A recent decision by the Ninth Circuit serves as a reminder to trademark owners that uncontrolled or "naked" licensing of a trademark without reasonable quality controls can result in an involuntary forfeiture of trademark rights. In FreecycleSunnyvale v. The Freecycle Network, No. 08-16382, (9th Cir. Nov. 24, 2010), the Ninth Circuit affirmed summary judgment of non-infringement for the licensee based on naked licensing. Although courts generally strive to find quality controls in even informal relationships, this decision is an example of the harsh penalty that can result when there is a lack of control by the licensor.
This case involved a loose online network of member groups engaged in a non-profit service called "freecycling" (i.e., giving away an item to others to be used for its intended purpose). There was no written license agreement between the parent organization licensor and the local chapter licensee. In determining whether there was nevertheless sufficient control to justify finding an implied license, the Ninth Circuit first examined whether the licensor retained an express contractual right to inspect and supervise the licensee's services. The licensor relied on the following e-mail:
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 to do your own fancy schmancy logo!
The Ninth Circuit rejected the licensor's argument because the implied license did not provide for the right to quality control and failed to provide for termination of the license if the marks were used for commercial purposes.
To overcome the absence of contractual quality control rights, the Ninth Circuit then analyzed whether the licensor had exercised actual quality control over the licensee. In an effort to establish actual control, the licensor relied on certain etiquette guidelines ("Keep It Free, Legal & Appropriate For All Ages") and policies posted on its Web site, licensees' incorporation of Yahoo! Groups' online service terms, and the non-commercial use restriction from the above e-mail. The Ninth Circuit rejected each of these bases as unrelated to actually maintaining a consistent quality for the licensee's services. Additionally, the licensor's suggested etiquette guidelines were voluntary, not uniformly interpreted or applied, and, at best, selectively enforced by local chapters rather than the licensor. The Court found no basis from any of these standards to conclude that the licensor exercised actual quality control over the licensees. Given the complete lack of quality control, the Court also rejected the licensor's argument that loosely organized non-profit groups should be subject to less stringent quality control requirements. See Birthright v. Birthright, Inc., 827 F. Supp. 1114 (D. N.J. 1993).
In a final attempt to save its marks, the licensor argued that it reasonably relied on its licensees' quality control measures. The Ninth Circuit found that reliance on a licensee's quality control efforts is only permissible where there is a "close working relationship" between the parties, and there are other indicia of quality control by the licensor. In determining whether a "close working relationship" exists, courts will examine factors such as the length of time the parties have worked together, the amount of experience working with each other, the lack of quality issues in the past, and other similar considerations. No such factors evidenced a close working relationship in this case. Accordingly, the Ninth Circuit held that the licensor engaged in naked licensing and abandoned its rights in the marks at issue.
This decision is a reminder that some form of quality control must exist to avoid a naked license and involuntary abandonment of trademark rights. The substance and form of such quality control will be determined by the reasonable expectations of the licensor's customers and will necessarily vary depending on the goods or services at issue. Trademark owners should authorize use of their marks by others only through a written license agreement whenever possible. This agreement should expressly retain quality control rights, including the right to inspect and supervise the licensor's operations on a regular basis. The agreement also should provide for termination in the event of a breach by the licensee. In the absence of a written agreement, the licensor should develop specific guidelines to regulate the licensee's use of the mark and the quality of the licensee's goods and/or services. These guidelines should be mandatory for each licensee and consistently enforced by the licensor. Measures should be taken by the licensor to address any non-compliance with the guidelines. Finally, the licensor should actually inspect and regulate the licensee's goods and/or services. Such monitoring should be designed to ensure a consistent quality of the branded goods. The frequency, duration, and methods used to assess the quality of a representative sample will vary by the type of goods and/or services.