One of the treats of writing a blog is that you can take issue with decisions – and so I take issue with a recent decision out of the Ninth Circuit in FreecycleSunnyvale v. Freecycle Network. The Ninth Circuit has now extended its questionable version of the naked licensing doctrine as last stated in Barcamerica Int’l USA Trust v. Tyfield Importers, Inc., 289 F.3d 589 (9th Cir. 2002) to a point well beyond the words and intent of the Lanham Act, as well as any meaningful commercial rationale. The Ninth Circuit applies a ruthless standard that strips trademark owners of significant value and furthers consumer confusion by punishing companies that, out of naivete, don’t adhere to an exacting legal standard that has little or no relationship to the policy basis for the doctrine or the goals of the Lanham Act.
How did the Ninth Circuit get here? The Ninth Circuit’s naked licensing doctrine has been based on a false foundation from the beginning. In Siegel v. Chicken Delight, Inc., 448 F.2d 43 (9th Cir. 1971), the Ninth Circuit relied on Section 5 of the Lanham Act, 15 U.S.C. § 1055, to find that there is a duty to control the quality of goods and services:
| The licensor owes an affirmative duty to the public to assure that in the hands of his licensee the trade-mark continues to represent that which it purports to represent. For a licensor, through relaxation of quality control, to permit inferior products to be presented to the public under his licensed mark might well constitute a misuse of the mark. 15 U.S.C. §§ 1055, 1127. |
Siegel at 51. No. Section 5 of the Lanham Act implies no duty to control the use of a trademark. Section 5 states:
| 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. |
This was not meant to impose any kind of duty of control; rather it was simply a vehicle for facilitating the registration of marks in the new, modern world:
| Of course, what is aimed at in this section is the modern way of doing business in this country through subsidiaries. Take the Ford Motor Co., for instance, they have factories all over the country, in every State of the Union. They are all controlled, either by contract or stock ownership, but they are all using the word “Ford” on the cars which they sell. Under existing law nobody can get registration, because nobody can make an affidavit that no one else has the right to use the mark. Sometimes there is no stock ownership. Sometimes one of the products made is controlled by contract. In order to make the statute conform to modern business practice something of this kind is needed, because the statute which was passed in 1905, before the question of local companies became so important, did not contemplate any such thing and did not provide for it. |
Hearings before the Committee on Patents, Subcommittee on Trade-Marks, House of Representatives, 76th Cong. 1st Sess. on H.R. 4744, March 28, 29, 30, 1939, p. 58.
Simplifying the sentence shows that the phrase “provided such mark is not used in such manner as to deceive the public” modifies the circumstances under which a trademark owner may rely on a related company’s use for purposes of registration and validity, and nothing more: “Where a registered mark . . . is . . . used legitimately by related companies, such use shall inure to the benefit of the registrant or applicant for registration . . . provided such mark is not used in such manner as to deceive the public.” One must take the phrase entirely out of context to find that this statutory section might impose an affirmative duty on a trademark owner to control the quality of goods and services. Nevertheless, the Ninth Circuit’s erroneous basis for its naked licensing doctrine has been perpetuated through Edwin K. Williams & Co., Inc. v. Edwin K. Williams & Co.-East, 542 F.2d 1053, 1059 (9th Cir. 1976), Transgo, Inc. v. Ajac Transmission Parts Corp., 768 F.2d 1001 (9th Cir. 1985), Barcamerica Intern. USA Trust v. Tyfield Importers, Inc., 289 F.3d 589 (9th Cir. 2002), and now Freecycle.
Unequivocally, the actual statutory basis for the naked licensing defense is the definition for abandonment in the Lanham Act, which defines a trademark as abandoned “[w]hen any course of conduct of the owner, including acts of omission as well as commission, causes the mark to . . . lose its significance as a mark.” Lanham Act § 45, 15 U.S.C. § 1127. The Fifth Circuit explains it thusly:
Exxon Corp. v. Oxxford Clothes, Inc., 109 F.3d 1070, 1079 -1080 (5th Cir. 1997) (citations omitted).
The Ninth Circuit gives lip service to the abandonment concept, acknowledging that “[u]ncontrolled or ‘naked‘ licensing may result in the trademark ceasing to function as a symbol of quality and controlled source” (emphasis added), but it entirely skips the part about proof. Instead, the court increasingly relies on compliance with technical standards of its own invention, the absence of which at best only circumstantially indicate loss of significance in some instances. Here, the Ninth Circuit decided that since “TFN (1) did not retain express contractual control over FS’s quality control measures, (2) did not have actual control over FS’s quality control measures, and (3) was unreasonable in relying on FS’s quality control measures,” the Freecycle Network has lost all right to enforce ALL its marks – FREECYCLE,* THE FREECYCLE NETWORK, and the logo. Yes, that is correct, based only on evidence about the licensor’s behavior with ONE licensee (the accused infringer no less), The Freecycle Network has been stripped of its trademark rights against all the world.
A naked licensing doctrine completely unmoored from the concept of loss of significance has no legal or business justification. Tell me – are the two logos confusing similar?
Of course they are. And what serves the consuming public better, a decision that fosters the very confusion the Lanham Act was designed to prevent when there has been no proof whatsoever that consumers no longer attribute trademark significance to the marks, or allowing the trademark owner to do its best to ensure that the marketplace operates efficiently and consumers can rely on what, to them, is an indicator of source and quality?
There are other doctrines, like implied license, laches and equitable estoppel, that are available to a defendant in situations where it may be inequitable to force the defendant to cease using the mark, such as may have been the case here. But the naked licensing doctrine has no place except in the rare case where a trademark has lost all source-identifying significance.
Read the insanity here (Scribd). If you want a simple synopsis of the case without the outrage, the Seattle Trademark Lawyer covers it here.
FreecycleSunnyvale v. The Freecycle Network, No. 08-16382 (9th Cir. Nov. 24, 2010).
*Yes, I’m aware that there is some dispute over whether the term “freecycle” is generic. There is no disclaimer in the application record and, as far as I know, no legal determination that it is.
The text of this work is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.
11 responses to “Ninth Circuit Ignores the Law Again”
Great article! My apologies for not reading the opinion before this post – did the plaintiff not assert licensee estoppel to counter the abandonment claim? Why would any collateral attack on the plaintiff’s rights in the mark be permitted by a licensee based on the actions of the licensee?
It seems that the Fifth Circuit’s approach to naked licensing, by rooting it in Lanham’s abandonment language rather than the related companies language, allows licensors to tarnish and weaken their marks all they want so long as they maintain sufficient control to avoid abandonment. I think the purpose of the naked licensing doctrine is to enforce Lanham’s policy of preventing source confusion over the course of the mark’s life. Placing an abandonment standard on the doctrine gives licensors too much leeway to destroy the mark as an indicator of source so long as they meet the comparatively minimal requirements to avoid abandonment. (Otherwise, what would be the point of having two separate defenses if defendants always had to prove abandonment?)
T.D. Ruth – the topic was not discussed in the decision. My thinking was perhaps, if there’s no true license because it’s “naked” (or, in the case, because there just wasn’t anything resembling a license), then there can’t be “licensee” estoppel?
Tim – Assuming you’re position is the better policy, I still have a problem with the statutory basis for the 9th Circuit’s standard. The 9th Circuit acknowledges that a naked license is a form of abandonment (“We have held that the proponent of a naked license theory of trademark abandonment . . . Freecycle at 18816). Abandonment is defined as loss of significance altogether and nothing less. I just don’t see how the 9th Circuit can ignore the statutory standard, regardless of whether it’s a good or bad policy in general.
If you read through the district court record, there were *thousands* of examples of naked licensing (as well as generic use by The Freecycle Network). This was not isolated to just FreecycleSunnyvale.
In the words of one of the lawyers “Indeed, TFN created a veritable
nudist colony of naked licensing as the evidence in support of Freecycle Sunnyvale’s Naked
Licensing Motion demonstrates.” See page 3 at http://docs.justia.com/cases/federal/district-courts/california/candce/4:2006cv00324/175584/86/
There was no license for thousands of instances of naked licensing in this case.
The evidence shows that people were encouraged to set up new feecycle sites without getting any prior permission from anyone. And the logo likewise was given away.
And no inspections for quality were done.
If all of that is not a slam dunk case of naked licensing, then nothing is.
Anonymous – if those were the facts the 9th Circuit relied on for its decision then the conclusion would be more understandable. But the 9th Circuit clearly focused on the relationship between TFN and FS in making its naked licensing decision. “At issue here is whether there is clear and convincing evidence, viewed in the light most favorable to TFN, that TFN allowed FS to use the trademarks with so few restrictions . . . .” (emphasis added.) The (1), (2), (3) quote in the post was from the conclusion of the case. It appears that to the 9th Circuit, all that mattered was whether TFN controlled FS.
And my problem still is the statutory basis. Where is the proof that any of that leads to a loss of trademark significance? Where are the surveys that show people didn’t think that the various “Freecycle” organizations were a branches of the same organization, i.e., that the trademark no longer was performing a source-identifying function?
Pamela – I think the loss of trademark significance as an identifier of source works on a different angle in naked licensing theory than it does in traditional abandonment; nevertheless, loss of significance as an identifier is till there: While the consumer might very well assume that the Freecycle organizations were branches of TFN, it is this assumption which would then cause the consumer to buy a potentially inferior product while thinking that its quality was guaranteed by TFN. Trademark law is meant to protect the consumer from precisely this type of confusion. The fact that this policy also often protects the producer is an externality.
This also bears on your statutory standard. Whereas traditional “abandonment” theory requires proof of abandonment of the mark, “naked licensing” theory is really about abandonment of that link between the mark and the product: the quality control.
Tim –
“Significance as a mark” in the definition of abandonment is a reference to distinctiveness: “A descriptive mark can become distinctive and thus strong if over time it has developed secondary meaning, which occurs when, in the minds of the public, the primary significance of a mark is to identify the source of the product rather than the product itself.” American Rice, Inc. v. Producers Rice Mill, Inc., 518 F.3d 321, 330-31 (5th Cir. 2008) (emphasis added; brackets removed). Your theory that it could be a reference to absence of quality control isn’t consistent with the generally understood meaning of “significance as a mark.”
I also have qualms about importing any greater requirement for quality control than avoiding loss of distinctiveness. The Lanham Act is not a consumer protection statute. When you start putting too much weight on the consumer protection aspect, it becomes a source of mischief, arbitrary in application. Who will be deciding whether the quality is consistent enough? I find hotel franchises have widely varying quality levels. How many lousy franchisees does it take for a naked license, even if the hotel chain name is famous? Sports leagues have different levels of quality of product by design, but put the same marks on all of them (Neil Wilkof). Apparel companies make different quality lines for the department store and outlet store markets, but they have the same branding. Would these be considered naked licensing? By your theory these should be because consumers can mistakenly buy inferior quality, but they’re clearly not. The naked licensing doctrine is misapplied when it is viewed as founded in consumer protection rather than protection of the competitive environment.
Pamela-
I should have clarified my argument, the main point of which was that I do not agree that the naked licensing doctrine is based on Lanham’s abandonment language but, I think, is in fact based on Section 5’s related companies language. Specifically, “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.” This language is clearly about consumer protection.
The Fifth Circuit (your cited Exxon case) is the only Circuit I have found to hold that the naked licensing doctrine arises out of abandonment language. Admittedly, the other Circuits do not opine on this issue, but none of them quote significance language either.
If we agree that naked licensing is a court-created doctrine — which it must be since there is no express “naked licensing” language in the Lanham act, I think it makes more sense that the courts would base this doctrine on something other than abandonment language since we already have an abandonment doctrine. Moreover, the way Circuits, other than the Fifth, have used this doctrine, I cannot help but think that it is meant to be a consumer protection doctrine.
Please see the following:
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).
Pamela-
I should have clarified my argument, the main point of which was that I do not agree that the naked licensing doctrine is based on Lanham’s abandonment language but, I think, is in fact based on Section 5’s related companies language. Specifically, “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.” This language is clearly about consumer protection.
The Fifth Circuit (your cited Exxon case) is the only Circuit I have found to hold that the naked licensing doctrine arises out of abandonment language. Admittedly, the other Circuits do not opine on this issue, but none of them quote significance language either.
If we agree that naked licensing is a court-created doctrine — which it must be since there is no express “naked licensing” language in the Lanham act, I think it makes more sense that the courts would base this doctrine on something other than abandonment language since we already have an abandonment doctrine. Moreover, the way Circuits, other than the Fifth, have used this doctrine, I cannot help but think that it is meant to be a consumer protection doctrine.
Please see the following:
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).
What happens when a naked licensee becomes a stand in for the TM owner in a bankruptcy of a dozen or more tiny jewelry stores bearing the name and mark of a well-known designer and many of these stores are franchises. The TM owner misappropriated the designer’s name and refuses to license ushering in a 25 year TM war that is soon going to trial. There has been massive confusion and the designer gets hundreds of complaints re quality. They want to return to the US and open hundreds of franchise shops concealing their bankruptcy by fraudulently filing the designer’s N.Y. Corp as being the 100% owner of the bankrupt stores to avoid bankrupt court requirement that franchisees must be notified of any legal actions or bankruptcies for a period of seven years scamming the potential franchisee. Which approach do you think the court will take?