by Jeffrey Pietsch

Naked licensing is not as fun as the name suggests. Rather it can mark the end of a trademark owner’s exclusive right to their trademark. A trademark owner may grant a license to another to use the owner’s trademark. For example, following the San Francisco Giants’ World Series victory, the amount and type of products that featured the Giants trademark was mindboggling. Each of these products, if legally produced, would have obtained a license from the Giants to produce these goods. The consumer purchasing these goods and seeing the Giants’ trademark would have an idea as to the quality of the merchandise based on the trademark. Naked licensing occurs when the trademark owner fails to exercise adequate quality control over the licensee. This failure may result in the trademark ceasing to represent the quality of the product or service the consumer has come to expect.   The Ninth Circuit stated that such licensing is “inherently deceptive and constitutes the abandonment of any rights to the trademark by the licensor.” 

In a recent case heard by the Ninth Circuit, a licensee sought declaratory relief against a trademark owner on the grounds that the trademark owner abandoned its trademark rights by granting naked licenses to others. The trademarks in question centered around the mark FREECYCLE which was owned by The Freecycle Network (“TFN”) and used by TFN to identify TFN’s services known as “freecycling.” Freecycling is the practice of giving an unwanted item to another so that it can continue to be used as intended. As practiced by TFN, freecycling is predominantly a local activity. Local volunteers create online user groups and message boards to coordinate their freecycling activities under the TFN umbrella.    TFN maintains a website as well as provides resources to the local groups. In addition, TFN provides a leadership structure and processes that its local groups may use to operate. TFN rules and procedures are flexible and the local moderators have flexibility in enforcing TFN’s suggested rules and guidelines.

In 2003, without TFN’s knowledge or involvement, Lisanne Abraham founded Freecycle Sunnyvale (“FS”). Abraham established a local group in Sunnyvale, California and adapted etiquette guidelines and rules from either TFN or one of its local group’s website. Shortly thereafter, Abraham emailed TFN requesting use of TFN’s logo. TFN responded by directing Abraham to use the logo on the TFN website on the condition that it is not used for commercial purposes. This communication was the only communication between the parties regarding the use of the TFN trademarks.

Two years later, for some reason unknown to the court, TFN ordered FS to cease and desist from using TFN’s trademarks. FS failed to comply and filed a declaratory judgment action against TFN alleging noninfringement of TFN trademarks based on a naked licensing defense. FS argued that TFN abandoned its rights to use the TFN marks because it engaged in naked licensing when it granted FS the right to use the trademark. In order to determine if TFN granted FS a naked license, the Ninth Circuit looked at three elements: (1) did TFN have the right to control the use of the trademarks, (2) did TFN exercise actual control over FS’s activities related to the trademarks, or (3) did TFN reasonably rely on FS to maintain quality control on the goods and services.

The court first determined if TFN had the right to control the use of its trademarks as licensed to FS. As previously mentioned, TFN granted FS the right to use TFN’s trademarks in an email communication. There was no express written agreement restricting or monitoring the quality of the goods or services produced using TFN trademarks. Even the admonition to FS to not use the marks for commercial purposes is silent on TFN’s ability to monitor or inspect the use of the trademarks. Because of this, the court found that TFN had no express contractual right to control the quality of the goods or services produced by FS using TFN’s trademarks.

Despite the fact that TFN lacked an express contractual right to control quality, the court examined whether TFN maintained actual control over its trademarks. If TFN maintained actual control, then FS’s naked license defense would not survive. TFN argued that it did maintain actual control because its member groups abided by TFN’s quality standards, including its rules and guidelines regarding freecycling activities. The court, however, found that such rules and guidelines were not rigid but very flexible. Additionally, the standards were not uniformly applied and did not adequately control the quality of the goods or services provided by TFN member groups. 

Finally, TFN argued that even if it did not exercise actual control, it justifiably relied on it members groups’ quality control measures. The court has previously found that where a “close working relationship” was established a licensor could rely on the licensee to control the quality of the goods or services. In these cases, though, the relationship between the parties is significantly close and intimate. TFN and FS did not enjoy this type of working relationship and TFN could not reasonably rely on FS’s quality control standards.

The court found that TFN (1) did not retain express contractual rights to control the quality of the goods, (2) did not have actual control of FS’s quality control measures, and (3) was unreasonable in relying on FS’s quality control measures. Because of this, the court held that TFN engaged in naked licensing and abandoned its trademarks. 

This case is a cautionary tale to trademark owners who license their marks. The trademark owner must maintain its ability to control the quality control measures in connection with the licensed marks. In TFN’s case, a written license agreement with express provisions providing TFN with inspection and quality control rights would likely have saved TFN’s marks.