Several months ago Pamela Chestek, of Property, intangible, and I had an inter-blog debate about the underlying policy of the “Naked Licensing” doctrine in trademark law. (Recall that the Naked Licensing doctrine is an argument that trademark infringement defendants can make to say that the trademark owner/plaintiff no longer has a valid trademark because he licensed it in such a way to other users that the mark no longer has any meaning.)
Pam argued that the Naked Licensing doctrine arose out of the trademark abandonment language of Section 45 of the Lanham Act, which effectively allows owners to keep their marks so long as they do not completely abandon them. I argued that Naked Licensing arose out of Section 5’s Related Companies language — which specifically governs, in my opinion, how “related companies” ought to treat a trademark license — and which implies that a license is deemed “naked,” and therefore the owner loses the trademark, when the owner fails to exercise significant control over the quality of the goods/services offered by the trademark licensee. (I did not like basing the doctrine on Section 45’s abandonment language because I felt it would allow owners to all but destroy the significance of their mark yet still keep it because they did not “abandon” it.)
At the time of our debate, Pam was reacting to the 9th Circuit’s decision in FreecycleSunnyvale v. The Freecycle Network, No. 08-16382 (9th Cir. Nov. 24, 2010) which found Naked Licensing based on plaintiff’s failure to control the quality of the mark. Now the 7th Circuit has also ruled a mark abandoned based not on plaintiff’s abandonment of the mark but, again, on plaintiff’s failure to exercise control over the quality of the mark. Eva’s Bridal Ltd. v. Halanick Enter., Inc., No. 10-2863 (7th Cir. May 10, 2011).
Indeed, in this latest 7th Circuit case, the Court goes so far as to find Naked Licensing based mostly on the licensing agreement’s failure to provide the owner with the means to oversee quality control rather than any specific evidence that such control was not exercised. The Court cited the Restatement, which summarizes the Related Companies language of Lanham’s Section 5:
Trademark law requires that “decisionmaking authority over quality remains with the owner of the mark.” Restatement § 33comment c.[*] How much authority is enough can’t be answered generally; the nature of the business, and customers’ expectations, both matter. Ours is the extreme case: plaintiffs had, and exercised, no authority over the appearance and operations of defendants’ business, or even over what inventory to carry or avoid. That is the paradigm of a naked license.
Takeaway: Trademark licensing agreements MUST include quality control language.
Second Circuit: “[T]he only effective way to protect the public where a trademark is used by licensees is to place on the licensor the affirmative duty of policing in a reasonable manner the activities of his licensees.” Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358, 367 (2nd Cir. 1959). “The critical question in determining whether a licensing program is controlled sufficiently by the licensor to protect his mark is whether the licensees’ operations are policed adequately to guarantee the quality of the products sold under the mark.” General Motors Corp. v. Gibson Chemical & Oil Corp., 786 F.2d 105, 110 (2nd Cir. 1986).
Third Circuit: “When the trademark owner fails to exercise reasonable control over the use of the mark by a licensee, the presence of the mark on the licensee’s goods or services misrepresents their connection with the trademark owner since the mark no longer identifies goods and services that are under the control of the owner of the mark.” Doeblers’ Pa. Hybrids, Inc. v. Doebler, 442 F.3d 812, 823 (3rd Cir. 2006) (citing 2 McCarthy on Trademarks § 18:48).
Tenth Circuit: “When ‘a trademark owner engages in naked licensing, without any control over the quality of goods produced by the licensee, such a practice is inherently deceptive and constitutes abandonment of any rights to the trademark by the licensor.'” Stanfield v. Osborne Indus., 52 F.3d 867, 871 (10th Cir. 1995).
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