The Perils of Naked Licensing

Naked licensing occurs when a trademark owner fails to exercise sufficient quality control over a licensee's use of a licensed trademark. When naked licensing is found, the subject trademark is deemed to have lost its ability to represent the quality of products or services consumers have come to expect. Cases involving true naked licensing issues are relatively rare. Those that include significant analysis are rarer still. A recent Ninth Circuit decision involving a not-for-profit entity dedicated to “freecycling” (i.e., a recycling practice of finding new uses for unwanted items) serves as a reminder to trademark owners about the pitfalls of failing to exercise sufficient quality control over licensees. See Freecyclesunnyvale v. The Freecycle Network, 626 F. 3d 509 (9th Cir. 2010).

Factual Background

The Freecycle Network was formed in March 2003. As practiced by The Freecycle Network, “freecycling” was conducted through Internet groups created through online service providers such as Yahoo! Groups and Google Groups. Through its Web site at www.freecycle.org, The Freecycle Network provided a directory of member groups and various resources for the groups, including etiquette guidelines. The Freecycle Network also claimed to maintain a democratic leadership structure through its member groups, which it called the “Freecycle Ethos.” At the time of its formation, The Freecycle Network began using three trademarks, namely, Freecycle, The Freecycle Network, and a logo. These trademarks served both to identify The Freecycle Network's services and affiliated member groups.

Lisanne Abraham founded Freecyclesunnyvale in October 2003. She established a member group through Yahoo! Groups and became the group's moderator. Freecyclesunnyvale contacted The Freecycle Network about using The Freecycle Network's logo in connection with Freecyclesunnyvale's activities. A Freecycle Network representative responded to Freecyclesunnyvale's query as follows: “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 do you [sic] own fancy schmancy logo!” This e-mail message was the only direct communication between Freecyclesunnyvale and The Freecycle Network regarding the use of any of The Freecycle Network's trademarks. After this communication, Freecyclesunnyvale was added to The Freecycle Network's list of online recycling groups displayed on The Freecycle Network's Web site. In addition, Freecyclesunnyvale received an all-members e-mail from The Freecycle Network welcoming Freecyclesunnyvale to The Freecycle Network. That e-mail included no restrictions or guidance on the use of The Freecycle Network's trademarks.

Before 2004, the etiquette section of The Freecycle Network's Web site had few guidelines. In early 2004, The Freecycle Network, with the input and approval of a majority of member groups, adopted the rule “Keep It Free, Legal and Appropriate For All Ages.” Unfortunately, both at the time of adoption and thereafter, there was not a clear understanding between member groups about what the rule meant. Accordingly, the rule's definition and application varied from group to group.

In November 2005, relations deteriorated between The Freecycle Network and Freecyclesunnyvale. This deterioration culminated in The Freecycle Network's sending cease and desist e-mails demanding that Freecyclesunnyvale cease using the Freecycle name and logo and threatening to have Yahoo! terminate Freecyclesunnyvale's Yahoo! Group if Freecyclesunnyvale did not comply. Although Freecyclesunnyvale disputed The Freecycle Network's ability to prevent Freecyclesunnyvale's continued use of The Freecycle Network's trademark, The Freecycle Network ultimately succeeded in terminating Freecyclesunnyvale's Yahoo! Group.

A Declaratory Judgment Action

On Jan. 18, 2006, Freecyclesunnyvale filed a declaratory judgment action against The Freecycle Network in the U.S. District Court for the Northern District of California. The Freecycle Network responded by filing a counterclaim for trademark infringement and unfair competition. Freecyclesunnyvale then moved for summary judgment on the issue of whether its naked licensing defense to trademark infringement allowed it to avoid a finding of infringement as a matter of law. Among other things, Freecyclesunnyvale argued that The Freecycle Network had engaged naked licensing by allowing Freecyclesunnyvale to use The Freecycle Network's trademarks without either: 1) a contractual right to control Freecyclesunnyvale's activities, or 2) the exercise of any actual control over Freecyclesunnyvale's activities. The district court granted Freecyclesunnyvale's summary judgment motion, holding as a matter of law that The Freecycle Network had engaged in naked licensing.

The Ninth Circuit's Decision

The Freecycle Network appealed the district court's decision to the Ninth Circuit. In assessing the naked licensing issue, the Ninth Circuit focused its analysis on three factors: 1) whether The Freecycle Network retained express contractual control over Freecyclesunnyvale's activities under the trademarks; 2) whether The Freecycle Network provided sufficient evidence of actual control over Freecyclesunnyvale's activities; and 3) whether The Freecycle Network reasonably relied on Freecyclesunnyvale's own quality control measures to satisfy the quality control requirement.

Analyzing the first factor, the court noted that The Freecycle Network had conceded the absence of an express license agreement with Freecyclesunnyvale. Nevertheless, The Freecycle Network argued that the October 2003 e-mail cautioning Freecyclesunnyvale about using The Freecycle Network's logo commercially constituted an implied license. The court rejected this argument. The court held that the purported prohibition on commercial use was insufficient, in part because the prohibition failed to include a contractual right to inspect or supervise Freecyclesunnyvale's services or to terminate the license in the event that Freecyclesunnyvale violated the prohibition.

Turning to the issue of actual control, The Freecycle Network asserted that it exercised actual quality control by means of: 1) the “Keep It Free, Legal And Appropriate For All Ages” standard and The Freecycle Network's incorporation of the Yahoo! Group's service terms; 2) the foregoing e-mail's commercial purposes prohibition; 3) the etiquette guidelines listed on The Freecycle Network's Web site; and 4) TFN's Freecycle Ethos. The Ninth Circuit disagreed with The Freecycle Network's contention that the “Keep It Free, Legal And Appropriate For All Ages” standard constituted actual control over any of its member groups. Among other things, the court noted that member groups were not required to adopt the standard and, more importantly, member groups did not uniformly apply or interpret the standard. Moreover, because the Yahoo! Group's service terms did little more than regulate generic online activity, the court held that these service terms could not be considered as evidence of actual quality control over the member groups and their use of The Freecycle Network's trademarks. As to the “non commercial prohibition,” the Ninth Circuit again emphasized that this requirement provided no guidance regarding the quality of services provided by member groups and therefore could not be construed as a quality control requirement. As to The Freecycle Network's reliance on its Web site etiquette guidelines, because member groups were free either to adopt these guidelines or refrain from adopting them, and because the guidelines were amorphous at best, the court reasoned that they could not be considered to be adequate quality controls. Finally, in view of The Freecycle Network's admission that the central premise of its “Freecycle Ethos” was “local enforcement with local variation,” the Ninth Circuit held, by definition, that this standard was not designed to maintain consistent quality across member groups and did not constitute adequate evidence of quality control. Even assuming arguendo that the foregoing standards could be construed as relating to the quality of the member groups' services, the court concluded naked licensing was not avoided in this case because the evidence established that, in any event, The Freecycle Network did not enforce such standards against the member groups.

On the issue of The Freecycle Network's purported reliance on Freecyclesunnyvale's own quality control efforts, the Ninth Circuit held such reliance was only appropriate in situations in which the licensor and licensee had a close working relationship, which was clearly absent here. The court added that, even assuming that The Freecycle Network had provided an adequate showing of reliance on Freecyclesunnyvale's own quality efforts, that reliance alone would be insufficient to rebut the finding of a naked license.

In a last ditch effort to avoid the affirmance of the district court's summary judgment holding, The Freecycle Network argued that the court's assessment of the foregoing factors should be less stringent because The Freecycle Network was a nonprofit entity. The court rejected this argument. The court held that, even accepting this contention as true, a holding of naked licensing was still appropriate because of the absence of the exercise by The Freecycle Network of any quality control over the member groups.

Conclusion

Naked licensing represents Armageddon for trademark owners because, when found, it results in the subject mark being deemed unprotectable. Whether the activities at issue involve for-profit or not-for-profit entities, the trademark owner must take adequate steps to ensure that its license agreements spell out the licensee's quality control obligations. The trademark owner must also maintain a record its efforts to ensure those obligations are, in fact, being followed. Indeed, in the author's view, the licensing activities of non-profits should be scrutinized even more closely because those entities often seem to be the least appreciative of the importance of providing for adequate quality controls over their licensees. Exercising such quality controls will continue to protect the integrity of the subject mark and the trademark owner's investment in an extremely valuable asset.

Christopher P. Bussert is a partner in the Atlanta office of Kilpatrick Townsend & Stockton LLP, where he focuses his practice on trademark, copyright, unfair competition, and franchise litigation. He can be reached at [email protected].

Naked licensing occurs when a trademark owner fails to exercise sufficient quality control over a licensee's use of a licensed trademark. When naked licensing is found, the subject trademark is deemed to have lost its ability to represent the quality of products or services consumers have come to expect. Cases involving true naked licensing issues are relatively rare. Those that include significant analysis are rarer still. A recent Ninth Circuit decision involving a not-for-profit entity dedicated to “freecycling” (i.e., a recycling practice of finding new uses for unwanted items) serves as a reminder to trademark owners about the pitfalls of failing to exercise sufficient quality control over licensees. See Freecyclesunnyvale v. The Freecycle Network , 626 F. 3d 509 (9th Cir. 2010).

Factual Background

The Freecycle Network was formed in March 2003. As practiced by The Freecycle Network, “freecycling” was conducted through Internet groups created through online service providers such as Yahoo! Groups and Google Groups. Through its Web site at www.freecycle.org, The Freecycle Network provided a directory of member groups and various resources for the groups, including etiquette guidelines. The Freecycle Network also claimed to maintain a democratic leadership structure through its member groups, which it called the “Freecycle Ethos.” At the time of its formation, The Freecycle Network began using three trademarks, namely, Freecycle, The Freecycle Network, and a logo. These trademarks served both to identify The Freecycle Network's services and affiliated member groups.

Lisanne Abraham founded Freecyclesunnyvale in October 2003. She established a member group through Yahoo! Groups and became the group's moderator. Freecyclesunnyvale contacted The Freecycle Network about using The Freecycle Network's logo in connection with Freecyclesunnyvale's activities. A Freecycle Network representative responded to Freecyclesunnyvale's query as follows: “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 do you [sic] own fancy schmancy logo!” This e-mail message was the only direct communication between Freecyclesunnyvale and The Freecycle Network regarding the use of any of The Freecycle Network's trademarks. After this communication, Freecyclesunnyvale was added to The Freecycle Network's list of online recycling groups displayed on The Freecycle Network's Web site. In addition, Freecyclesunnyvale received an all-members e-mail from The Freecycle Network welcoming Freecyclesunnyvale to The Freecycle Network. That e-mail included no restrictions or guidance on the use of The Freecycle Network's trademarks.

Before 2004, the etiquette section of The Freecycle Network's Web site had few guidelines. In early 2004, The Freecycle Network, with the input and approval of a majority of member groups, adopted the rule “Keep It Free, Legal and Appropriate For All Ages.” Unfortunately, both at the time of adoption and thereafter, there was not a clear understanding between member groups about what the rule meant. Accordingly, the rule's definition and application varied from group to group.

In November 2005, relations deteriorated between The Freecycle Network and Freecyclesunnyvale. This deterioration culminated in The Freecycle Network's sending cease and desist e-mails demanding that Freecyclesunnyvale cease using the Freecycle name and logo and threatening to have Yahoo! terminate Freecyclesunnyvale's Yahoo! Group if Freecyclesunnyvale did not comply. Although Freecyclesunnyvale disputed The Freecycle Network's ability to prevent Freecyclesunnyvale's continued use of The Freecycle Network's trademark, The Freecycle Network ultimately succeeded in terminating Freecyclesunnyvale's Yahoo! Group.

A Declaratory Judgment Action

On Jan. 18, 2006, Freecyclesunnyvale filed a declaratory judgment action against The Freecycle Network in the U.S. District Court for the Northern District of California. The Freecycle Network responded by filing a counterclaim for trademark infringement and unfair competition. Freecyclesunnyvale then moved for summary judgment on the issue of whether its naked licensing defense to trademark infringement allowed it to avoid a finding of infringement as a matter of law. Among other things, Freecyclesunnyvale argued that The Freecycle Network had engaged naked licensing by allowing Freecyclesunnyvale to use The Freecycle Network's trademarks without either: 1) a contractual right to control Freecyclesunnyvale's activities, or 2) the exercise of any actual control over Freecyclesunnyvale's activities. The district court granted Freecyclesunnyvale's summary judgment motion, holding as a matter of law that The Freecycle Network had engaged in naked licensing.

The Ninth Circuit's Decision

The Freecycle Network appealed the district court's decision to the Ninth Circuit. In assessing the naked licensing issue, the Ninth Circuit focused its analysis on three factors: 1) whether The Freecycle Network retained express contractual control over Freecyclesunnyvale's activities under the trademarks; 2) whether The Freecycle Network provided sufficient evidence of actual control over Freecyclesunnyvale's activities; and 3) whether The Freecycle Network reasonably relied on Freecyclesunnyvale's own quality control measures to satisfy the quality control requirement.

Analyzing the first factor, the court noted that The Freecycle Network had conceded the absence of an express license agreement with Freecyclesunnyvale. Nevertheless, The Freecycle Network argued that the October 2003 e-mail cautioning Freecyclesunnyvale about using The Freecycle Network's logo commercially constituted an implied license. The court rejected this argument. The court held that the purported prohibition on commercial use was insufficient, in part because the prohibition failed to include a contractual right to inspect or supervise Freecyclesunnyvale's services or to terminate the license in the event that Freecyclesunnyvale violated the prohibition.

Turning to the issue of actual control, The Freecycle Network asserted that it exercised actual quality control by means of: 1) the “Keep It Free, Legal And Appropriate For All Ages” standard and The Freecycle Network's incorporation of the Yahoo! Group's service terms; 2) the foregoing e-mail's commercial purposes prohibition; 3) the etiquette guidelines listed on The Freecycle Network's Web site; and 4) TFN's Freecycle Ethos. The Ninth Circuit disagreed with The Freecycle Network's contention that the “Keep It Free, Legal And Appropriate For All Ages” standard constituted actual control over any of its member groups. Among other things, the court noted that member groups were not required to adopt the standard and, more importantly, member groups did not uniformly apply or interpret the standard. Moreover, because the Yahoo! Group's service terms did little more than regulate generic online activity, the court held that these service terms could not be considered as evidence of actual quality control over the member groups and their use of The Freecycle Network's trademarks. As to the “non commercial prohibition,” the Ninth Circuit again emphasized that this requirement provided no guidance regarding the quality of services provided by member groups and therefore could not be construed as a quality control requirement. As to The Freecycle Network's reliance on its Web site etiquette guidelines, because member groups were free either to adopt these guidelines or refrain from adopting them, and because the guidelines were amorphous at best, the court reasoned that they could not be considered to be adequate quality controls. Finally, in view of The Freecycle Network's admission that the central premise of its “Freecycle Ethos” was “local enforcement with local variation,” the Ninth Circuit held, by definition, that this standard was not designed to maintain consistent quality across member groups and did not constitute adequate evidence of quality control. Even assuming arguendo that the foregoing standards could be construed as relating to the quality of the member groups' services, the court concluded naked licensing was not avoided in this case because the evidence established that, in any event, The Freecycle Network did not enforce such standards against the member groups.

On the issue of The Freecycle Network's purported reliance on Freecyclesunnyvale's own quality control efforts, the Ninth Circuit held such reliance was only appropriate in situations in which the licensor and licensee had a close working relationship, which was clearly absent here. The court added that, even assuming that The Freecycle Network had provided an adequate showing of reliance on Freecyclesunnyvale's own quality efforts, that reliance alone would be insufficient to rebut the finding of a naked license.

In a last ditch effort to avoid the affirmance of the district court's summary judgment holding, The Freecycle Network argued that the court's assessment of the foregoing factors should be less stringent because The Freecycle Network was a nonprofit entity. The court rejected this argument. The court held that, even accepting this contention as true, a holding of naked licensing was still appropriate because of the absence of the exercise by The Freecycle Network of any quality control over the member groups.

Conclusion

Naked licensing represents Armageddon for trademark owners because, when found, it results in the subject mark being deemed unprotectable. Whether the activities at issue involve for-profit or not-for-profit entities, the trademark owner must take adequate steps to ensure that its license agreements spell out the licensee's quality control obligations. The trademark owner must also maintain a record its efforts to ensure those obligations are, in fact, being followed. Indeed, in the author's view, the licensing activities of non-profits should be scrutinized even more closely because those entities often seem to be the least appreciative of the importance of providing for adequate quality controls over their licensees. Exercising such quality controls will continue to protect the integrity of the subject mark and the trademark owner's investment in an extremely valuable asset.

Christopher P. Bussert is a partner in the Atlanta office of Kilpatrick Townsend & Stockton LLP, where he focuses his practice on trademark, copyright, unfair competition, and franchise litigation. He can be reached at [email protected].