BACKGROUND
A trademark or service mark is a distinctive word, phrase, logo, or graphic symbol that allows consumers to identify the manufacturer, merchant, or service provider responsible for providing the goods or services. Basically, a trademark or service mark is a brand. In contrast to inventions and creative works, both of which have an express basis in the Constitution, trademarks are not specifically referred to within the U.S. Constitution. Instead, trademark law derives from the Constitution’s commerce clause which provides Congress with the power to regulate interstate commerce
The Lanham (Trademark) Act is the federal statute governing federal trademark registration. It pertains to marks used in interstate commerce which Congress has the right to regulate under the Constitution’s Commerce Clause. The United States Trademark and Patent Office (USPTO) is the administrative agency in charge of determining whether an applied-for mark is eligible for federal trademark registration. States, including Florida and Montana, also provide for registration of trademarks & service marks. Marks used within only one state are limited to relying on state law protections. Marks which are registered simultaneously in both a state and the USPTO may rely on both federal and state law protections.
Trademark law’s focus is on the protection of the consumer. The objective is to prevent consumer confusion as to the source of the goods and to prevent “palming off” where one producer attempts to pass of its goods as originating from another producer. That is, the consumer has the right to know that what they are buying is actually from the mark’s owner. A registered trademark is given to the business/individual to signify to consumers the origin of the product or service bearing the registered mark symbol (the circled R). Hence the reason why trademark law is encompassed by U.S. commerce law.
Once a registered trademark is granted by the USPTO, the continuation of registration status is dependent upon periodic proof filed with the USPTO that the mark is still in interstate commerce and the payment of a maintenance fee. Registered TM protection can go on indefinitely as long as the fees are paid and the mark is indeed being used in commerce.
As with patents and copyrights, trademarks can be licensed. Patent and copyright licensors generally stay out of the licensee’s “commercialization” endeavors unless the licensor’s involvement is required to get the invention or creative work to market. Trademark licensors, on the other hand, have on-going obligations! Failure to follow these obligations can result in a loss of registered trademark rights if the license is viewed as a naked license by courts or the USPTO.
EXAMPLE
Mary developed a proprietary organic spice mixture as a seasoning which she has been selling through a website. She was featured on HSN and developed a loyal following. She specifically developed the spice rub for individuals having a histamine intolerance like herself so they too could enjoy tasty food. She secured a catchy registered trademark for Spyced Right under which the spice mixture is sold. She was eventually approached by ABC, Corp., national food manufacturing and distribution company to sell her product on a nationwide scale under her brand name. They had promised her that her product’s quality could be maintained with their large-scale manufacturing processes. The royalty payment was attractive and would allow her to put money away for her and her husband’s retirement. She decided to enter into a detailed exclusive trademark licensing agreement for Spyced Right and also license her spice mix composition trade secret to ABC. The trademark licensing agreement failed to clearly specify component sourcing requirements, namely that the mix’s organic components were to be sourced from specified small farm organic spice farmers suppliers all certified by an independent organic certification authority. Also, that the brand had come to be viewed as a safe brand by individuals with histamine intolerance and individuals preferring organic foods due to careful sourcing of the spices.
A couple of years later, ABC started substituting non-organic spices to increase profits and stopped selling the spice as an organic spice. A substantial number of Mary’s previous customers started complaining on social media that the Spyced Right brand’s quality had declined, and in some cases has made its users ill. Almost immediately thereafter ABC stopped paying royalties and stopped selling the Spyced Right brand as an organic-based spice mix. They did continue paying royalties due under the trade secret license.
Mary sued ABC under 15 U.S.C. §§ 1117, 1125(a) for violation of her rights as a trademark owner (right to receive royalties in this case). Her trademark claim was dismissed on the ground that Mary abandoned her mark by engaging in naked licensing – that is, by allowing ABC to use the mark without exercising “reasonable control over the nature and quality of the goods, services, or business on which the mark is used by the licensee.” Restatement Third of Unfair Competition §33 (1995).
The above example is only a hypothetical. But see e.g., Barcamerica International USA Trust v. Tyfield Importers, Inc., 289 F.3d 589 (9th Cir. 2002) as an example of a real case where the registrant’s mark was cancelled by the court. Naked licensing issues may also arise during opposition and registered mark cancellation proceedings before the Trademark Trial & Appeal Board. Mary may still have been receiving trade secret royalties, but the brand she had worked so hard to develop was badly tarnished.
What happened in Mary’s care?
- Mary relinquished control over the quality of her spice mix. The sort of supervision required for a trademark license (REMEMBER FOCUS ON THE CONSUMER) is the sort that produces consistent quality and expectations in the mind of the consumer for that registered mark.
- Mary’s licensing agreement should have specified that she would audit ABC’s product manufacturing processes, quality assurance steps, and spice supply sources. Contingencies for addressing product deficiencies should also have been delineated.
- As an aside, generally, the licensor, as the owner of the registered mark, is responsible for filing the necessary documentation for establishing that the mark is in commerce at the Lanham Act’s specified renewal time frames. Failure to file such documentation will result in cancellation of the mark.
KEY TAKEAWAYS
- Trademarks are indicators of consistent and predictable quality assured through the trademark owner’s control over the use of the designation. Restatement Third of Unfair Competition §33, comment b.
- A trademark’s function is to tell shoppers what to expect. Mary’s customers had come to expect a certain taste/quality/spice tolerance level, and it was her reputation that was at stake. Similarly, a franchise restaurant licensee is expected to provide food/cleanliness/service (an experience) consistent with the franchisor’s requirements as detailed in lengthy franchise agreements. The franchisor’s reputation is at stake in every franchised restaurant outlet, so it typically monitors its franchised outlets to the extent required to ensure customers will be satisfied with their dining experience provided under the registered mark.
- The failure of the trademark owner to monitor its registered trademark is seen as an effective relinquishment of the trademark owner’s responsibilities under the law. The level of required oversight is at least in part determined by the nature of the products including their consumer and legal safety requirements
- IP licensing agreements should be reviewed by an experienced IP attorney who is well-versed in IP licensing nuances. This is especially true for trademark licensing agreements where the licensor/trademark owner has important obligations which do not go away upon licensing. Failure to comply with these obligations may result in loss of valuable registered trademark rights.
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©2020 (originally published at www.troyandschwartzlaw.com)
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Where Legal Meets Entrepreneurship™
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Susan Dierenfeldt-Troy
