On November 24, 2010, the Ninth Circuit announced its decision in FreecycleSunnvale v. The Freecycle Network, a case involving the naked licensing defense to trademark infringement. FreecycleSunnyvale is a member group of The Freecycle Network, an organization devoted to facilitating recycling. The Freecycle Network was formed in March 2003 as an Arizona non-profit corporation dedicated to “free cycling,” which is “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.” The Freecycle Network maintains its own website and provides a directory of member groups as well as resources for volunteers to create new groups. It’s website also includes a section of etiquette guidelines for its member groups.
Freecycle Network maintains a “Freecycle Ethos” by which decisions are made through a process of surveys and discussions among volunteer moderators. Local volunteer moderators are responsible for enforcing Freecycle Network’s rules and policies but have some discretion in enforcing such guidelines.
The Freecycle Network has been using three trademarks since May 2003: “Freecycle,” “The Freecycle Network,” and a logo to identify The Freecycle Network’s services and affiliated member groups. Its federal trademark registrations is currently pending but they have been registered in other countries. The Freecycle Network permits its member groups to use the trademarks and relies on local moderators to regulate the trademark use.
In October 2003, FreecycleSunnyvale was formed without The Freecycle Network’s knowledge or involvement. It was established by entering into a service contract with Yahoo! Groups and adopted etiquette guidelines and instructions from The Freecycle Network’s website or the websites of its member groups. In October 2003, FreecycleSunnyvale’s founder emailed The Freecycle Network to ask for a logo for FreecycleSunnyvale and received an email stating: “You can get the neutral logo from www.freecycle.org, just don’t use it for commercial purposes . . . .” This was the only evidence of direct communication between FreecycleSunnyvale and The Freecycle Network regarding the trademark use.
In October 2003, FreecycleSunnyvale was added to the Freecycle Network’s list of online “free cycling” groups and The Freecycle Network sent out an email to its moderators announcing the addition of FreecycleSunnyvale.
In January 2004, the Freecycle Network circulated an email proposing that the groups adopt a “Keep it Free, Legal & Appropriate for All Ages” rule and the majority of the moderators voted to adopt that rule. However, the actual meaning of the rule and its enforcement varied from group to group.
In November 2005, The Freecycle Network ordered FreecycleSunnyvale to cease and desist using the Freecycle name and logo. After Yahoo! terminated FreecycleSunnyvale’s Yahoo! Group, FreecycleSunnyvale filed a declaratory judgment against The Freecycle Network alleging noninfringement of The Freecycle Network’s trademarks. After The Freecycle Network brought its own counterclaims for trademark infringement against FreecycleSunnyvale, FreecycleSunnyvale moved for summary judgment on the issue of its naked licensing defense. In 2008, the district court granted summary judgment to Freecycle.
The Ninth Circuit began by analyzing what standard of proof applied in determining whether summary judgment had been properly granted on the naked licensing defense. The court recognized that it previously held that “the proponent of a naked license theory of trademark abandonment must meet a `stringent standard of proof’.” The Court recognized that it had not decided whether this required clear and convincing evidence or the preponderance of evidence, but held that it was unnecessary to resolve this issue because FreecycleSunnyvale could satisfy either burden.
The Ninth Circuit turned its attention to the merits of the naked licensing defense. The Court began by recognizing that, as a general matter, trademark owners have a duty to control the quality of their trademarks: “It is well-established that ‘[a] trademark owner may grant a license and remain protected provided quality control of the goods and services sold under the trademark by the licensee is maintained.’” The Court continued by recognizing that naked licensing is present when the licensor “fails to exercise adequate quality control over the licensee.” In essence, “naked licensing may result in the trademark’s ceasing to function as a symbol of quality and a controlled source.” The Court recognized that where a licensor fails to exercise adequate quality control, the trademark owner has essentially abandoned the trademark.
The first issue in deciding whether a summary judgment had been properly granted was to determine “whether the license contained an express contractual right to inspect and supervisor the licensee’s operations.” The Court recognized that the absence of such an agreement would help support a finding of naked licensing. The Freecycle Network conceded that it did not have an express license agreement with FreecycleSunnyvale concerning the use of its trademark and therefore, it “necessarily lacks express contractual rights to inspect and supervise FreecycleSunnyvale.”
The Freecycle Network argued, however, that despite the lack of an express contract, it “maintained actual control over its member groups’ services and use of the trademarks.” The Freecycle Network claimed that it exercised actual control by: (1) adapting its “Keep it Free, Legal and Appropriate for all Ages” standard; (2) the email that said it could not be used for commercial services; (3) the etiquette guidelines listed on its websites; (4) its “Freecycle Ethos.” The Freecycle Network also argued that based on a case from the District of New Jersey, Birthright v. Birthright, Inc., 827 F.Supp. 1114, loosely organized non-profits like The Freecycle Network and FreecycleSunnyvale that share “the common goals of a public service organization” are subject to less stringent quality control requirements.
The Ninth Circuit rejected the argument that the “Keep it Free, Legal and Appropriate for all Ages” standard constituted actual control over its member groups. The Ninth Circuit found it significant that The Freecycle Network’s licensees were not required to adopt that standard nor was it uniformly applied or enforced by the local groups. The Ninth Circuit also rejected the claim that the emails saying that the logo could not be used for commercial purposes constituted actual control because it said “nothing about the quality of the services provided by member groups and therefore it did not establish control in requiring member groups to maintain consistent quality.” Finally, the Court distinguished the Birthright case and found that the Freecycle Network “exercised no actual control over its licensees so, even under a less stringent standard, The Freecycle Network has not raised a material issue of fact as to whether it exercised actual control over FreecycleSunnyvale’s use of the trademarks.”
Finally, the Ninth Circuit rejected The Freecycle Network’s argument that even if it did not exercise actual control, it justifiably relied on its member groups’ quality control measures. The Court recognized that this would only be true where there was a “close working relationship” between the licensor and licensee to establish adequate quality control. In a prior case, the Ninth Circuit found a “close working relationship” sufficient to allow the licensor to rely on the licensee’s own quality control where there had been a close working relationship for a period of eight years; where the licensor manufactured 90% of the components sold by the licensee; where the licensee and licensor were siblings or former business partners and there was a close working relationship between the licensor and the licensees employees. The Ninth Circuit found that The Freecycle Network and FreecycleSunnyvale did not enjoy that type of close working relationship: (1) there was no long term relationship between the two and (2) the email mentioning the use of the logo was the parties first and only written communication about trademark use.
The Court found that The Freecycle Network did not retain express contractual control over FreecycleSunnyvale’s quality control measures, did not have actual control over FreecycleSunnyvale’s quality control measures and acted unreasonably in relying on FreecycleSunnyvale’s quality control measures. The Ninth Circuit concluded that the district court properly granted summary judgment to FreecycleSunnyvale on its naked licensing defense. The Freecycle Network case is a reminder to all trademark owners that they must actively control any usage of their trademarks by licensees in order to prevail on a trademark infringement claim.