On July 31, 2012, in 01 Communique Laboratory, Inc. v. LogMeIn, Inc., the United States Circuit Court for the Federal Circuit (“Federal Circuit”), reversed a decision of noninfringement issued by Senior Judge Claude M. Hilton of the Eastern District of Virginia based on a faulty claim construction.  Part of the Court’s decision took issue with a limitation to the claim language imposed by Judge Hilton based upon an alleged disclaimer made by the Plaintiff’s expert in reexamination proceedings.  In doing so, the Court follows its recent trend in rejecting the use of so called disclaimers in all but the clearest of situations. 

The claim term at issue in construction was “location facility.”  Plaintiff sought a broad construction of this term arguing it could be created by several computers and LogMeIn argued it should be narrowly construed to exclude such a multiple computer set up.  LogMeIn based its claim, in part, upon certain statements made by Plaintiff’s expert, Dr. Gregory Ganger, during the inters parties reexamination of the patent.   Dr. Ganger opined that in the patented invention the location facility creates a communication channel between the remote computer and the personal computer, and that this “create” limitation would not be satisfied by a location facility “that is simply used by some other component that creates the communication channel.” Dr. Ganger emphasized that “the location facility, itself, [must] create the communication channel.” As a result, Judge Hilton read these statements to disclaim distribution of the location facility among multiple computers—the broader construction sought by Plaintiff.    The Court disagreed with Judge Hilton, finding that Dr. Ganger’s statements did not limit the use of multiple computers but addressed another point entirely – he was differentiating between technology in which the location facility itself creates the communication channel and technology in which some component other than the location facility creates the communication channel.

In rejecting Judge Hilton’s findings the Court rebuked the district court and noted:

“When the patentee makes clear and unmistakable prosecution arguments limiting the meaning of a claim term in order to overcome a rejection, the courts limit the relevant claim term to exclude the disclaimed matter.” SanDisk Corp. v. Memorex Prods., Inc., 415 F.3d 1278, 1286 (Fed. Cir. 2005). “A patentee’s statements during reexamination can be considered during claim construction, in keeping with the doctrine of prosecution disclaimer.” Krippelz v. Ford Motor Co., 667 F.3d 1261, 1266 (Fed. Cir. 2012). “An ambiguous disclaimer, however, does not advance the patent’s notice function or justify public reliance, and the court will not use it to limit a claim term’s ordinary meaning.” Sandisk, 415 F.3d at 1287.

Importantly, the Court held that “[t]here is no ‘clear and unmistakable’ disclaimer if a prosecution argument is subject to more than one reasonable interpretation, one of which is consistent with a proffered meaning of the disputed term.” Id. (emphasis added).  As a result, the Court made clear that it will continue to look closely at claims that prosecution history statements, like those in specifications, are limiting and will, in cases where the patentee can proffer a reasonable alternative, not limit claim terms based on the alleged disclaimers. 

Stephen E. Noona is the head of Kaufman & Canoles’ Trial Section and Co-chair of its Intellectual Property Law and Franchising Practice Group.  He has been counsel in over ninety (90) patent cases in the Eastern District, is Fellow in the American College of Trial Lawyers, and has appeared before the judges in all four Divisions of the Eastern District on patent and intellectual property matters.  –Stephen E. Noona

The National Labor Relations Board’s (NLRB) most recent effort to maintain relevance in an era of declining union membership recently landed and it’s a doozy.  As you will recall, in the last two years, the NLRB has busied itself with  becoming the “Facebook Police” and finding that numerous employers’ social media policies were unlawful because they improperly restricted employees from making negative comments about their employer(s).  Not content to stop there, however, the NLRB has now decided that employers cannot have a blanket policy of asking employees who make a complaint about employee misconduct to not discuss the complaint with other employees while the investigation is ongoing.  According to the NLRB, such a policy has a tendency to coerce employees and restrains their Section 7 rights (i.e. their rights to engage in concerted activities for the purpose of collective bargaining or other mutual aid or protection).  Instead, employers must now engage in a case by case analysis, balancing the employer’s concern for the integrity of its investigation against employees’ Section 7 rights: “[I]n order to minimize  the impact on Section 7 rights, it was [employer's] burden ‘to first determine whether in any give[n] investigation witnesses needed protection, evidence [was] in danger of being destroyed, testimony [was]in danger of being fabricated, or there [was] a need to prevent a cover up.’”  Banner Health System and James A. Navarro,  NLRB case 28-CA-023438 (July 30, 2012).

But, you are no doubt thinking to yourself, employment lawyers are always telling us that employer investigations into complaints of employee misconduct should be kept “as confidential as possible” — don’t these employment lawyers know what they are doing?  Well, as hard as this may be to believe, the left hand of the federal government (NLRB) doesn’t know what the right hand of the federal government (EEOC) is doing.  EEOC’s 1999 “Enforcement Guidance on Vicarious Employer Liability for Unlawful Harassment by Supervisors”  has this to say about confidentiality in investigations of harassment complaints:

Confidentiality

An employer should make clear to employees that it will protect the confidentiality of harassment allegations to the extent possible. An employer cannot guarantee complete    confidentiality, since it cannot conduct an effective investigation without revealing certain information to the alleged harasser and potential witnesses. However, information about the allegation of harassment should be shared only with those who need to know about it. Records relating to harassment complaints should be kept confidential on the same basis.

A conflict between an employee’s desire for confidentiality and the employer’s duty to investigate may arise if an employee informs a supervisor about alleged harassment, but asks him or her to keep the matter confidential and take no action. Inaction by the supervisor in such circumstances could lead to employer liability. While it may seem reasonable to let the employee determine whether to pursue a complaint, the employer must discharge its duty to prevent and correct harassment. One mechanism to help avoid such conflicts would be for the employer to set up an informational phone line which employees can use to discuss questions or concerns about harassment on an anonymous basis. (emphasis added).

As can be seen, the positions of EEOC and the NLRB on the issue of confidentiality in investigations into employee misconduct are not only not consistent with one another, they are, to some extent, antagonistic, especially where the employee misconduct at issue is harassment. This, of course, puts employers conducting investigations into allegations of employee misconduct in a very difficult position.  Such investigations often are time sensitive and the necessary scope of investigation is not always readily apparent–making the analysis suggested by NLRB, on the surface, highly impractical.

In practice, however, adding  the considerations suggested by NLRB to your case file and documenting  your analysis of them (e.g. “Do witnesses need protection from possible retaliation– yes; Is testimony in danger of fabrication– yes; and is there a need to prevent a cover up– yes”) may be more of a bother than a burden.  Indeed, when you think about it, retaliation is likely a concern with any significant employee complaint.  There also is a danger of employees getting together to “get their stories straight”  when a complaint against a co-worker or supervisor is being  investigated.  And, really, when isn’t there a need to prevent a cover up?

So, when faced with your next investigation into employee misconduct, unless your analysis reveals it is one where there is: 1) no concern of retaliation, 2) witnesses may not lie, and 3) a cover up does not need to be prevented, you likely will find yourself erring on the side of keeping your investigation as confidential as possible under the circumstances.
–Scott W. Kezman

As explained in prior posts, the Internet Corporation for Assigned Names and Numbers (“ICANN”) is making available new generic top-level domains which include different types of words in different languages.  The public comment period for the new generic top-level domain applications began on June 13, 2012 and originally was scheduled to end on August 12, 2012.  During the public comment period, the public has a chance to express any concerns to the evaluators as part of the application evaluations.  ICANN decided that the public comment period should be extended because the public sought more time to review and comment on the more than 500 applications received for new generic top-level domains.  ICAAN has given the public an additional forty-five days (until September 26, 2012) to submit comments.

For additional information on these new generic top-level domains, visit  http://newgtlds.icann.org.  –Kristan B. Burch

What happens when a company takes a license to manufacture and sell a product under another’s mark, only to discover later that the licensor has entered bankruptcy?  Can the bankrupt estate reject the license and deny the licensee the ability to continue using the mark in its business?  The problem can arise, and sometimes has, to the detriment of trademark licensees.  Yet, a recent Seventh Circuit decision takes an interesting new approach to the problem.  In the short term the decision creates uncertainty, but it opens the door to reconsideration of the effects of a licensor’s bankruptcy on IP licenses.

Some historical background will help to understand the problem and the Seventh Circuit’s solution.  Bankruptcy is intended in large part to free the bankrupt estate of debts (giving it a “fresh start”) and to maximize the value of the bankrupt estate for the benefit of its creditors.  To these ends, Section 365 of the Bankruptcy Code allow a trustee in bankruptcy, subject to the court’s approval, to assume, assign or reject any executory contract.  (An IP license may or may not qualify as an “executory contract”, which is a topic unto itself).   A trustee in bankruptcy may thus want to reject an IP license to free itself from ongoing obligations under a license and/or in order to sell the IP, free of the license, for a greater return.   The resulting legal question has been whether rejection of a license effectively ends the licensee’s rights.

A 1985 Fourth Circuit decision, Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., held that a trustee’s rejection of a license does deprive the licensee of the right to continue using the licensed intellectual property.  The decision aroused great concern among licensees, and Congress subsequently adopted Section 365(n) of the Bankruptcy Code to allow licensees of “Intellectual Property”, as defined by the Code, to continue to use the IP it held by license, albeit subject to several limitations.    

Congress excluded trademarks from the Code’s definition of Intellectual Property, however, believing trademarks posed special issues that required further study.  Thus, when trademark licensors enter bankruptcy, the consensus in the bar has been that its licensees do not enjoy the protection of Section 365(n), that Lubrizol applies, and therefore, trustee rejection deprives the licensee of continuing rights.  The hardship of that result is well illustrated In re Exide Technologies, where an exclusive trademark licensee was denied for years the right to use a mark on which it built a business and for which it paid $133 million.  (After nearly ten years of litigation, in 2010 the Third Circuit overturned the result, holding that the license at issue was not “executory” after all and thus not subject to rejection).

The story brings us to Judge Easterbrook’s recent opinion in  Sunbeam Prods., Inc. v. Chicago American Mfg., LLC, No. 11-3920 (7^th Cir., July 9. 2012).  The facts were straightforward:  Lakewood granted to Chicago American a license of patents and marks to manufacture and sell box fans, later entered involuntary bankruptcy, and then rejected the license so as to sell the intellectual property through bankruptcy to Sunbeam (which did not want to take the IP subject to a license). 

The Seventh Circuit deemed Section 365(n) inapplicable and came to a different conclusion than Lubrizol on the effects of rejection under Section 365 generally.  The court of appeals concluded that the exclusion of trademarks from the Code’s definition of Intellectual Property was “just an omission.”  While a deliberate exclusion, it did not follow that Congress legislated that licensees could not use marks when a bankrupt licensor rejects the license.  Instead, the exclusion simply meant that Section 365(n) does not apply and the court must decide whether to follow the Fourth Circuit’s rule in Lubrizol.  Lubrizol, Easterbrook concluded, “does not persuade us.”  The Seventh Circuit looked to Section 365(a) and (g) of the Code, noted that rejection constitutes a “breach” by the licensor for which damages may be sought, not termination, and stated (without citation to any authority) that outside of bankruptcy a licensor’s breach does not terminate the license.  (The licensee could cover to mitigate its damages, for example, and continue to use the IP).   From this the court of appeals concluded that Lubrizol wrongly concluded that rejection cut off the licensee’s rights to the IP. 

Sunbeam represents one solution to a rare but serious problem.  The implications are unclear.  Two courts of appeal facing the same situation now have reached opposite conclusions.  What results will obtain in other jurisdictions remain to be seen.  Licensees in the Seventh Circuit apparently have more breathing room today, but in the Fourth Circuit (which includes Virginia) Lubrizol presumably remains good law.  Since the reasoning of Sunbeam did not rely at all on Section 365(n), it raises the possibility that, at least within the Seventh Circuit, Section 365(n) was and is unnecessary.  Since Sunbeam appears to permit the licensee unrestricted exploitation of its licensed rights (while allowing the bankrupt licensor to avoid other obligations of its agreement), the question arises of whether the restrictions on continued use in Section 365(n) continue to apply to non-trademark licensees.  If so, the curious result obtains that trademark licensees can use their licensed mark without restriction while technology licensees are subject to the statutory limits of Section 365(n). 

The split in authority also forces the question of which course is more sound.  Judge Easterbrook is a wonderful writer, with a way of making his logic seem inexorable.   Yet, while the Lubrizol rule is both suspect and indisputably harsh, Sunbeam’s approach is not clearly more cogent.  Sunbeam does not squarely confront the question of why a licensor’s allowing ongoing use of its IP is not a form of performance that it is entitled to avoid pursuant to rejection.   In particular, a trademark license is more than a one-time grant:  the licensor has an ongoing obligation, for its own benefit as well as its licensees’, to monitor and enforce the quality of goods and services sold under the mark.  This is why Congress thought trademarks required further study.  If a bankrupt trademark licensor is freed of this ongoing obligation, unless an early sale of the IP with the license is arranged, continued use by an exclusive licensee might amount to more or less a conveyance of the mark for no value, a result inconsistent with the goals of bankruptcy.  In the context of a nonexclusive trademark license, continued use by multiple licensees without any quality control arguably results in abandonment of the mark, to the possible detriment of the bankrupt licensor, its creditors and even its licensees.    No doubt such issues will be sorted out in future decisions.

Christopher Mugel practices intellectual property law from Kaufman & Canoles’ Richmond, Virginia office.  He spoke on how IP licensors and licensees can deal with the risks of bankruptcy at the 2009 annual meeting of the AIPLA.  –Christopher Mugel

When parties get together contemplating a proposed new venture, it is similar to a new marriage. They are very excited about the future opportunities, but have not really thought through the issues if events do not go as anticipated. Whether the venture takes the legal form of a corporation, limited liability company or partnership, many issues are common with each. While the parties may recognize that it is appropriate to have a buy-sell agreement, operating and/or partnership agreement depending on the particular entity (collectively “entity agreement”), at the initial stages of the venture they may not have either the resources or the historical perspective to appreciate and plan for what is going to or could happen down the road as their circumstances change. As they continue to make money and develop the business, one of the last things with which they typically wish to deal, is updating the entity agreement or dealing with problems for which there may be no easy solutions. Unfortunately, when one party later wishes to retire or has a terminal illness, they may find that their lack of planning not only puts their future, but also that of their family in a situation which was never contemplated. The consequences can be even more significant if the business interest represents the major asset of the owner’s estate.

Parties should periodically review and update their entity agreement to reflect changes which have occurred as the entity and their personal situations evolve. Some of the issues to consider in this process are outlined below.

1. First Right of Refusal or Opportunity. The agreement should normally contain a first right of refusal or a first right of opportunity, so that if either party wishes to get out of the business and sell their interest to a third party, the remaining owner will not have to deal with a new owner, if they want to own the business by themselves. The advantage of the first right of refusal is that the remaining owner will know who that new owner is going to be, while the right of the first opportunity merely sets forth the terms upon which a sale may occur, if the remaining owner chooses not to purchase the interest offered.
2. Tag Along and Drag Along Rights. When there are multiple owners, these types of provisions can allow the majority owner in the “drag along” situation and the minority owner in the “tag along” situation to make sure that they are protected or have the ability to control their own destinies. In the drag along situation, the majority owner can require the minority owner to be dragged along in any sale upon the same terms and conditions as the majority owner obtains, therefore allowing for a sale of 100% of the ownership interests to a new party. However, the minority owner should first have the right to buy out the majority owner, on those same terms, before the drag along occurs. In the tag along situation, in the event that the minority owner does not wish to buy out the majority owner, they would have the right to tag along under the same terms and conditions as the majority owner is obtaining.
3. What events would allow an owner to purchase or require an owner to purchase the interest of another owner’s interest? These could include: (a) retirement, (b) death or (c) disability. Each of the above events would have separate conditions and terms for such a sale or purchase and may be influenced by what funding mechanisms are to be used to purchase the interest. In this way, upon the specified events, the parties would know what rights and obligations they would have.
4. Valuation of the Business. In the event of a requirement to purchase from or sell to the other owner under the entity agreement, what will be the value of that interest? Usually parties will agree to a certain value or a formula up front when they form the entity. However, the agreement should contemplate a periodic review and an update of that value and if one does not occur, an adjustment based on a formula or business valuation at the time such event occurs. Many times the value of the business will increase over time and the agreement should reflect this change. In addition, an entity agreement among family members must comply with certain tax requirements under the Special Valuation Rules of IRS Code Section 2700 or there could be adverse tax consequences.
5. Mechanism for Buy-Out. In the event a buy-out does occur, how will one party buy the other party out? Is the purchase price to be paid in cash or upon terms, and if upon terms, will there be collateral for the obligation? Also will the owners purchase life insurance on each other’s lives to fund the buy-out upon a death? If so, will the agreement be a cross-purchase agreement which may have different tax affects verses a redemption agreement vehicle? In the event insurance is to be utilized, the parties should periodically review the value of the business to determine whether there is sufficient insurance. If there is not sufficient insurance to fund the buy-out, the agreement should contemplate how any excess portion of the purchase price is to be paid, either through cash or by a promissory note and if so, what duration? The selling party or their estate may prefer the term to be a shorter period and would like to have collateral, while the buying party would like a longer term with less collateral.
6. What happens to Guaranteed Debt? During the term of an entity, the entity usually needs to borrow money and the owners frequently are called upon to guarantee that debt. Upon an event in which one owner sells their interest, what happens to their guarantee on that debt? Is there an obligation on the buyer to refinance the debt and remove the liability of the selling owner? While in concept this sounds fine, it may not be very practical since the lender may not be willing to permit a refinancing without the selling owner’s continued guarantee. If this release is not possible, should there be a separate indemnification for the benefit of the selling owner by the buying owner of the debt for which they have guaranteed? If the indemnification were to occur, should that be a reduction in the purchase price to reflect the added benefit to the seller? Without the release of the guarantee, a consequence may be that an estate may not be permitted to distribute assets to its beneficiaries and may ultimately find itself having to pay off part or all of the guaranteed debt, thereby imposing unexpected financial burdens to a surviving spouse or family.
7. Push-Shove and Deadlock. What happens when the parties just cannot get along as owners, such as in a bad marriage? Normally under the law, there is not an unilateral right to terminate the entity and therefore the parties must live with each other for some period of time usually not on the best of circumstances. A “push-shove” or “deadlock” provision in the agreement would allow one owner to set a price and give the other owner the option to right to either buy or sell at that price, which may be a solution to the deadlock without having to go to court. Such a provision can be fair if both parties are in somewhat equal parity financially. How to deal with the payout and how to deal with existing debt also become very important issues to resolve in these push-shove situations.

While sometimes there may not be simple solutions to all issues involving owners of a business, it is important that the parties periodically review their entity agreements to make sure they are up-to-date based on the evolving nature of the business and their personal circumstances, or they, their estates and families may find themselves in a position no one ever contemplated.
–James G. Steiger

The 2012 session of the Virginia General Assembly resulted in several important changes to trusts and estates law, most of which became effective July 1, 2012. Below are some of the more notable changes.

Self-Settled Spendthrift Trusts – Senate Bill No. 11
Enacts Virginia Code § 55-545.03:2 and 55-545.03:3 allowing individuals to establish irrevocable discretionary self-settled spendthrift trusts that can hold assets for their benefit without being subject to creditor claims. For more information on this topic, please see the recent Private Client Services newsletter prepared by Larry Cumming on self-settled spendthrift trusts.

“Decanting” Trusts – Senate Bill No. 110
Enacts Virginia Code § 55-548.16:1 authorizing “decanting” trusts, which allow the trustee of an irrevocable trust to appoint trust assets into other trusts for further distribution according to the terms of the second trust. This legislation provides a very beneficial tool for trustees. For more information on this topic, please see the recent Private Client Services newsletter prepared by Bob Powell on “decanting” trusts.

Notice of Preexisting Death Benefits After Divorce – House Bill No. 282
Amends Virginia Code § 20-111.1 such that divorce decrees and annulment decrees entered after July 1, 2012 must contain a conspicuous warning that the decree may not revoke certain beneficiary designations of the prior spouse as beneficiary to a death benefit, alerting the parties that further action may be required in such circumstances to amend such beneficiary designations.

Automatic Cancellation of Power of Attorney in Certain Circumstances – House Bill No. 677
Amends Virginia Code § 26-81 to provide that an agent under a power of attorney has no authority to act for the principal upon the filing of the following actions between the principal and agent: divorce, annulment, legal separation, separate maintenance, or custody or visitation of their child.

Non-Virginia Executors & Trustees – House Bill No. 763
Amends Virginia Code § 64.1-150 to provide that a non-Virginia resident executor or trustee under a will probated in another state is authorized to transfer title to real estate located in Virginia, even though the executor or trustee did not qualify in Virginia. The non-Virginia executor or trustee must have qualified in the state where the will was probated, the will must be considered valid under Virginia law, the will must give the executor or trustee the right to convey the property and an authenticated copy of the will must be admitted to probate in the Virginia jurisdiction where the property is located. This legislation creates a very efficient and user-friendly rule in Virginia, but will mainly benefit non-Virginia residents. Hopefully, other states will follow suit, easing the administrative burden involved in interstate estate administrations.

Extension of Tenants by the Entirety Protection – House Bill No. 229
Amends Virginia Code § 55-37 to provide that a lien for a judgment under the doctrine of necessaries (spousal liability for certain debts of the other spouse) will not attach to a home previously held by spouses as tenants by the entirety if the tenancy ended only as a result of the death of one of the spouses.

Real Estate Tax Exemption for Disabled Veterans – House Bill No. 922
Amends Virginia Code § 58.1-3219.5 to confirm that disabled veterans and their spouses are exempt from real estate taxes on their principal residence. The exemption is applicable to the following types of ownership by the veteran (and spouse, if applicable): fee simple, tenancy for life, revocable trusts, and irrevocable trusts with life estate or continuing right of use and support. If the property is owned by the veteran (and spouse) and others, then the exemption is prorated based on the ownership interests.

Settlor Income Tax Obligations – Senate Bill No. 432
Amends the Virginia Uniform Principal and Income Act and the Virginia Uniform Trust Code to authorize a trustee to use trust principal to pay the income tax incurred on income of the trust not distributed to the settler without causing other trust income or principal to be subject to the claims of the settlor’s creditors.

Notary Conflicts – Senate Bill No. 270
Amends Virginia Code § 47.1-30 to clarify that a person named in a document as executor or trustee, or as a person to receive notices, is not precluded from notarizing the document.

Increase of Certain Statutory Limits – House Bill No. 134
Amends Virginia Code § 8.01-606 to increase the statutory limits from $15,000 to $25,000, for certain distributions in the following circumstances without appointment of a separate fiduciary and/or without requiring further accounting:

• Amounts due to a person which are paid into court and later paid by the court to such person.
• Amounts paid to a third party for the benefit of a disabled person’s education, maintenance and support pursuant to court order or pursuant to approval of the Commissioner of Accounts.
• Amounts paid directly to a minor child who is of sufficient age to use it judiciously pursuant to court order or pursuant to approval of the Commissioner of Accounts.
• Amount that a fiduciary can continue administering without further accountings and without continuing surety, pursuant to court authorization, regardless of whether the fiduciary resides in the State of Virginia.

Protection of Trust Director Instructions – Senate Bill No. 180
Amends Virginia Code § 55-548.08 to protect trustees from liability when they follow the actions of a trust director when the trust document gives a trust director the power to direct the trustee. Protection under the statute requires the trust instrument to incorporate the statute by reference. This code section also imposes a fiduciary duty on a trust director to act in good faith with respect to the purpose of the trust and the beneficiaries’ interests. A trust director is liable for loss resulting from a breach of this duty. A trustee has no duty to monitor the trust director’s conduct, to provide the trust director with information beyond that which is requested in writing, or to do anything to prevent the trust director from acting.

Re-codification of Title 64.1 – Senate Bill No. 115
Results in a complete re-codification of Virginia Code Title 64.1 under new Title 64.2, which will combine current Titles 26 (Fiduciaries Generally), 31 (Guardian and Ward), 64.1 (Wills and Decedent’s Estates) and portions of Title 37.2 (provisions related to medical directives) and Title 55 (provisions related to uniform acts) to create a more comprehensive Title 64.2. Existing documents will not be affected. This legislation will become effective on October 1, 2012. 
-Will Holt & Sarah Messersmith

Owners of valuable trademarks and service marks routinely focus on protecting those rights against unauthorized use by others. However, less attention is paid to the potential for inadvertent loss of rights in trademarks when their use by third parties is authorized without a proper license agreement giving the owner adequate control over the third parties’ use of its trademarks.

Some excerpts from a couple of fairly recent federal court decisions are helpful to understanding the nature and consequences of such “naked licensing” of trademarks.

First, from a 2010 Ninth Circuit Court of Appeals decision ruling that the owner’s rights in its trademark had been effectively abandoned through uncontrolled licensing:

“Naked licensing” occurs when the licensor fails to execute adequate quality control over the licensee. Naked licensing may result in the trademark’s ceasing to function as a symbol of quality and a controlled source. [N]aked licensing is inherently deceptive and constitutes abandonment of any rights to the trademark by the licensor. Consequently, whether the licensor fails to exercise adequate quality control over the licensee, a court may find that the trademark owner has abandoned the trademark, in which case the owner would be estopped from asserting rights to the trademark.

FreecycleSunnyvale v. The Freecycle Network (United States Court of Appeals for the Ninth Circuit, 2010) (quotation marks and citations deleted).

And, in a similar ruling by the Seventh Circuit of Appeals in 2011:

Trademark law requires that decision making authority over quality remains with the owner of the mark. How much authority is enough can’t be answered generally; the nature of the business, and customers’ expectations, both matter. Ours is the extreme case. Plaintiffs [the trademark owners] had, and exercised, no authority over the appearance and operations of defendants’ [third party users of the trademarks] business, or even over what inventory to carry or avoid. That is the paradigm of a naked license.

Eva’s Bridal Ltd. v. Halanick Enterprises, Inc. (United States Court of Appeals for the Seventh Circuit, 2011) (quotations and citations deleted).

While the exact legal basis for the naked licensing doctrine can be debated, these and other court decisions make it very clear that trademark owners should never authorize someone else to use their trademarks without a written license agreement giving them sufficient control over the use of their marks by the licensee and over the quality of goods and services sold or provided by the licensee under the marks.

The key thing to remember is that any authorized use of your trademarks or service marks by others should be done under appropriate written license agreements. While it may be easier and more convenient to not require a written license agreement – or to require one that doesn’t adequately address the control issue – the potential for consequent loss of trademark rights under the naked licensing doctrine far outweighs any benefit one might think would be gained from taking either of these shortcuts. –Robert E. Smartschan