpretations of the law. Under the USPTO determination of overlap, if the application is pending after three years from the filing date, the time period for stating the B-delay is the application’s filing date rather than the date that occurs three years after the filing date. Any A-Delay that occurred during the first three years would therefore necessarily overlap, resulting in the USPTO awarding “A-Delay” or “B-Delay,” but never any “A-delay” plus “B-delay.” In Wyeth, Plaintiffs argued that the correct B-delay should start the day after the three year date passes and not the Applicants filing date. Under such a scenario, true overlap would occur only if the A-delay and a B-delay occurred on an actual calendar day, thus providing the Applicant the benefit of A-delay plus B-delay PTA.
The USPTO recently changed the way it awards PTA to Applicants that enter the U.S. Patent System through national stage applications filed from international PCT applications. This change may provide the Applicant another opportunity to extend the patent term. For international applications, the USPTO must issue a notification within 14 months from the date on which an international application fulfills its formal national stage requirements. Prior to the change, the USPTO used the same date in calculating the B-Delay period. However, the USPTO now calculates the three year period for national stage applications from the date the national stage begins, which is 30 months from the earliest priority date of the PCT application. The Applicant can, however, use an earlier date if the application expressly requests early processing and completes the formal filing requirements prior to the 30 month deadline.
Conclusion
It is difficult to predict the value of a patent in the later years of its term particularly during the early stages of product research and development, when the patent application is usually being examined. The pace of technological innovation and other factors will affect that patents economic viability over the years. These basic practices are relatively simple and easy to implement and may extend the patent’s period of enforceability and potential value.
By:
Michael A. Slavin
Registered Patent Attorney