A recent decision by the Ninth Circuit, FreecycleSunnyvale v. Freecycle Network, 1626 F.3d 509, 97 USPQ2d 1127 (9th Cir. 2010) (81 PTCJ 142, 12/3/10). reaffirmed that licensing a trademark without quality control will result in the loss of the underlying trademark rights. Specifically, the appellate court affirmed the district court’s grant of partial summary judgment for declaratory judgment plaintiff FreecycleSunnyvale, finding that the Freecycle Network had abandoned its rights in both the “Freecycle” and “The Freecycle Network” word marks, as well as an associated logo mark, by granting a “naked” license of those marks (i.e., a license without quality control). As a result, the court found that FreecycleSunnyvale was not infringing the Freecycle Marks. 2Id. at 520.
Naked Licensing
The prohibition against naked licensing is rooted in the fundamental doctrine underlying trademark law that trademarks identify for consumers a single source of the products and/or services afforded under the mark. As such, trademarks protect consumers from fraud or deceit by third parties, and ensure that consumers’ expectations for a certain level of quality and service that the consumer associated with such mark will be met.
The need for quality control by a trademark owner is particularly necessary when a third party, not the owner itself, will be offering a product or service under the mark, because “unless the licensor exercises supervision and control over the operations of its licensees the risk that the public will be unwittingly deceived will be increased.” 3Dawn Donut Co. v. Hart’s Food Stores Inc., 267 F.2d 358, 367, 121 USPQ 430 (2d Cir. 1959) (citing S. Rep. No. 1333, 79th Cong., 2d Sess. (1946)).
Prior Case Law
The issue of naked licensing has been addressed by a number of courts prior to FreecycleSunnyvale. The courts all agree that a license without any form of quality control will invalidate the licensor’s rights in the mark, though whether a court has found sufficient quality control has depended on the underlying facts.
Actual Control in Absence of a Contractual
Control Provision
In Dawn Donut Co. v. Hart’s Food Stores Inc., 4267 F.2d 358 one of the first cases to address naked licensing, the trademarks “Dawn” and “Dawn Donut” were licensed by the plaintiff to various bakers. While some of the bakers signed an agreement that provided for quality control, others did not. The court held that the licensor may “in fact have exercised control in spite of the absence of any express grant by licensees of the right to inspect and supervise” and remanded the issue of actual control to the district court. 5Id. at 368.
Subsequent decisions have similarly held that de facto control in the absence of a quality control provision is sufficient to avoid an impermissible naked license. 6Carl Zeiss Stiftung v. V. E. B. Carl Zeiss Jena, 293 F. Supp. 892, 917-18, 160 USPQ 97 (S.D.N.Y. 1968), aff’d and modified on other grounds, 403 U.S. 905, 170 USPQ 64 (1971); Penta Hotels Ltd. v. Penta Tours, 9 USPQ2d 1081, 1109 (D. Conn. 1988); General Motors Corp. v. Gibson Chemical & Oil Corp., 786 F.2d 105, 110, 229 USPQ 352 (2d Cir. 1986). For example, in Carl Zeiss Stiftung v. V.E.B. Carl Zeiss Jena, the court found sufficient quality control, notwithstanding the absence of a quality control provision in the license agreement, because the licensor made inspections of the goods bearing the mark and there was no evidence that the goods were of a lower quality standard. 293 F. Supp. at 917-18.
The courts have consistently held that “because a finding of insufficient control … works a forfeiture [of ownership by the licensor in the licensed mark,] the proponent of a naked license theory ’faces a stringent standard’ of proof.” 8Moore Business Forms Inc. v. Ryu, 960 F.2d 486, 489, 22 USPQ 1773 (5th Cir. 1992) (citing Taco Cabana International Inc. v. Two Pesos Inc., 932 F.2d 1113, 19 USPQ2d 1253 (5th Cir.1991), aff’d, 1128 S. Ct. 2753 (1992)). See also, American Foods Inc. v. Golden Flake Inc., 312 F.2d 619, 624-25, 136 USPQ 286 (5th Cir. 1963); Edwin K. Williams & Co. v. Edwin K. Williams & Co.-East, 542 F.2d 1053, 1059, 195 USPQ 93 (9th Cir. 1976); Kentucky Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368, 387. 193 USPQ 649 (5th Cir. 1977); Winnebago Industry Inc. v. Oliver & Winston Inc., 207 USPQ 335, 340 (T.T.A.B. 1980).
Reliance on Licensee’s Quality
Control Measures
In addition to cases finding de facto quality control, courts have refrained from nullifying rights in trademarks that have been subject to licenses that lacked quality control provisions by finding that the trademark owner reasonably relied on the quality control of the licensee. 9Taco Cabana, 932 F.2d at 1121-22 (finding adequate quality control where brothers/ex-partners cross-licensed the mark to each other, licensee’s goods and services were not inferior to licensor’s, and the customers received a consistent level of quality); Woodstock’s Enterprises Inc. v. Woodstock’s Enterprises Inc., 43 USPQ2d 1440, 1446 (T.T.A.B. 1997) (stating that license can be valid where “the licensor justifiably relies on the integrity of the licensee to ensure the consistent quality of services performed under the mark”), aff’d, 152 F.3d 942 (Fed. Cir. 1998); Embedded Moments Inc. v. International Silver Co., 648 F. Supp. 187, 194 (E.D.N.Y. 1986); Land O’Lakes Creameries Inc. v. Oconomowoc Canning Co., 330 F.2d 667, 670, 141 USPQ 281 (7th Cir. 1964); Printers Services Co. v. Bondurant, 20 USPQ2d 1626, 1631 (C.D. Cal. 1991).
For example, in Land O’Lakes Creameries Inc. v. Oconomowoc Canning Co., 10330 F.2d at 670. the Seventh Circuit found that the licensor and licensee had a sufficiently close working relationship such that the licensor could rely on the past quality of the licensee to prevent a naked license. Specifically, the reasonableness of such reliance was based on the approximately 40-year relationship and license period, during which there evidently were no complaints about the quality of goods. 11Id.
Cases Where Quality Control Insufficient to
Protect Mark
In contrast to the above cases, courts have found under certain circumstances that a licensor’s reliance on a licensee to maintain quality control was insufficient to protect the mark. In Stanfield v. Osborne Industries Inc., for example, the 10th Circuit affirmed the district court’s finding that a fifteen year agreement between an inventor/licensor and a manufacturer/licensee was a naked license. 1252 F.3d 867, 871 & n.3, 34 USPQ2d 1456(10th Cir. 1995). There, the agreement contained no quality control provisions, the licensee had the right to use the marks on any of the products it manufactured, and the licensee had sole discretion to design the mark. 13Id. The court noted that the parties did not have a close relationship and indeed had no contact with each other in twenty years except as adversaries in litigation. 14Id. at 872.
In First Interstate Bancorp v. Stenquist, the court found naked trademark licensing in the context of a real estate license agreement. 1516 USPQ2d 1704, 1707 (N.D. Cal. 1990). In this case, even though the licensor had informal contacts with the licensee concerning the real estate business, the licensor and licensee had known each other professionally and socially for six to seven years, and the licensor trusted the licensee’s integrity, experience, and professionalism, the court found that the licensor did “not engage in any meaningful supervision or inspection.” 16Id. at 1705-06. The court noted that “while reasonable reliance on the licensee’s own quality control is one factor which may be considered, it is not alone sufficient to show that a naked license has not been granted.” 17Id. at 1707. The court emphasized that in those reasonable reliance cases in which the licensor’s trademark rights were upheld (such as those discussed above) there was at least one additional indicia of control. 18See id. at 1706 (citing Transgo Inc. v. Ajac Transmission Parts Corp., 768 F.2d 1001, 1017-18 (9th Cir. 1985) (finding quality control sufficient where licensor manufactured at least 90 percent of the goods sold by its licensee using its own quality control procedures, where licensor had worked closely with the licensee for ten years, and where licensor never received complaints about licensee’s performance)); Land O’Lakes Creameries Inc. v. Oconomowoc Canning Co., 330 F.2d 667, 670-71 (7th Cir. 1964) (long term relationship and no complaints); Syntex Laboratories Inc. v. Norwich Pharmacal Co., 315 F. Supp. 45, 55-56 (S.D.N.Y. 1970) (FDA regulations governed manufacturing process).
Two cases that are, like FreecycleSunnyvale, from the Ninth Circuit (Barcamerica International USA Trust v. Tyfield Importers Inc.
19289 F.3d 589, 62 USPQ2d 1673 (9th Cir. 2002) (64 PTCJ 64, 5/17/02). and Halo Management LLC v. Interland Inc.
202004 U.S. Dist. LEXIS 15563 (N.D. Cal. 2004) (68 PTCJ 498, 8/27/04).), show that the Ninth Circuit has actively enforced the prohibition against naked licensing. In Barcamerica, a U.S-based winery, Barcamerica International USA Trust, sought to enjoin an Italian entity, Cantine Leonardo Da Vinci Soc. Coop. a.r.l. and its U.S. distributor, Tyfield Importers Inc., from selling wines under the “Da Vinci” mark. Cantine Leonardo and Tyfield argued that Barcamerica was no longer using the Da Vinci mark when they adopted it. In response, Barcamerica claimed continued use of the Da Vinci mark based on its ongoing license to Renaissance Vineyards, another winery. Specifically, Barcamerica relied on trademark license agreements that it had entered into with Renaissance and Renaissance’s continued use of the Da Vinci mark on wine under such license agreements. The Ninth Circuit rejected Barcamerica’s argument, holding that the license agreements, which contained no quality control provisions, were naked licenses of the Da Vinci mark. 21289 F.3d at 595-96. Moreover, the court found that there were neither actual quality controls nor a sufficiently close relationship between the parties to justify reliance by Barcamerica on the licensee’s quality control. 22Id. at 596-97. Indeed, the only quality controls alleged by Barcamerica were that Barcamerica’s principal, Barca, occasionally tasted the wine 23The court noted that “Mr. Barca fail[ed] to state when, how often, and under what circumstances he taste[d] the wine.” Id. at 597. and relied on the reputation of the licensee as a “world famous winemaker” 24Id. at 592. (despite the fact that such winemaker was deceased). These alleged quality controls were seen as deficient by the court, which concluded that Barcamerica engaged in naked licensing and, therefore, forfeited its rights in the Da Vinci mark. The court accordingly affirmed cancellation of Barcamerica’s registration. 25Id. at 598.
In Halo, the plaintiff Halo Management claimed that the defendant Interland infringed the “Halo” mark by using the mark “blueHALO” in connection with Interland’s web-hosting services. Halo Management registered the word mark “Halo” for electronic communication/commerce-related and search engine services in 2002. In that same year, Halo Management entered into a license agreement with Planet Halo Inc. permitting Planet Halo to use the Halo mark in the development and marketing of a hand-held computer device. In its defense, Interland argued that Halo Management had abandoned the Halo mark by failing to exercise any quality control over Planet Halo’s use of the mark. 262004 U.S. Dist. LEXIS 15563, at *7-14.
In concluding that Halo Management had granted a naked license, the district court noted that the license agreement did not provide Halo Management the ability to inspect or monitor Planet Halo’s use of the Halo mark and that Planet Halo had agreed only “to employ reasonable commercial efforts to maintain the positive business value of the HALO mark.” 27Id. at *7 (quotation marks and citation omitted). Furthermore, the court mentioned that (i) pursuant to the license agreement, Halo Management did not even have the ability to terminate the agreement if Planet Halo “derogate[d] its supposed ‘quality’ or ‘value’ obligations,” 28Id. at *14. (ii) the parties maintained no working relationship, (iii) no “product” was ever reviewed by Halo Management, and (iv) Halo Management played no meaningful role in assessing the quality of the product issued under its mark. Although Halo Management did produce two e-mail messages it sent to Planet Halo seeking to review samples of Planet Halo’s products, the court noted that these monitoring efforts coincided with Halo Management’s filing of the litigation against Interland (more than six months after the execution of the license agreement) and dismissed such efforts as tardy and insufficient. 29Id. at *24-25. Having thus determined that Halo Management had granted Planet Halo a “naked license,” the court granted Interland’s motion for summary judgment on the issue of trademark infringement.
The FreecycleSunnyvale Decision
The Freecycle Network is an umbrella non-profit corporation dedicated to the practice of “freecycling,” which refers to “the practice of giving an unwanted item to a stranger so that it can continue to be used for its intended purpose, rather than disposing of it.” 30626 F.3d at 512. The Freecycle Network maintained its own website, which included a member directory of local freecycling organizations, as well as guidelines for starting new freecycle groups. In practice, freecycling was primarily conducted by such local volunteer organizations that utilized internet groups (such as Yahoo! Groups) and/or their own websites to coordinate freecycling activities. FreecycleSunnyvale was one such local organization, headquartered in Sunnyvale, Calif.
The Freecycle Network permitted local organizations to use the Freecycle marks, including FreecycleSunnyvale. Approximately two years after granting FreecycleSunnyvale such permission, The Freecycle Network sent a letter to FreecycleSunnyvale demanding that FreecycleSunnyvale cease all use of the Freecycle marks. In response to such letter, FreecycleSunnyvale instituted a declaratory judgment action against the Freecycle Network, which alleged that the Freecycle Network’s grant of a naked license of the Freecycle marks to FreecycleSunnyvale had resulted in abandonment of the Freecycle Network’s rights therein. The Freecycle Network counterclaimed for trademark infringement and unfair competition under the Lanham Act and the California Business and Professions Code. FreecycleSunnyvale filed for partial summary judgment based on its naked licensing allegation. After the district court granted summary judgment in favor of FreecycleSunnyvale (holding that the Freecycle Network had granted a naked license of the Freecycle marks and thus abandoned its rights thereto), the parties stipulated to dismiss their remaining claims and the Freecycle Network appealed the ruling. 31Id. at 514.
Citing its prior holding in Barcamerica, the Ninth Circuit noted that a “stringent standard of proof” must be satisfied by the proponent of a naked license theory. 32Id. at 514-515. The Ninth Circuit then conducted a three-part inquiry to determine if the Freecycle Network had granted a naked license. The first prong was whether the Freecycle Network had the “express contractual right to inspect and supervise” FreecycleSunnyvale’s operations. 33Id. at 516. Although the Freecycle Network conceded that there was no express license regarding usage of its marks by FreecycleSunnyvale, it argued that an e-mail from the Freecycle Network to FreecycleSunnyvale, which noted that the marks should not be used for commercial purposes, functioned as an implied license agreement. The court rejected this argument, stating that even if such an e-mail functioned as a license it nonetheless contained “no express contractual right to inspect or supervise [FreecycleSunnyvale’s] services and no ability to terminate [FreecycleSunnyvale’s] license” if FreecycleSunnyvale violated the prohibition on commercial use. 34Id.
The second prong of the court’s analysis focused on whether or not the Freecycle Network exercised “actual control” over its licensees, including FreecycleSunnyvale, through inspection and/or supervision. 35Id. at 517 The Freecycle Network asserted that it had satisfied this prong because: (i) all of the moderators of the local freecycling groups, as well as the Freecycle Network, agreed to adopt the statement “Keep it Free, Legal, and Appropriate for all Ages” as a guiding principle and to abide by the Yahoo! Groups terms of service; (ii) the Freecycle Network imposed a noncommercial services requirement on FreecycleSunnyvale’s use of the marks; (iii) the Freecycle Network’s website listed certain etiquette guidelines and the “Freecycle Ethos,” which described the democratic leadership structure and local volunteer-centric nature of the Freecycle Network. The court rejected each of these arguments, finding that the “Keep it Free” rule, the Freecycle Network etiquette guidelines and “Freecycle Ethos” were all voluntary in nature and inconsistently enforced at the discretion of each individual freecycling group. The court also found that the remaining controls asserted by the Freecycle Network did not qualify as actual quality controls because neither the Yahoo! Groups terms of service nor the noncommercial usage requirement addressed the quality of services provided by member groups. The court concluded that none of the Freecycle Network’s alleged actual controls were “adequate quality controls because they were not enforced and were not effective in maintaining the consistency of the trademarks.” 36Id. at 517-518. Moreover, the court declined to address the Freecycle Network’s argument that loosely organized nonprofits were subject to less stringent quality control requirements, finding that, in any event, the Freecycle Network did not exercise any quality controls at all. 37Id. at 518.
The third prong of the court’s analysis addressed whether the Freecycle Network and FreecycleSunnyvale were engaged in the type of “close working relationship” that would permit the Freecycle Network to justifiably rely on FreecycleSunnyvale’s quality control measures despite its lack of any contractual or actual controls. 38Id. at 518-519. The court concluded that the Freecycle Network did not have such relationship with FreecycleSunnyvale and that, even if it did, such a relationship alone would not preclude the finding of a naked license. 39Id.
The court also rejected the following two arguments made by the Freecycle Network because it did not raise these arguments during the district court proceedings: (i) that FreecycleSunnyvale must also show loss of trademark significance in addition to naked licensing; and (ii) that FreecycleSunnyvale should be “estopped from supporting its naked licensing defense with evidence that demonstrates that the Freecycle Network did not adequately control the services offered by FreecycleSunnyvale when using the trademarks.” 40Id. at 519.
Consequently, the court concluded that the Freecycle Network had engaged in naked licensing and thus had abandoned the Freecycle marks.
Implications of the FreecycleSunnyvale
Decision
The FreecycleSunnyvale decision serves as a potent reminder to practitioners to include quality control provisions in trademark license agreements and advises trademark owners to at least periodically exercise such quality control rights. Such precautions must be taken where a trademark owner is engaged in the business of licensing its trademark rights, and accordingly has keen interest in protecting the future reputation and value of its mark.
In certain situations, however, ongoing quality control is less likely to be either a consideration or a priority from a business perspective. One such situation is where a trademark license is royalty free, and thus possibly does not justify a commitment of resources by the licensor to control quality. Another example is a spin-off or other divestiture of a business where the divesting party seeks to discontinue any involvement with such business (including oversight of quality) and/or the purchaser (having paid good value to acquire such business) objects to ongoing oversight by the seller.
Though situations may arise where it is not financially feasible to provide quality control, a decision not to provide for such controls should take into account the possibility of forfeiting all rights in the mark. To the extent that the trademark owner’s mark will be used by a third party on a going forward basis, the trademark owner is well advised to insist on some level of quality control. The FreecycleSunnyvale decision thus serves as a fresh reminder to all practitioners to consider including quality control provisions in any trademark license. 41We note that there is greater risk of a naked license where products or services are being created or provided by a third party licensee, as opposed to where a third party licensee references a trademark owner’s trademark for promotional purposes or in connection with redistribution of a trademark owner’s products or services. This latter model increasingly is used in the mobile application and social media space (i.e., the trademark owner grants a license to the third party media platform provider for marketing and promotional purposes, rather than the creation and branding of a new product or service of such third party provider). In such latter contexts, there should be less concern regarding inclusion of quality control provisions for a number of reasons, including that a new third-party product or service is not being created and offered under the brand.
