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FreecycleSunnyvale v. The Freecycle Network

FreecycleSunnyvale? v. The Freecycle Network
United States Court of Appeals, Ninth Circuit
2010 WL 4749044 (C.A.9 (Cal.))
November 24, 2010

Facts:
FreecycleSunnyvale? (“FS”) is a member of The Freecycle Network (“TFN”). TFN is an organization that facilitates the recycling of goods by giving unwanted items to a stranger so that it can continue to be used for its intended purpose. TFN practiced freecycling as a local activity conducted using internet groups. Most TFN members used Yahoo! Groups. TFN has its own website that provides a directory of member groups. Deron Beal, TFN’s founder, did not create the term “freecycle,” and TFN was not the first to promote its use.
TFN uses a democratic leadership structure in which decisions are made among volunteer moderators. Local volunteer moderators enforce TFN’s rules and policies but have flexibility in enforcement. Since May 2003, TFN has used three trademarks: freecycle, The Freecycle Network, and a logo. Federal registration of the marks was pending at the time of the case. Originally, Beal personally regulated the trademark’s use, but as TFN grew he relied on local moderators to regulate.
Lisanne Abraham founded FS on October 7, 2003 without TFN’s knowledge or involvement. She adapted rules and policies for how to use FS from either TFN or one of TFN’s member websites. In an e-mail conversation with Beal, Beal gave Abraham permission to use the TFN logo as long as it was not used for commercial purposes. Abraham created a unique freecycle logo for her Sunnyvale group. FS was added to TFN’s list of online freecycling groups, soon after which all the groups received an e-mail from Beal, which did not discuss or include any restrictions or guidance on the use of TFN’s trademarks.
Before 2004, TFN only had a few recommended guidelines in the etiquette section of its website. Beal proposed the adoption of “Keep it Free, Legal & Appropriate for All Ages.” All groups were required to adopt the rule but its definition varied from group to group. For no clear reason, on November 1 and 15, 2005, TFN ordered FS to cease and desist using the Freecycle name and logo and threatened to have Yahoo! Terminate FS’s group. FS claimed TFN granted it a license in October 2003.

Procedure:
On January 18, 2006, FS filed a declaratory action against TFN in the U.S. District Court for the Northern District of CA alleging non-infringement of TFN’s trademarks and tortious interference with FS’s business relations. FS moved for partial summary judgment on the issue of whether its naked licensing defense to trademark infringement allowed it to avoid a finding of infringement. TFN claimed it had adequate quality control standards over licensees’ services and use of the trademark so it should not be found to have engaged in naked licensing and thus abandoned its trademark. TFN counterclaimed for trademark infringement and unfair competition under the Lanham Act. The District Court granted summary judgment to FS.

Issue:
Whether TFN produced evidence to raise a material fact issue as to whether it:
(1) retained contractual rights to control the quality of the use of the trademark
(2) actually controlled the quality of the trademark’s use
(3) reasonably relied on FS to maintain the quality

Holding:
(1) TFN did not retain express contractual control of FS’s quality control measures
(2) TFN did not have actual controls over FS’s quality control measures
(3) TFN was unreasonable in relying on FS’s quality control measures
(4) Therefore, TFN engaged in naked licensing and abandoned its trademarks.

Standard of Review:
Court reviewed de novo a grant of partial summary judgment. It would view the evidence in the light most favorable to the nonmoving party to determine if the district court applied the relevant substantive law and whether there are any genuine issues of material fact. A naked license claimer must meet a stringent standard of proof. The court did not decide whether this required clear and convincing evidence or preponderance of the evidence because the outcome would be the same here regardless.

Court Analysis:
Generally, trademark owners have a duty to control the quality of their trademarks. Naked licensing arises when a licensor (here TFN) does not exercise adequate quality control over its licensee’s use of a licensed trademark such that the trademark no longer represents the quality of the product or service the consumer has come to expect. Thus, the licensor may forfeit his rights to enforce the trademark.

Issue #1: Whether the license contained an express contractual right to inspect and supervise the licensee’s operations.
The absence of an agreement with provisions restricting or monitoring the quality of goods or services produced under a trademark supports a finding of naked licensing. TFN agrees that it did not have an express license with FS Thus, TFN lacks express contractual rights to inspect and surprise FS. Beal claims the e-mail communication supports a finding of an implied license. Even if it was an implied agreement, there was still no express contractual right. Thus, there is no disputed issue of material fact as to this issue.

Issue #2: Whether TFN maintained actual control over its member groups’ services and use of the trademarks when FS was granted use of the trademarks in October 2003.
When there is a lack of express contractual rights, courts require that the licensor demonstrate actual control through inspection or supervision. TFN points to several control standards in place: the “Keep it Free” standard, incorporation of Yahoo! Groups service terms, the non-commercial services requirement, the etiquette guidelines, and the established policies and procedures for member groups. The court disagreed that Keep it Free or Yahoo!’s service terms constituted actual control. Group’s were not reuiqred to adopt the standard nor were they required to use Yahoo!. Yahoo! Service terms cannot be considered quality controls. TFN did not exercise actual control no matter what time period is considered.
The non-commercial requirement says nothing about the quality of the services provided and does not establish a control. Also, groups can freely adopt the etiquette rules which are voluntary and cannot be considered actual control. Even if TFN’s asserted standards related to the quality of its services, they were not adequate quality controls because they were not enforced and were not effective in maintaining consistency of the trademarks

Issue #3: Did TFN justifiably rely on its member group’s quality control measures?
For this to be valid, the licensor and licensee must be involved in a close working relationship to establish adequate quality control in the absence of a formal agreement. Four examples of a close working relationship: close working relationship for eight years; licensor who manufactured 90% of components sold by licensee with whom it had a ten year association and knew of licensee’s expertise; siblings who were former business partners and had a seventeen year business relationship; licensor with close working relationship with licensee’s employees. None of these applied to the relationship with TFN and FS, so TFN could not justifiably rely on FS’s quality control measures.

Conclusion:
The court disagreed that TFN should be subject to a lesser level of quality control due to the non-dangerous and variable nature of its services. The court said a licensor must exercise control sufficient to meet reasonable expectations of customers. TFN did not establish any quality control. The court failed to review TFN’s final arguments which were raised on appeal.



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