Don’t Let Your Trademark Run Naked
November, 2002
As the licensor of a trademark, you have invested years of experience and time and energy creating a very valuable asset - your trademark. However, you must still supervise the nature and quality of the goods and services the license provides. In a recent decision, Barcamerica International U.S.A. Trust v. Tyfield Importers Inc., 289 F.3d 589 (9th Cir. 2002), the 9th Circuit Court of Appeals found that the licensor of a trademark had inefficiently supervised the nature and quality of the goods being sold under that licensed mark and therefore had a "naked" license, which justified canceling the licensor's trademark registration.
The court deemed the naked license to constitute an abandonment of the trademark itself. The 9th Circuit reached this decision notwithstanding the fact that the licensor had occasionally invested sporadic time and energy to protect the trademark. The opinion serves as a harsh reminder to those who license trademarks that they must continuously supervise and exert control over the quality of goods and services offered by their licensees.
Quality Control Is Crucial
Trademarks serve the commercial purposes of identifying and distinguishing goods by affording customers an assurance that the offerings under a particular mark will be of a consistent quality. By granting a license to a third party, a trademark owner receives valuable income from the trademark. A licensor must maintain adequate quality control over those goods and services in order to protect the integrity of the trademark.
Most trademark licenses are drafted to avoid such a harsh result. It typically contains objective standards and/or the licensor's subjective standards with respect to quality. Where the license agreement specifically provides for these standards, the licensor may remain protected as to its ownership rights in the trademark. Generally, a license agreement will contain a quality control provision that affords the licensor the right and opportunity to inspect the licensee's goods or services offered to ensure that the licensee complies. Although the inclusion of quality control provisions in a license agreement has in some instances been sufficient to establish the requisite control necessary to avoid abandonment of a licensed mark, a licensor is well served by taking affirmative action to actually exercise such control.
In Barcamerica, the 9th Circuit addressed the question of whether a licensor's quality control measures were sufficient to avoid a finding of "naked" licensing of its trademark and the resulting cancellation of the registration of its trademark. Barcamerica International U.S.A. Trust owned the federally registered trademark "Leonardo da Vinci" for wines. Barcamerica had used the trademark since 1980. In 1988, Barcamerica entered into a written license agreement with Renaissance Vineyards, which obtained a non-exclusive right to sell wines under the da Vinci trademark. The agreement did not contain a quality control provision. In 1989, Barcamerica entered into a second written license agreement to replace the 1988 agreement. Like the 1988 agreement, the 1989 agreement did not contain a quality control provision.
Barcamerica's Trademark Was Vulnerable
During this same time period, Italian wine producer Cantine Leonardo da Vinci Soc. Cop. a.r.l. had been selling its wines under the trademark "Leonardo da Vinci" to importers in the United States. In 1995, Cantine filed with the patent trademark office for registration of its own "Leonardo da Vinci" trademark for wines. Cantine discovered Barcamerica's registration and investigated Barcamerica's use of the da Vinci mark. Cantine concluded that Barcamerica had abandoned its use of the da Vinci mark. In 1997, Cantine commenced a proceeding at the PTO's Trademark Trial and Appeal Board to cancel Barcamerica's registration.
Barcamerica responded by filing a lawsuit in the Eastern District of California against Cantine and Tyfield Importers Inc., the company that had served since 1996 as Cantine's exclusive importer and distributor of Cantine's "Leonardo da Vinci" wines. The lawsuit alleged infringement of Barcamerica's da Vinci trademark. The District Court of California found that Barcamerica had abandoned the trademark and added that Barcamerica's lawsuit was barred because Barcamerica had known since 1993 about Cantine's and Tyfield's use of the Leonardo da Vinci mark and had taken no action to protect the trademark.
Barcamerica appealed the decision of the district court to the 9th Circuit. On appeal, the 9th Circuit agreed. The 9th Circuit determined that Barcamerica failed to identify when, how often, and under what circumstances it exercised quality control efforts over the license provided to Renaissance, concluding that Barcamerica and Renaissance did not have "the type of close working relationship required to establish adequate quality control in the absence of a formal agreement."
Appellate Court Rules Trademark Was Abandoned
The 9th Circuit noted that the significant matter was whether Barcamerica played a meaningful role in holding the wine to a particular standard of quality – good, bad, or otherwise. The 9th Circuit noted "the point is that customers are entitled to assume that the nature and quality of goods and services sold under the mark at all licensed outlets will be consistent and predictable." Where a trademark licensor fails to exercise control over the goods produced by a licensee, such behavior is inherently deceptive and constitutes abandonment of any rights to the trademark by the licensor.
Although the 9th Circuit did not articulate a minimum standard of control or inspection that would satisfy the requirement of an adequate quality control, the court did indicate that protection in the form of a written license agreement may be sufficient. The court noted that the standard of control or inspection will vary depending upon the particular circumstances of the license and the particular marketplace in which the goods or services are sold. Thus, each case involving specific claims of abandonment will be determined on its own facts. Such a case-by-case approach can create a host of litigation problems for a trademark licensor seeking to protect the valuable investment it has made in its trademark.
How Does This Affect You?
The opinion and conclusions in Barcamerica serve as a reminder to trademark owners and their counsel that the use of trademarks by licensees should be governed by a written standard setting forth quality requirements for the licensed goods or services, together with inspection rights and approval rights or other monitoring provisions. During the life of the license, a trademark owner or its representative should be monitoring the licensee's provision of the goods or services bearing the mark to ensure that the licensee is actually providing the licensed goods or services in a manner consistent with the licensor's standards of quality.