Published by LawTechie - November 30, 2010 - LawTechie

The Ninth Circuit has applied an affirmative duty to control quality in trademark licensing situations, finding that a licensor’s failure to retain actual and contractual control over the quality of the trademarked goods or services results in a “naked license,” whereby the trademark is canceled. FreecycleSunnyvale v. Freecycle Network, 06-cv-00324 (9th Cir. November 24, 2010). The court canceled plaintiff’s mark because it “(1) did not retain express contractual control over [defendant’s] quality control measures, (2) did not have actual control over [defendant’s] quality control measures, and (3) was unreasonable in relying on [defendant’s] quality control measures.”

The “naked licensing” doctrine is a defense to trademark infringement which allows defendant to argue that plaintiff no longer owns a protectable trademark because the plaintiff has failed to control the quality of the goods and services sold under the mark sufficiently to effectuate the Lanham Act’s policy of preventing consumer confusion as to the source of such goods and services. The Ninth Circuit’s most recent decision has raised some controversy among legal professionals. Pamela Chestek of Property, intangible sees Freecycle as an unwarranted relaxation of the naked licensing standard, arguing that “the Ninth Circuit’s licensing doctrine has been based on a false foundation from the beginning” by drawing its basis in Section 5 of the Lanham Act:

Use by related companies affecting validity and registration

Where a registered mark or a mark sought to be registered is or may be used legitimately by related companies, such use shall inure to the benefit of the registrant or applicant for registration, and such use shall not affect the validity of such mark or of its registration, provided such mark is not used in such manner as to deceive the public.

Citing the Fifth Circuit, Ms. Chestek contends that the naked licensing defense is, in fact, founded “unequivocally” on the Lanham Act’s abandonment language at §45, and that the standard for naked licensing ought to require “an ultimate showing of loss of trade significance.” Exxon Corp. v. Oxxford Clothes, Inc., 109 F.3d 1070, 1079 -1080 (5th Cir. 1997) (citations omitted).

I must, respectfully, disagree with Ms. Chestek (and the Fifth Circuit). Rooting the naked licensing defense in the Lanham Act’s abandonment language unifies two separate defenses (abandonment and naked licensing) into one. This approach entirely moots the purpose of the naked licensing defense, which is to promote the integrity of a trademark as an indicator of source throughout the life of its registration. Requiring a defendant to prove abandonment on its naked licensing defense allows an irresponsible licensor to contravene the Lanham Act’s underlying policy of preventing consumer confusion as to the source of goods and services simply by acting responsibly with some, but not all, of its licensees.

Indeed, Circuits other than the Fifth seem to support the “policing” or affirmative duty standard for naked licensing rather than the one-shot abandonment standard:

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 (citing the Ninth): “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).

Certainly where a trademark licensor is found to have failed to exercise sufficient control over the quality of the trademarked goods, even with just one of its licensees, consumers of such goods can no longer trust in the source of such goods. Thus, where the Fifth Circuit seems to require a showing of blanket abandonment of the mark (read: defendant must prove that plaintiff failed to exercise control over all, or at least most, of its licensees), the Ninth Circuit’s more relaxed standard better effectuates the Lanham Act’s policy.

LawTechie is a blog focusing on trends in tech and digital media. Areas covered include intellectual property, cyberlaw, venture capital, transactions and litigation as they relate to the emerging sectors. The blog is edited by the firm's partner Tim Bukher with contributions from the firm's experts in their respective areas of law.

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