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Naked License Strips Brand Owner of Name Rights

January 12, 2011

Naked License Strips Brand Owner of Name Rights – Ninth Circuit Decision Serves As Cautionary Tale For Trademark Holders.

An Arizona non-profit organization recently learned the hard way not to overlook the need for a carefully crafted license agreement when allowing others the use of its trademark.  In a case of special significance for social media-based and other internet-driven organizations, the Ninth Circuit has affirmed a ruling that the owner of the trademark “Freecycle” (used in connection with a community based recycling program) allowed its member groups to use this mark with so few restrictions that the Freecycle name ceased to function as a symbol of quality and controlled source, resulting in a naked license and abandonment of trademark rights in the name.  FreecycleSunnyvale v. The Freecycle Network, Case No. 08-16382, 2010 WL 4749044 (9th Cir. Nov. 24, 2010).  While this situation is unfortunate, it could have been avoided had the trademark owner taken some basic and routine steps to monitor and protect online use of its name.
 
The Freecycle Network case is a classic example of a trademark owner not properly policing its mark.  There was no express license agreement governing FreecycleSunnyvale’s use of the Freecycle mark.  The Freecycle Network argued that an implied license agreement was created by a single e-mail it sent to FreecycleSunnyvale at the beginning of their relationship, instructing FreecycleSunnyvale how to obtain the Freecycle logo online and advising it “not to use [the trademark] for commercial purposes.”  The court discounted this argument, concluding that even if an implied license did exist, it was insufficient to protect The Freecycle Network’s trademark rights because it did not give The Freecycle Network any contractual right to supervise and inspect FreecycleSunnyvale’s activities in connection with the Freecycle mark.
 
Absent an agreement (whether through an express or implied license) granting a trademark owner the right to control the quality of its licensee’s services, an owner must demonstrate actual control through inspection or supervision of its licensee’s activities.  In this case, the court found nothing to indicate that The Freecycle Network exercised the necessary control over FreecycleSunnyvale’s use of the Freecycle name.  Although a message on The Freecycle Network’s website advised its member groups to keep their activities “Free, Legal & Appropriate for All Ages,” and The Freecycle Network posted “rules of etiquette” on its website for members like FreecycleSunnyvale to consult when conducting their affairs, none of these requirements addressed the quality of the services that had to be provided by The Freecycle Network’s member groups.  Moreover, even the existing guidelines were not enforced by The Freecycle Network, and it remained quite liberal in allowing its member groups to conduct their own affairs, including permitting FreecycleSunnyvale to create a modified “rules of etiquette” for its own website.
 
In certain situations, it may be appropriate to hold a loosely organized non-profit entity to less stringent quality control requirements.  In The Freecycle Network case, however, the court found that evidence of quality control was so lacking that a lesser standard would still not have been satisfied.  Nor could The Freecycle Network claim that it justifiably relied on its member groups’ own quality control measures, since no real long term working relationship existed between The Freecycle Network and FreecycleSunnyvale and there was no evidence to suggest that The Freecycle Network had any confidence in FreecycleSunnyvale’s own quality control measures.  The Ninth Circuit therefore affirmed the district court’s finding of naked licensing and trademark abandonment. 

HOW TO AVOID A NAKED LICENSE:

A trademark, by definition, conveys a message that the trademark owner is controlling the nature and quality of the goods or services sold under the mark.  In the absence of quality control, this message is false and the goods or services can no longer be considered genuine because the mark now carries the potential for consumer deception.  In today’s fast-paced internet age, lack of quality control can erode a trademark’s ability to serve as an accurate indicator of origin in a relatively short time period – even months.   

Trademark owners can protect their marks by entering into license agreements that (1) empower owners to control their licensees’ use of trademarks, (2) provide trademark owners the right to inspect licensee operations, and (3) allow the owner to revoke the license if necessary.   Even without a license agreement, adopting – and enforcing – trademark usage guidelines are an important way to educate licensees on proper usage of licensed marks and foster proper and consistent usage among several licensees.  Trademark usage guidelines have become especially important lately given that many companies are now making social media an integral component of their overall branding and marketing strategies.  Opportunity and potential for third party misuse of trademarks is perhaps nowhere greater than in these online outlets.
 
Above all, trademark owners must be vigilant in requiring their licensees to correct any improper trademark usage when an improper use is first discovered.  As was the case in The Freecycle Network dispute, a trademark owner’s delay in enforcing proper usage can result in costly forfeiture of rights.
 
In view of this decision, it is advisable for brand owners to review their existing license agreements to confirm they provide the necessary safeguards that will allow for enforcement of their trademarks.  In addition, brand owners should reassess their trademark enforcement policies and guidelines in light of changes in the way their marks are being used in the marketplace by licensees or the general public.  Do not assume that existing licenses and agreements (including oral agreements) adequately protect your right to enforce your intellectual property rights without undertaking this review.

Shulman Rogers’ attorneys are experienced in advising brand owners on best practices for managing and enforcing their trademarks, including counseling clients on how to minimize risk of infringement.  If you have any questions or would like more information on any of the issues discussed in this Alert, please contact any of the Shulman Rogers attorneys below:

Eric J. von Vorys
301-230-5242