• Ninth Circuit Ignores the Law Again

    by  • November 30, 2010 • trademark

    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:

    The language of subsection 1127(2) reflects that to prove “abandonment” the alleged infringer must show that, due to acts or omissions of the trademark owner, the incontestable mark has lost “its significance as a mark.” This statutory directive reflects the policy considerations which underlie the naked licensing defense: “[i]f a trademark owner allows licensees to depart from his quality standards, the public will be misled, and the trademark will cease to have utility as an informational device … [a] trademark owner who allows this to occur loses his right to use the mark.” Conversely, if a trademark has not ceased to function as an indicator of origin there is no reason to believe that the public will be misled; under these circumstances, neither the express declaration of Congress’s intent in subsection 1127(2) nor the corollary policy considerations which underlie the doctrine of naked licensing warrant a finding that the trademark owner has forfeited his rights in the mark.

    [The defendant], pointing to recent precedent in this Circuit indicating that naked licensing results in an “involuntary trademark abandonment,” posits that when a defendant proves that the trademark owner has licensed its mark without any quality control provisions the courts should presume a loss of significance. We disagree. Abandonment due to naked licensing is “involuntary” because, unlike abandonment through non-use, referred to in subsection 1127(1), an intent to abandon the mark is expressly not required to prove abandonment under subsection 1127(2). In addition, a trademark owner’s failure to pursue potential infringers does not in and of itself establish that the mark has lost its significance as an indicator of origin. Instead, such a dereliction on the part of the trademark owner is largely relevant only in regard to the “strength” of the mark; absent an ultimate showing of loss of trade significance, subsection 1127(2) (and the incorporated doctrine of naked licensing) is not available as a defense against an infringement suit brought by that trademark owner.

    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 ‘nakedlicensing 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.

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