Naked Licensing Results in Loss of Trademark Rights

The 9th Circuit Court of Appeals found a naked license of a trademark when The FreeCycle Network (“TFN”) did not have a contract to control the quality of FreeCycleSunnyvale’s (“FS”) services under the mark, did not have actual quality control over FS’ services and it was unreasonable to rely on FS’ quality control measures. FreeCycleSunnyvale v. The FreeCycle Network, Case No. 08-16382 (9th Cir. Nov. 24, 2010)(available here).

As a general matter, trademark owners have a duty to control the quality of their trademarks. McCarthy § 18:48. “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.’ ” Barcamerica Int’l USA Trust v. Tyfield Importers, Inc., 289 F.3d 589, 595-96 (9th Cir. 2002), (quoting Moore Bus. Forms, Inc. v. Ryu, 960 F.2d 486, 489 (5th Cir. 1992)).

Here, TFN, the registered trademark owner (in foreign countries, with pending U.S. applications), (1) did not have express contractual control over FS’ quality control measures, (2) did not have actual control over FS’s quality control measures, and (3) was unreasonable in relying on FS’ quality control measures. TFN had to provide evidence that it (1) retained contractual rights to control the quality of services under its trademark; (2) actually controlled the quality of services and the trademark’s use; or (3) reasonably relied on FS to maintain the quality.

The burden of proof to establish naked licensing is on the challenger of the mark, but the courts have not agreed on whether the burden is by a preponderance of the evidence or clear and convincing evidence, or something in between (a stringent standard of proof). Slip opn. p. 18816; Electro Source, LLC v. Brandess-Kalt-Aetna Group, Inc., 458 F.3d 931, 935 n.2 (9th Cir. 2006); Cumulus Media, Inc. v. Clear Channel Commcn’s, Inc., 304 F.3d 1167, 1175 n.12 (11th Cir. 2002); Cerveceria Centroamericana, S.A. v. Cerveceria India, Inc., 892 F.2d 1021, 1024 (Fed. Cir.1989) (adopting the preponderance of the evidence standard). Trial courts seem to use the clear and convincing standard.

The absence of an agreement with provisions restricting or monitoring the quality of goods or services produced under a trademark supports a finding of naked licensing. Stanfield v. Osborne Indus., Inc., 52 F.3d 867, 871 (10th Cir. 1995). Where there is no license, that is, no contractual right to control quality, the licensor may demonstrate actual control through inspection or supervision. See, e.g., Stanfield, 52 F.3d at 871 (“The absence of an express contractual right of control does not necessarily result in abandonment of a mark, as long as the licensor in fact exercised sufficient control over its licensee.”).

In this case, there was little or no quality control by TFN over the services offered by FS. Without a contract and with no actual quality control, the court found a naked licensing and an abandonment of the trademark.

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