How to Lose a Mark in 3 Ways – Part 3: Naked Licensing

By: Summer Associate Payton Miles and Associate Shana L. Olson

Trademarks help brand owners build and communicate their brand’s reputation and value with the relevant public. Once that valuable goodwill is linked between a mark and the owner’s products and services, trademark owners can capitalize on that reputation by extending into new product and service offerings, or outsourcing their current offerings, via license agreements with third parties. However, if a mark owner does not maintain sufficient control over the nature and quality of the goods and/or services that a third party produces under their mark, the brand owner risks losing rights in their mark by engaging in “naked licensing.”

Similar to genericide, which we discussed last month, Section 45 of the Lanham Act governs abandonment of a mark due to loss of distinctiveness. Naked licensing, which happens when a mark owner does not monitor the way that a trademark licensee uses their mark, can cause a mark to lose distinctiveness because the mark may no longer represent the quality goods or services that the public has come to associate with that mark. If a trademark owner does not pay close attention to how their mark is being used by licensed third parties, or to the quality of goods or services licensed third parties are offering under their mark, they risk damaging the goodwill that they have built up in their mark.

The factors that are relevant for determining whether a trademark owner exercises sufficient control over their licensed marks include: (1) whether the trademark owner retains contractual rights to control the quality of the use of its mark; (2) whether the trademark owner actually controls the quality of the mark’s use; and (3) whether the trademark owner reasonably relies on the licensee to maintain the quality of the goods and/or services. These factors are generally considered in situations when a trademark owner accuses a third party of infringement, and the infringer raises an affirmative defense of abandonment by naked licensing, arguing that their conduct is not infringement, because the trademark owner has lost its ability to enforce its own mark.

The 9th Circuit considered these factors in FreecycleSunnyvale v. Freecycle Network to determine whether The Freecycle Network (TFN) engaged in naked licensing and therefore effectively abandoned its rights in the marks FREECYCLE, THE FREECYCLE NETWORK, and a related logo (collectively, “the TFN marks”). TFN is a non-profit corporation founded in 2003 by Deron Beal, dedicated to “freecycling,” or giving unwanted items to strangers through internet groups so that the items can be repurposed rather than discarded. TFN allowed member groups, including FreecycleSunnyvale (FS), to use the TFN marks to identify TFN’s services and the various member groups online. When TFN first started, Beal regulated the use of the TFN marks himself. Eventually, TFN grew and then relied on local moderators to regulate member groups’ use of the TFN marks. FS was founded after TFN, and adapted guidelines and instructions for how to use the TFN marks from another TFN member group. Later, FS was added to TFN’s list of online freecycling groups displayed on TFN’s website and was permitted to use the TFN marks without any restrictions or guidelines.

In 2005, TFN sent emails to FS ordering the group to cease and desist using the TFN marks. FS filed a declaratory judgment action against TFN, and TFN brought counterclaims for trademark infringement and unfair competition. FS then moved for summary judgment on the issue of whether its naked licensing defense to trademark infringement allowed it to avoid an infringement claim. FS argued that TFN engaged in naked licensing when it granted FS rights to use the TFN marks without control over FS’s use.

Going through the three factors, the 9th Circuit first considered whether TFN retained contractual rights to control the quality of the use of its mark. TFN did not have a license agreement with FS regarding use of the TFN marks; the absence of such an agreement supports a finding of naked licensing.

Next, the 9th Circuit looked to whether TFN had actual control over its member groups’ services and use of the TFN marks. Even though TFN had established certain policies that FS and its other member groups were expected to follow, the Court found that these were mere suggestions, rather than requirements, because TFN lacked a system for restricting or monitoring the quality of use among all licensees.

Finally, the 9th Circuit considered whether TFN relied on FS’s own quality control efforts. While this is a relevant factor for the naked licensing analysis, this reliance alone is not sufficient to show that a naked license has not been granted—in this case, TFN unreasonably relied on FS’s quality control measures rather than implementing their own. Ultimately, the 9th Circuit held that TFN engaged in naked licensing and therefore effectively abandoned the TFN marks.

Other examples of cases that consider whether a mark owner lost rights in their mark by engaging in naked licensing include:

• Eva’s Bridal Ltd. v. Halanick Enterprises, Inc., 639 F.3d 788 (7th Cir. 2011) (holding that the trademark owner’s rights in the mark EVA’S BRIDAL were abandoned because the license granted was a naked license that did not require the licensee to run his business a certain way and did not allow the licensor to retain any power of supervision over the nature and quality of the goods and services).
• Barcamerica Int’l USA Tr. v. Tyfield Importers, Inc., 289 F.3d 589 (9th Cir. 2002) (holding that Barcamerica abandoned its DA VINCI mark through naked licensing because tasting the wine produced by Renaissance Vineyards under the DA VINCI mark was not enough to show that Barcamerica exercised control over the use of its mark).
• Monster, Inc. v. Dolby Lab’ys Licensing Corp., 920 F. Supp. 2d 1066 (N.D. Cal. 2013) (holding that the mark MONSTER was not abandoned due to naked licensing because the trademark owner consistently monitored the licensees’ use of the mark and required licensees to enter into agreements to abide by its guidelines for use of its mark and technology, despite Plaintiff’s arguments to the contrary).

Naked licensing can be avoided if a trademark owner implements its own quality control standards for licensees and enforces those standards. Additionally, Licensors should take great care to ensure that license agreements specify the quality a licensee must maintain over the goods and services offered under a licensed mark, as well as the trademark owner’s rights to control the use of the licensed mark.

And with that, we close out our summer series on how to lose a trademark in 3 ways—abandonment, genericide, and naked licensing. Thank you for tuning in!

This article appeared in the August 2023 issue of MarkIt to Market®. To view our past issues, as well as other firm newsletters, please click here.