Product Liability Concerns For Trademark Licensors
Two principle theories of liability that have its sources in the Restatements of Torts have emerged. First, under a "stream of commerce" theory, where the control retained by the licensor may be deemed sufficient for the licensor to have placed the product into the stream of commerce, licensors have been held liable under Restatement (Second) of Torts § 402A.
Second, under the apparent manufacturer doctrine, where the licensor can be deemed to put out the product as its own, the licensor is held to the same liability as the manufacturer under § 400. The analysis does not differ significantly under either theory.
In 1998, the Restatement (Third) of Torts: Products Liability included a derivative of § 400 that explicitly provided that it does not, by its terms, apply to the owner of a trademark who licenses its trademark. Liability does lie, however, when trademark licensors "participate substantially in the design, manufacture, or distribution of the licensee's products." This codified the majority of the case law.
Cases after 1998, including recent cases, have been consistent with the § 14 standard and the majority of the case law prior to 1998. Recently, on Aug. 24, 2012, in Acquarulo v. A.O. Smith Corporation, No. CV 095024498S, a Connecticut Superior Court upheld a $2.4 million verdict against a trade association after previously denying its summary judgment motion as to whether it could be liable as a product manufacturer under the Connecticut Products Liability Act. The trade association argued that it neither processed, made, distributed, sold, shipped or re-branded the dry-set mortar product at issue.
The plaintiff argued, however, that the association held a patent on the asbestos-containing product, licensed the manufacture and sale of the product, and retained tight control over the formulation, manufacture, packaging, marketing and research of the product. In agreeing with the plaintiff, the court noted the trade association's invention of the product; detailed specifications governing all aspects of its product, including the percentage of asbestos to be used; the requirement of in-house testing; the responsibility for packaging and labeling; receipt of licensing fees; and undertaking of issuance of warnings concerning its product.
In Lou v. Otis Elevator Co., 77 Mass. App. Ct. 571, 933 N.E.2d 140 (2010), a Massachusetts court for the first time in a reported case applied the apparent manufacturer doctrine to an entity outside the distribution chain. In Lou, a boy's hand was caught and injured in an escalator in a department store in China. The boy and his parents brought suit on the basis of breach of the implied warranty of merchantability against the American company that licensed its trademark and technology to the manufacturer of the escalator. Adopting § 14, comment d, and its concept of liability for trademark licensors based on substantial participation, the court affirmed the jury verdict of $3.35 million in damages. The court reasoned that comment d served as a response to a class of cases that had held trademark licensors liable for defective products even without participating in the design, manufacture, or distribution. The court stated that, because the defendant did not argue that it did not substantially participate as provided for in § 14 and there was ample evidence for such a finding, the jury's determination was not improper.
The Lou court distinguished Burkert v. Petrol Plus of Naugatuck Inc., 216 Conn. 65, 68 (1990), in which the Connecticut Supreme Court declined to apply the apparent manufacturer doctrine to General Motors Corp. where its "role as a Trademark Licensor was unusually limited." The court noted that General Motors exercised no control over the formulations its licensees used to meet its performance standards, received no royalties or financial benefits from its licensing, provided little supervision of production and distribution, and did not require its licensees to submit samples or test data for performance assurance. Accordingly, the court concluded that General Motors could not, as a matter of law, be an apparent manufacturer.
Likewise, other courts applying or citing favorably § 14 consistently have held that trademark licensors that participate substantially in the design, manufacture or distribution of licensees' products can be held liable in tort for harm caused by defective products.
These cases demonstrate the risks of abandonment under the Lanham Act and products liability for trademark licensors under the apparent manufacturer doctrine or stream of commerce theory. To avoid liability, trademark licensors must not "participate substantially in the design, manufacture, or distribution of the licensee's products."
Licensors should not abstain, however, from any oversight in the use of its mark. Rather, trademark licensors should, pay particular attention to the degree of control it exercises over their mark and be cognizant the indicia of control that could subject them to liability. Specifically, courts examine trademark licensors' rights to, involvement in, or control over: formula, design, advertisement, packaging, manufacturing, distribution, issuance of specifications, inspection, and management of licensees. Courts have also analyzed the prominence of the trademark, overlapping management of the licensor and licensee, and the licensor's stockholdings of the licensee. To avoid abandonment under the Lanham Act, trademark licensors should maintain a valid licensing agreement that: specifies at least minimal quality control standards, such as warranties that the products will be free from defects in design and material; provides indemnification for the licensor as to product defects; and requires the licensee to maintain comprehensive insurance coverage for product liability claims.