No Shirt, No Shoes, No Trademark: Naked Licensing Can Mean Abandonment of Your Valuable Rights

A trademark is more than a designation of source. It is also a symbol of quality, attesting to the consistent, predictable nature of the identified goods or services. Consumers rely upon marks to insure that they purchase the same product or service they have come to know from prior experience.

For this reason, a company that uses its mark through licensees must control the quality of the goods and services that the licensees sell under the mark. If the licensor fails to do this–if it engages in “naked licensing” that fails to ensure a consistent and repeatable experience for consumers–the mark may lose its meaning as a predictor of quality and effectively cease to be a mark.

In such cases, the legal penalty is a finding of trademark abandonment. Having failed to maintain and preserve the meaning of its mark, the licensor forfeits its rights. The mark may then be freely used or appropriated by others.

Abandonment is a harsh penalty, but as shown by a trio of recent cases, the courts will impose it in appropriate circumstances. Last year the Ninth Circuit held that Freecycle, a well-known charitable recycling organization, had abandoned its FREECYCLE logo by failing to exercise quality control over its “licensees”– really just a loose affiliation of online member groups. FreecycleSunnyvale v. The FreeCycle Network, 626 F.3d 509 (9th Cir. 2010). There was no written or oral license agreement. Freecycle had sent an e-mail to its members urging them to use its mark on a non-commercial basis, and had posted a few voluntary guidelines and policies on its website. However, it had made no effort to enforce even these minimal standards. The Court also found that Freecycle did not have a close working relationship with its members that would justify its reliance on their own quality controls. Freecycle’s charitable status and the highly sympathetic nature of its mission did not prevent the Court from imposing the ultimate sanction.

Earlier this year, the Trademark Trial and Appeal Board of the U.S. Patent and Trademark Office found that a party seeking to cancel a registered mark had set forth a sufficient claim of abandonment through uncontrolled (i.e., naked) licensing. Zoba International Corp. v. DVD Format/Logo Licensing Corp., 98 USPQ.2d 1106 (TTAB 2011). The Petition to Cancel alleged that the registrant permitted DVD replicators to use its DVD logo in a manner that did not comply with its standards “for extensive periods of time with indifference.” This pleading was deemed sufficient to survive a motion to dismiss.

Most recently, the Seventh Circuit held that the owners of a bridal wear shop had abandoned their mark EVA’S BRIDAL by failing to exercise any control over their licensee (who also happened to be one of their relatives). Eva’s Bridal Salon Ltd. v. Halanick Enterprises, Inc., 2011 U.S. App. LEXIS 9539 (7th Cir. 2011). As in the Freecycle case, there was a complete lack of oversight. The license agreement did not contain any quality control provisions; it did not give the licensors supervisory authority over the licensee; and the licensors never tried to exercise such authority. In view of these extreme circumstances, the Court held that the plaintiffs had abandoned the mark, and that their former licensee could continue to use it free of charge.

The lesson of these cases is clear: abandonment is a genuine threat, and one that licensors should take care to avoid. The license should expressly give the trademark owner a right of quality control, including the right to inspect the licensees’ goods or services, and the owner should actively exercise that right.

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