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Naked Licensing of Trademarks

Wednesday, September 28, 2011

Although a trademark owner may license the use of a trademark, "[n]aked licensing occurs when a licensor does not exercise adequate quality control over its licensee's use of a licensed trademark such that the trademark may no longer represent the quality of the product or service the consumer has come to expect. By not enforcing the terms of the trademark's use, the licensor may forfeit his rights to enforce the exclusive nature of the trademark."1 Naked Licensing is inherently deceptive to the consumer.2 A defendant who asserts that a trademark owner has allowed naked licensing of its trademark, and therefore unintentionally abandoned all rights of enforcement of the trademark, must prove that the trademark owner (1) did not retain express contractual control over the licensee's quality control measures; (2) did not have actual control over the licensee's quality control measures; and (3) if the trademark owner contends it relied on the licensee's own quality control measures, such reliance was unreasonable.3 A defendant may assert that the trademark owner has allowed naked licensing of the mark whether or not the defendant was the licensee.4 Since a finding of abandonment of a mark is a harsh remedy, the defendant asserting that position is subject to a "stringent standard of proof."5 However, federal circuits differ on whether that standard requires clear and convincing evidence or a preponderance of the evidence. The Federal Circuit adopted the preponderance of the evidence standard.6 The Ninth Circuit is yet to make a determination, as the cases it has addressed have either produced the same conclusion under either standard,7 been the subject of debate in separate concurrences,8 or been a reserved issue.9 However, most district courts to address the issue of trademark abandonment have applied the clear and convincing evidence standard.10

Express Contractual Control

The absence of a licensing agreement, or the absence of provisions within a licensing agreement governing quality control of the mark, supports a finding of naked licensing. However, lack of an agreement or appropriate provisions may be overcome by evidence of actual quality control or reasonable reliance on the quality control measures of the licensee. Understandably, most cases which reach litigation address situations where an agreement was absent or quality control was unaddressed or unclear. For instance, in FreecycleSunnyvale v. The Freecycle Network,11 the plaintiff requested a declaratory judgment that its use of the defendant's mark was noninfringing due to, inter alia, a naked license. The trademark owner defendant argued that it had granted the plaintiff, a local chapter of this multi-chapter recycling organization, with an implied license to use the mark. The defendant argued that the implied license, which included a single email instructing the plaintiff "[y]ou can get the neutral logo from www.freecycle.org, just don't use it for commercial purposes. . . ." contained adequate quality control measures by inclusion of that restriction.12 However, the court disagreed, noting that the email contained no express discussion of quality control.

Actual Quality Control

"The absence of an express contractual right of control does not necessarily result in abandonment of a mark, as long as the licensor in fact exercised sufficient control over its licensee."13 However, evidence of actual control is a fact-sensitive analysis. "How much authority is enough can't be answered generally; the nature of the business, and customers' expectations, both matter."14 For instance, in Barcamerica International USA Trust v. Tyfield Importers, Inc.,15 the court found it unsatisfactory that the plaintiff only randomly tasted the wine sold under the license it provided to a wine manufacturer, and then relied on the licensee's reputation to ensure quality control. "[A]t the very least, one might have expected [the plaintiff] to sample (or to have some designated wine connoisseur sample) on an annual basis, in some organized way, some adequate number of bottles of the [defendants'] wines which were to bear Baramerica's mark to ensure that they were of sufficient quality . . . ."16 In Dawn Donut Co. v. Hart's Food Stores, Inc.,17 the court found that although the plaintiff's contracts with its licensees required the licensees to use the plaintiff's baking mix only as directed, there was no system of inspection and control. "Without such a system plaintiff could not know whether these bakers were adhering to its standards in using the mix or indeed whether they were selling only products made from Dawn mixes under the trademark 'Dawn.'"18 In Freecycle Sunnyvale, the court rejected the plaintiff's position that it exerted actual quality control over its trademarks when it required that the defendant adhere to Yahoo! Group's service terms, adhere to the plaintiff's standard that the items offered on the defendant's website were free, legal, and appropriate for all ages, adhere to the plaintiff's etiquette standards, and apply the policies and procedures of the plaintiff's website moderator group (although the defendant was allowed flexibility in applying the policies and procedures). The FreecycleSunnyvale court noted, inter alia, that the Yahoo! Groups service terms applied to generic online activity, not activity specific to the plaintiff, and the plaintiff's standards were not uniformly applied or interpreted by other alleged licensees.19 On the other hand, in General Motors Corp. v. Gibson Chemical & Oil Corp.,20 the court found that General Motors Corporation ("GM") specified the refining process for the fluid marketed by licensees under GM's mark, and carefully monitored the licensees' products.

Reasonable Reliance on the Quality Control Standards of the Licensee

A trademark owner may rely on the quality control standards of its licensee if such reliance is reasonable. The Third, Seventh, and Tenth Circuits seem to favor this approach.21 Courts have found that such reliance is reasonable only when the parties share a special relationship. For example, the trademark owner was allowed to rely on the licensee's standards in cases where the parties were in:
(1) a close working relationship for eight years; (2) a licensor who manufactured ninety percent of the components sold by a licensee and with whom it had a ten year association and knew of the licensee's expertise; (3) siblings who were former business partners and enjoyed a seventeen-year business relationship; and (4) a licensor with a close working relationship with the licensee's employees, and the pertinent agreement provided that the license would terminate if certain employees ceased to be affiliated with the licensee.22
However, in Barcamerica, the court found that such a special relationship did not exist. The Barcamerica court explained that therefore the trademark owner could not reasonably rely on the licensee's reputation for making good wine as adequate quality control of the licensed trademark. The court explained that the quality of the actual goods or services is not what is measured, but instead the consistency of the quality with the trademark owner's products and services—whether that particular quality is great or poor—to provide predictability for the consumer. Furthermore, "while reasonable reliance on the licensee's own quality control is one factor which may be considered, it is not alone sufficient to show that a naked license has not been granted."23 Nor can a licensor claim it relied on the quality control standards of the licensee when the relationship was a contentious one.24 Even a familial relationship, without more, will not establish reasonable reliance on the licensee's quality control standards.25

Limitations

Some courts have found that a naked license does not result in total abandonment of the mark, but may only result in abandonment of the mark in certain markets—either geographical or within certain product or service markets. For instance, in Tumblebus Inc. v. Cranmer,26 the court found that despite naked licensing activities, the plaintiff had not lost its trademark rights in the Louisville, Kentucky area, and therefore could pursue its claim of trademark infringement against the defendant.27 Similarly, in Dawn's Donuts, the court held that abandonment in the retail market for the trademark owner's baking mixes might not result in abandonment of the mark in the wholesale market.28 Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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