Top Tips for Maintaining Adequate Quality Control Over Trademark Licensees

December 2, 2019, 07:15 AM 0

“Whether or not a given level of quality control and inspection is sufficient is determined on a case-by-case basis; however, it must in all instances be sufficient to meet the ‘reasonable expectations of customers.’”

In order for rights in a trademark to persist, the mark must be used in commerce continuously. Wallack v. Idexx Labs., Inc., No. 11CV2996-GPC(KSC), 2015 WL 5943844, at *4 (S.D. Cal. Oct. 13, 2015). Abandonment of a mark is, therefore, an affirmative defense to a trademark infringement claim. One form of trademark abandonment is non-use of the mark. A second form of trademark abandonment is uncontrolled or “naked” licensing of one’s trademark. The policy behind prohibiting uncontrolled licensing is reflected in 15 U.S.C. § 1127, which states that “[a] mark will be deemed abandoned … [w]hen any course of conduct of the owner, including acts of omission as well as commission, causes the mark to … lose its significance as a mark.” 15 U.S.C. § 1127 (emphasis added); Already LLC v. Nike Inc., 568 U.S. 85, 99 (2013).

Use of a trademark sufficient to maintain trademark rights may be either by the trademark owner themselves or by another with the permission of the owner through a licensing agreement. Doeblers’ Penn. Hybrids, Inc. v. Doebler, 442 F.3d 812, 823 (3d Cir. 2006). Trademark licenses are, as a general matter, permitted if the trademark owner exercises sufficient control over the nature and quality of the licensee’s products or services marketed and sold in connection with the licensed mark. See also Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S.Ct. 1652, 1664 (2019). Quality control in this context is referring of course to consistency of quality, not the level of quality. Eva’s Bridal Ltd. v. Halanick Enterprises, Inc., 639 F.3d 788, 790 (7 th Cir. 2011). The purpose of the control requirement is to protect the consumer. If the licensor does not exercise sufficient quality control the consumer may be lured into a mistaken belief as to the nature and quality of products bearing the licensed mark.

“Naked licensing is an uncontrolled licensing of a mark whereby the licensee can place the mark on any quality or type of goods or services, raising a grave danger that the public will be deceived by such a usage.” Doeblers’ Penn. Hybrids, 442 F.3d at 823 (internal quotations and citations omitted). The way to protect against this danger to the consuming public is to require the licensor to actively police use of the licensed mark.

Ways to Establish Adequate Quality Control

The most direct method for demonstrating adequate quality control is through an express written licensing agreement obligating the licensor to actively monitor the nature and quality of products bearing the licensed mark. Doeblers’ Penn. Hybrids, 442 F.3d at 823; FreeCycle Sunnyvale v. Freecycle Network, 626 F.3d 509, 516 (9 th Cir. 2010). A license need not be express, however. Doeblers’ Penn. Hybrids, 442 F.3d at 824; see also Ritchie v. Williams, 395 F.3d 283, 290 (6 th Cir. 2005) (citing the proposition that “the existence of a legal right of the licensor to control the quality of its licensee’s activities is neither necessary nor sufficient, since it is the control in fact of the quality of its licensee’s goods or services which is dispositive….”). A licensor-licensee relationship may be implied. Doeblers’ Penn. Hybrids, 442 F.3d at 824. Whether or not an implied trademark license is deemed to exist is determined based on the objective conduct of the parties. Where there is no express right to control the quality of the goods bearing the licensed mark, a trademark owner may nonetheless avoid a finding of uncontrolled licensing and abandonment of the mark if it can establish actual control through inspection or supervision. Ritchie, 395 F.3d at 290. Whether or not a given level of quality control and inspection is sufficient is determined on a case-by-case basis; however, it must in all instances be sufficient to meet the “reasonable expectations of customers.” FreeCycle Sunnyvale, 626 F.3d at 519.

In limited instances, a party may rely upon the licensee for quality control where the parties have a “special relationship.” Doeblers’ Penn. Hybrids, 442 F.3d at 824. Whether or not a “special relationship” exists is a fact-intensive analysis. However, such a relationship has been deemed to exist where the licensor has supplied the vast majority of items sold by the licensee and has done so over the course of many years. A “special relationship” has also been held to exist where the licensor and licensee are both closely held, family-owned, companies with interlocking ownership. A “special relationship” was found to exist where the trademark licensor maintained a close working relationship with the licensee’s employees and the agreement provided for termination of the license if these employees were no longer affiliated with the licensee. FreeCycle Sunnyvale, 626 F.3d at 518. As a word of caution, however, before a court will find that a trademark owner/licensor was justified in relying upon the licensee’s quality control procedures, at least some indicia of actual control by the licensor will be required.

How Much Quality Control is Necessary to Avoid Abandonment?

While generalizations are elusive when it comes to the level of control necessary to avoid an abandonment finding based on “naked” licensing, the case law addressing this issue reveals that the following considerations may inform the analysis.

• The existence of express licensing provisions requiring the licensee to meet quality standards set by the licensor and permitting inspections by the licensor. Wallack, 2015 WL 5943844, at *9; Paleteria La Michoacana, Inc. v. Productos Lacteos Tocumbo S.A., 188 F.Supp.3d 22, 93 (D.D.C. 2016).
• Whether the licensee was required to provide product samples to the licensor prior to selling the products and whether the licensee did in fact adhere to this approval process. Hawaii-Pacific Apparel Group, Inc. v. Cleveland Browns Football Co., 418 F.Supp.2d 501, 507 (S.D.N.Y. 2006).
• Whether the quality control measures are effective in generating consistent quality.
• Whether the licensor enforces the quality control measures. Halo Management, LLC v. Interland, Inc., 308 F.Supp.2d 1019, 1030 (N.D. Cal. 2003).
• The frequency of inspections by the licensor. Barcamerica Int’l USA Trust v. Tyfield Importers, Inc., 289 F.3d 589, 597-98 (9 th 2002).
• The regularity of inspections by the licensor.
• The thoroughness of the inspections.
• Whether the parties have agreed upon when, how often, and under what circumstances inspections will take place. Halo Management, 308 F.Supp.2d at 1030.
• Evidence of an actual lack of product consistency. Paleteria La Michoacana, 188 F.Supp.3d at 94.
• Whether the trademark owner has interposed any objections to quality deviations. Starsurgical, Inc. v. Aperta, LLC, 40 F.Supp.3d 1069, 1080 (E.D. Wisc. 2014).
• Evidence of an actual decrease in quality relative to the trademark owner’s products/services. Taco Cabana Int’l, Inc. v. Two Pesos, Inc., 932 F.2d 1113, 1121 (5th Cir. 1991).
• Whether the licensor has the right to terminate the license in the event of derogation from the quality control standards. FreeCycle Sunnyvale, 626 F.3d at 516.
• Whether the licensor’s quality control measures are mandatory. FreeCycle Sunnyvale, 626 F.3d at 517-18.
• The degree to which the public expects local variation in the products or services. FreeCycle Sunnyvale, 626 F.3d at 519.
• How potentially dangerous the products or services are to the public.
• Whether there are restrictions on the degree to which the licensee may modify the products in connection with which the mark is used. Slep-tone Entm’t Corp. v. Coyne, 141 F.Supp.3d 813, 825 (N.D. Ill. 2015).
• The percentage of the licensee’s relevant inventory that is supplied by the licensor. Paleteria La Michoacana, 188 F.Supp.3d at 93.
• The licensor’s knowledge of the licensee’s quality control procedures. Barcamerica Int’l, 289 F.3d at 596.
• Whether a “special relationship exists” between the parties; taking into account, among other factors, how close a working relationship the licensor and licensee have, whether the owners of the licensor and licensee are related in a familial sense, and whether and to what extent there is an overlap of ownership and/or management between the licensor and licensee. Paleteria La Michoacana, 188 F.Supp.3d at 93-94; FreeCycle Sunnyvale, 626 F.3d at 518-19.

A determination as to whether or not a trademark owner/licensor maintains sufficient control over a licensee’s products or services is a fact-intensive analysis determined on a case-by-case basis. However, taking the above considerations into account will decrease the chances of a trademark abandonment finding based on “naked” licensing.

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