Trademark clarity where it’s manufacturer versus distributor
Everyone here understands that in the U.S., trademark rights are determined by use, a term of art that, practically speaking, means hardly anything, but if it means anything at all pretty much means “sale.” And priority in trademark — priority being a term of art that means pretty much everything — goes to the party that makes that use first.
But what if the manufacturer of a branded good leaves that part — the selling — to an exclusive distributor? This can often make perfectly good business sense. Just as great lawyers are not necessarily great salespeople of legal services, there is no reason a great widget manufacturer should know how get out of its own way at getting those widgets into the hands of America’s widget-lovers. If the manufacturer thus never, itself, sells the product to the relevant consuming public, however — or if it does so well after the exclusive distributor has built the market and acted as the de facto source of the good — how can the manufacturer claim to be the “source” of the product and beneficiary of consumer goodwill associated with the trademark under which it is sold? Riddle me that!
So really this is not such a new question, and is one more reason why you cannot rely on blogs for your legal training — even LIKELIHOOD OF CONFUSION®. And in a recent post, Pamela Chestek discusses a recent Third Circuit decision that brings that circuit squarely into line with other courts on this issue and makes it clear — as we will see, very clear — that, as it stated before in Doeblers’ Pa. Hybrids, Inc. v. Doebler, 442 F.3d 812, 821-22 (3d Cir. 2006), that where there’s a question of whether the distributor or the manufacturer owns a trademark, “it cannot be that, in the absence of a contractual arrangement, the first use test automatically fills that gap.”
The new decision, Covertech Fabricating, Inc. v. TVM Bldg. Prods., No. 15-3893 (3rd Cir. April 18, 2017), involved a dispute over ownership of trademarks including rFOIL and ULTRA for a line of reflective insulation products between its manufacturer, Covertech, and a very naughty distributor. Clarifying and reiterating its decision in Doebler, the Third Circuit made it crystal-clear that “where initial ownership between a manufacturer and its exclusive distributor is at issue and no contract exists,” courts should not look to first use, which in this context is pretty hard to justify, but should instead assign a rebuttable presumption of trademark ownership to the manufacturer.
And how might that presumption be rebutted?
If you guessed that the answer was a multi-factor balancing test, you were right! The six-factor test, which the court calls “the McCarthy test” after Prof. Tom McCarthy by virtue of his felicitous distillation of it in The Treatise, instructs a court to consider:
(1) Which party invented or created the mark;
(2) Which party first affixed the mark to goods sold;
(3) Which party’s name appeared on packaging and promotional materials in conjunction with the mark;
(4) Which party exercised control over the nature and quality of goods on which the mark appeared;
(5) To which party did customers look as standing behind the goods, e.g., which party received complaints for defects and made appropriate replacement or refund; and
(6) Which party paid for advertising and promotion of the trademarked product
In other words: Which party, really, developed the goodwill — that is, the relationship with the consumer, right?
Well, not quite. Though you might, as LIKELIHOOD OF CONFUSION® did briefly, read those six factors and think that they were really just ways of getting at goodwill, this would be error, as Covertech explains:
[T]he District Court and the parties relied on Premier Dental Products. Co. v. Darby Dental Supply Co., 794 F.2d 850 (3d Cir. 1986), where we counseled consideration of a product’s goodwill before finding that ownership has vested in a distributor, even when the manufacturer has expressly assigned title to the mark. In Doebler, however, we cabined Premier to only those cases involving express assignment of a mark. Yet the case before us, all parties agree, falls outside that category.
OK, then, well, how exactly is the six-factor McCarthy test different from evaluating which party is properly deemed the one that owns the goodwill in the mark? Is it just the fact that in Doebler the court enunciated specific factors that go to that analysis? Is that the big improvement over “counsel[ing] consideration of a product’s goodwill”?
I hate when this happens, because it means we have to take a look at Premier Dental. But we have to do what we have to do. And when we do, we see that that case says that when the distributor or the manufacturer are fighting over the goodwill in the a trademark, such as, in that case, IMPREGUM, here’s how to decide it (bunches of citations and quotes omitted):
If the public believes that the exclusive distributor is responsible for the product, so that the trademark has come, by public understanding, to indicate that the goods bearing the trade-mark come from plaintiff although not made by it, or if the distributor has obtained a valuable reputation for himself and his wares by his care in selection of his precautions as to transit and storage, or because his local character is such that the article acquires a value by his testimony to its genuineness, that is proof that he possesses the goodwill associated with the product. . . .
Therefore, he who controls the nature and quality of the goods on which the IMPREGUM trademark appears, or whom the public regards as standing behind IMPREGUM, possesses the goodwill in the IMPREGUM trademark.
In other words, in Premier Dental, the court did explicitly employ (4) and (5) of the McCarthy test and, implicitly, the other factors as well. But it did not apply the whole of it — with those factors and that balancing, without which no legal standard can exist in our times. And this was error.
Despite its general acceptance and although our own adoption of it today was presaged by Doebler, the McCarthy test is absent from the District Court’s analysis of the ULTRA mark in this case. Nor, apparently, did the parties recognize its relevance, as it garnered nary a mention in their briefing before the District Court or on appeal.
And while it would have been error enough if the parties had merely relied on Premier Dental in the briefing, the district court evidently made matters worse. Though it had been counseled, if you will, to at least consider goodwill by Premier Dental, the Third Circuit notes that the trial court failed even to do that, and actually relied on the manufacturer’s first use as grounds to credit its claim to the trademark.
This undoubtedly seemed like a good way to avoid a lot of “business,” because the premise of this classic conundrum is that the exclusive distributor has apparently aced the manufacturer out of goodwill by using the manufacturer’s own mark in commerce before (usually way before) the manufacturer has (if it indeed ever has at all). If, however, we can find a way to force the whole thing back down the pipe and say no, actually, that first use was the manufacturer’s use after all… problem solved right? No conundrum! Why try to do all this geometry with goodwill when a first use analysis that goes the right way offers the shortest route between two points?
The Third Circuit answers: Because when we have made something clear, we clearly means that thing to be good and clarified.
While the outcome was the right one, the legal test was clearly the wrong one. So the Third Circuit affirmed this part of the decision on alternative grounds and remanded back to the trial court for bunches of other stuff.
The takeaway? First, clearly, first use is not at all, ever, the thing in a manufacturer- versus-exclusive-distributor trademark dispute. Stick a fork in that already, and don’t, district judges, try to outsmart our complicated tests with an end-run that sounds, in chambers, as if you have cut the Gordian Knot and avoided a bunch of trouble. Your job, judge, is to untie it, or at least make it look plausibly as if the jury has magically done so.
And because the Circuit had already, in Doebler, set out a more precise approach — that is, enunciated specific criteria by which to “consider” a product’s goodwill — that is its little way of saying that parties and judges should use that damned approach, which is clearly why it wrote it down on paper.
But there’s more! And this is great stuff. The decision explains that, when it asked the parties for supplemental briefing to address what it calls the McCarthy standard, respondent Covertech — cleverly, zealous-advocacy-ly, lawyerly-ly — tried to the use the supplemental briefing as an opportunity to score points on precisely the omission by the appellant that briefing was meant to rectify.
“Hey,” says respondent, “I hate to bring this up, but, well, it was their defense and then it was their appeal, right? They didn’t raise the argument you’ve asked us to brief, so they blew it, right? We win.”
Clearly that’s the right approach, right?
Well, maybe it’s irresistible, because zeal, but of course that argument shouldn’t work. And the hint that it won’t may perhaps be found in the fact that the court of appeals asked you to brief the right standard. It’s hard to resist arguing that the wrong standard is good enough, seeing as how it worked so well for you below, but probably resist we must — especially where, as here, the right standard works quite well.
In fact, you can’t waive the law that applies to the specific legal issue going up on appeal. You can waive an issue, waive an argument, waive a legal theory. But you cannot waive the correct legal standard to be applied to the issue being appealed because it is not yours or the other side’s or even the judge’s to waive:
Covertech also contends that we should not determine the applicability of the McCarthy test in this case given TVM’s failure to raise it before the District Court and in its opening brief on appeal. We disagree. Notwithstanding TVM’s waiver, it is necessary and appropriate for us to take up the question of the proper legal test because it is a purely legal question, the resolution of which is in the public interest. See Huber v. Taylor, 469 F.3d 67, 74-75 (3d Cir. 2006).
See what the Third Circuit did there? It did good. If only district court decisions were always so carefully limned and the law so thoughtfully applied on appeals.
The lessons being over and we all of us being enlightened on the now-clearly-enunciated, virtually universal — or, as Pamela perhaps somewhat churlishly puts it, “standard” — test for determining goodwill as between a manufacturer and an exclusive distributor, it’s worth noting a final point from the world of multi-factor balancing. The Ninth Circuit, as explained by Covertech, managed to squeeze the six multi-prongy-testy factors into four in Sengoku Works Ltd. v. RMC Int’l, Ltd., 96 F.3d 1217, 1220 (9th Cir. 1996), “combin[ing] as one factor the first and second factors—asking “which party invented and first affixed the mark onto the product”—and omitt[ing] the sixth factor, which party paid for marketing.”
That’s some fancy factoring. After this brief chin-stroke, however, the Covertech court concludes that, notwithstanding the condensed standard suggested by the Ninth, “district courts’ analysis and appellate review will be facilitated by considering each of these factors distinctly.”
So the Third Circuit has got your goodwill factors right here, see. And it would appear, clearly, to be a good idea not to make them have to clarify them again.