Product Liability Concerns For Trademark Licensors
For more than three decades, courts have been grappling with whether to hold trademark licensors liable for defective products even where they neither manufactured nor sold defective products. It appears that courts are reaching a consensus concerning the relevant considerations regarding this liability issue.
This article discusses the interplay between the Lanham Act, which permits licensors to retain their trademarks if they do not completely abandon them, and courts' imposition of liability on trademark licensors who appear to exercise too much control. This article also examines recent cases concerning product liability of trademark licensors. Finally, this article makes recommendations to the wary trademark licensor on how best to avoid the pitfalls courts are now beginning to delineate.
A trademark is legally defined as any "word, name, symbol, or device or any combination thereof … used … to identify and distinguish … goods … from those manufactured or sold by others and to indicate the source of the goods." 15 U.S.C. § 1127.
Congress enacted the Trademark Act of 1946, 15 U.S.C. § 1051 et seq., commonly referred to as the "Lanham Act" after the congressman who introduced it, to address deceptive uses of protected trademarks and unfair competition and provides remedies for those whose registered marks are infringed.
Under a trademark licensing agreement, the owner of the trademark, known as the licensor, provides permission to another person or entity, known as the licensee, to use its trademark for a specific purpose. The agreement describes the scope of the license, the nature and quality of the goods that the licensee may offer under the trademark, and provides indicia of control that the licensor exercises over the mark.
This retention of control by the licensor is essential in helping to ensure that the licensor will not be deemed to abandon the mark. Unfortunately, the Lanham Act does not provide the amount of control that must be maintained by the licensor to avoid abandonment. The act does specify that a mark is deemed abandoned when its use has been discontinued without intent to resume such use or when course of conduct by the owner causes the mark to lose its significance as a mark, such as by becoming a generic name for the goods with which it is used. Accordingly, a licensor must retain adequate quality control over the goods and services sold under the mark by its licensees otherwise the licensor risks abandonment of its mark.
Trademark infringement defendants sometimes rely on what has been termed the "naked licensing" doctrine, which provides that where a licensor has licensed its mark in such a way that renders the mark meaningless and the mark no longer represents the quality of the product, the mark becomes invalid. Essentially, the doctrine discourages a licensor from granting a license without retaining some degree of control of quality.
In FreecycleSunnyvale v. Freecycle Network , 626 F.3d 509 (9th Cir. 2010), the U.S. Court of Appeals for the Ninth Circuit held that the defendant engaged in naked licensing and therefore abandoned its trademarks. The defendant was a non-profit organization whose purpose was to encourage the public to "freecycle," that is, to donate an unwanted item to a stranger rather than disposing of it. The plaintiff was a member group of the defendant and used the "freecycle" trademark. The defendant did not maintain a licensing agreement or place nearly any restrictions on the use of the marks, but it did send an e-mail allowing the organization to use the trademarks for non-commercial purposes and a subsequent cease-and-desist letter regarding the use of the marks. The court concluded that the defendant failed to retain express contractual or actual control over the plaintiff's quality control measures and abandoned the mark.
Similarly, the U.S. Court of Appeals for the Seventh Circuit recently identified "the paradigm of a naked license" as a plaintiff who "had, and exercised, no authority over the appearance and operations of defendants' business, or even over what inventory to carry or avoid." Eva's Bridal Ltd. v. Halanick Enters., 639 F.3d 788, 791 (7th Cir. 2011). In determining whether a mark was abandoned, Chief Judge Easterbrook asked the important question in this case: "How much control is enough?" His answer was: "The licensor's self-interest largely determines the answer. Courts are apt to ask whether 'the control retained by the licensor [is] sufficient under the circumstances to insure that the licensee's goods or services would meet the expectations created by the presence of the trademark.'" This standard resists a bright-line rule, but an examination of some landmark and recent cases provides insight into this nebulous area.
Although trademark licensors must be vigilant to avoid abandoning their marks, retaining significant control over the mark may result in unintended liabilities. Where licensors have exercised too much control over the products that bear their mark, they have been held liable for defects in those products.