Court ruling shows risk of “naked license”

When licensing your trademarks to others, it’s important to carefully draft the license agreement or you could end up giving away — or even losing — your trademark rights.  “Naked licensing” occurs when a trademark holder licenses its trademark to another party without exercising adequate quality control over the licensee.   When a licensor fails to exercise adequate quality control, a court may find that the trademark holder abandoned the trademark.  The practical effect of naked licensing may prevent the owner from asserting rights in the trademark in the future.

In FreeCycle Sunnyvale v. The FreeCycle Network (9th Cir. Nov. 24, 2010), the court considered a license agreement in which a recycling organization – The FreeCycle Network (TFN) – coordinated a network of local groups that promote recycling by giving unwanted items away so that others can use them.   A local group in Sunnyvale, California formed FreeCycle Sunnyvale and received permission to use TFN’s trademarks via an email.  The email correspondence was sparse, and the only express restriction was that the Sunnyvale group could not use the marks for commercial purposes.  Two years later, TFN ordered the Sunnyvale group to stop using the mark, and litigation ensued.

The Court found that TFN’s license was a “naked license” because (1) the license included no contractual control over the licensee’s activities, (2) TFN exerted no actual control over the licensee’s activities, and (3) TFN unreasonably relied on the licensee’s quality control measures.  Although TFN posted general guidelines on its website, licensees were not required to adopt the guidelines, and other licensees did not uniformly apply or interpret the guidelines.  Thus, the Court upheld summary judgment in favor of the Sunnyvale group and found that TFN had abandoned its trademarks. 

The court’s opinion indicates that trademark holders should be careful to impose both contractual restrictions and actual quality control procedures to avoid losing valuable trademark rights through a naked license.