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Monday, 3 January 2011

When Rodney Dangerfield Meets the Naked Trade Mark Licence


The late American comedian Rodney Dangerfield was closely identified with his tagline -- "I don't get no respect." He would then go on to offer one of his famous monologues that would recount his recent encounters in a world in which he was the object of derision and scorn. If I were to chose which aspect of trade mark law, at least under U.S. law, deserves to be adorned with Dangerfield's lament, it would be the requirement that there be quality control as part of a trade mark licence.

Under this requirement, for a trade mark licence to be valid, there must be bona fide quality control contractual provisions in place whereby the licensor can validate that the licensee is using the mark in the manner set out in the licence. The requirement reaches back to jurisprudence, particularly in England and the U.S., over 75 years ago, which held that as long as quality control is in place, the source theory of trade marks is preserved, because there is in effect an identity between the licensor and the licensee as the source of the goods. Conversely, if there is no quality control in place, the mark no longer serves the source identification function and the mark itself is liable for cancellation, because the user of the mark is not the owner of the mark, and the owner of the mark is not the user of the mark.

Those jurisdictions in which trade mark law did not emerge from the common-law tradition find the entire legal edifice of quality control baffling. Moreover, in most common-law jurisdictions, the quality requirement has either been in effect eliminated or signficantly watered down to the extent that is often simply ignored. To the contrary, however, is the legal position in the U.S., where the requirement is live and kicking. For U.S. licensors who treat quality control with Rodney Dangerfield-like derision, the results can be most unpleasant.


A recent example of this can be in the decision of the Ninth Circuit Federal Court of Appeals in Freecyclesunnyvale v The Freecycle Network (No. 08-16382, Nov. 24, 2010) here. The plaintiff/appellee ("FS") is a member of the defendant/appellant ("TFN"), a non-profit organization devoted to facilitating the recycling of goods. TFN has used three marks in its operations since 2003. These marks have been registered in various foreign countries but federal registration was pending for them at the time of the judgment.

As for the terms of use of the marks, the court stated that "TFN permits member groups to use the trademarks. When TFN first started, Beal [its founder--NJW]personally regulated the use of the trademarks but, as TFN has grown, it has relied on local moderators to regulate member groups’ use of the trademarks." No formal guidelines were ever issued regarding such use and the only rule seems to have been that all moderators were obliged to the principle of "Keep It Free, Legal & Appropriate for All Ages."

A dispute arose between the parties, as a result of which FS brought a declaratory judgment action for non-infringement. TFN countered with a claim of trade mark infringement, which FS defended, inter alia, by alleging that the marks had been abandoned on the ground that the licence was "a naked licence", i.e., there was no quality control in place. The trial court granted partial summary judgment, holding that there was a naked licence and therefore an abandonment of the trade marks. An appeal by TFN was then filed.

The Ninth Circuit denied the appeal and affirmed the decision of the trial court. Relying on the previous ninth circuit decision of Barcamerica Int’l USA Trust v Tyfield Importers, Inc., 289 F.3d 589 (9th Cir. 2002), the court rejected all attempts by TFN in support of its claim that adequate quality control was in place. In particular, the court rejected the argument that, although there were no explicit quality provisions between the parties, there were implied terms regarding quality control. The fact that TFN had advised FS that it "can get the neutral logo from 2003www.freecycle.org just don't use it for commercial purposes" is not sufficient to establish quality control, because it makes no reference to either (i) a contractual right to inspect: or (ii) the ability to terminate, should ES should use the mark for commercial purposes.

The court recognized that a licensor, in appropriate circumstances, may establish quality control in a situation where either (i) there is quality control in fact, even in the absence of an agreement or (ii) the licensee(s) exercised sufficient quality control. As for the first claim, there was insufficient evidence that the licensor exercised adequate control, even accounting for the fact that in circumstances such as this, where a non-profit organization is coupled with disparately placed volunteeers, the licensor may not be held to the same standard as the licensee-manfacturer of a discrete product. As for the second claim, the court stated that reliance on the licensee's quality control is appropriate only where there is "a close working relationship" between the parties. That is not the case here.

Since this Kat actually devoted a number of years penning a volume on trade mark
licensing, he is especially sensitive to developments under the idiosyncratic approach taken by U.S. courts. Against that backdrop, he wonders whether the court may have been misled in at least two aspects:

First, the contours of quality control as they apply to service marks are less settled than with respect to licensed products. Historically, mirroring the development of trade mark law generally, quality control was conceived in a world where service marks were not legally protected as trade marks, much less licensed as such. When one adds to that the special nature of the services involved in this case, one wonders whether, according to the court, the fact that "because member groups may freely adopt and adapt TNT's rules of etiquette and because of the voluntary and amorphous nature of these rules, they cannot actually be considered actual control." The failure by the licensor to address these issues at all is one thing, but I wonder whether the court was too harsh and formalistic in applying these principles to the free-wheeling world of voluntarism and on-line groups.

Second, the court condemns the arrangement because "this standard does not maintain consistency across member groups." A court can make too much of consistency in the context of quality control. I am brought back to a talk that I heard 15 years ago, where the speaker explained how one of the major sports leagues allowed its housemark to be used on a single category of goods, but at different levels of quality (reflected, presumably in the price). Even assuming that there was consistency at each sub-level of the product line, the end result was that the same mark was being applied to the same product class, but at various quality levels. If so, perhaps the better test under such circumstances is not "consistency" but rather "attention". Under this standard, perhaps, the licensor did meet the required standard.

Irrespective of these musings, however, the fact remains: any licensor that ignores the quality control requirements in a licence involving a U.S. trade mark puts the mark at risk of being found to have been abandoned. For a licensor that sues the licensee for breach, either for failure to pay royalities or for other alleged lack of contractual performance, seeing one's trade mark at risk by a counterclaim for abandonment may lead to serious shock, among other consequences.

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