Manufacturer vs. distributor: Who owns that unregistered trademark?

October 12, 2017
Patterson Thuente IP

Manufacturers that let their distributors use their unregistered trademarks may later find themselves in a fight over the marks’ ownership. This article highlights how one federal court of appeals recently addressed such ownership disputes and adopted a different test for determining ownership of common law trademarks where there is no agreement addressing the issue.

Companies clash over marks

Covertech Fabricating, Inc., manufactures protective packaging and reflective insulation. It sells numerous products under the umbrella of its lucrative rFOIL brand. In 1998, Covertech entered into a verbal agreement with TVM Building Products, Inc., that designated TVM as the exclusive marketer and distributor of rFOIL products in the United States. TVM agreed to refrain from selling competitors’ products.

Covertech terminated the agreement in October 2007, partly because it had discovered that TVM had been purchasing comparable product from another manufacturer and passing it off as Covertech’s. TVM assured Covertech that its labeling indiscretions were isolated incidents caused by errors in filling its orders, and the companies entered a new agreement not long after. That agreement was subsequently terminated, too.

Nonetheless, TVM continued to market products using the rFOIL brand names. Covertech ultimately sued TVM. The trial court ruled for Covertech on its trademark claims, and TVM appealed.

 

Court adopts new ownership test

The rFOIL brand comprises several products, including products under the ULTRA NT RADIANT BARRIER, which isn’t registered. On appeal, TVM argued that it, not Covertech, owned the ULTRA mark. In assessing ownership of the mark the trial court relied on the “first use test,” which determines ownership by asking which party was the first to use an unregistered trademark in commerce.

The Third Circuit Court of Appeals acknowledged that the first use test is generally appropriate for unregistered trademarks but found an “imperfect fit” when it comes to the “often exclusive and noncompetitive manufacturer-distributor relationship.” In that circumstance, ownership rights would go to the distributor in many cases simply because the distributor made the initial sale of goods bearing the mark to the public. Thus, the court said, a different test is necessary when ownership isn’t decided in advance.

On appeal, the Third Circuit held that the proper test in such circumstances is the “McCarthy test” (named after the legal treatise where it was first laid out). Under that test, the manufacturer is the presumptive trademark owner. The distributor can rebut that presumption using a balancing test that considers the following six factors:

  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. Which party customers looked to as standing behind the goods (for example, the party that received complaints about defects and made appropriate replacements or refunds), and
  6. Which party paid for advertising and promotion of the trademarked product.

According to the Third Circuit, this approach allows courts to conduct a thorough, individualized analysis of each case that accounts for the unique attributes of the manufacturer-distributor relationship.

Applying the test to the Covertech-TVM relationship, the court found that the first, second, fourth and fifth factors favored Covertech. The third factor was neutral, and the last factor favored TVM. The court therefore held that the six factors in the McCarthy test weighed in favor of Covertech. The trial court’s conclusion that Covertech owned the mark, while based on the incorrect test, was upheld.

Better protection for manufacturers

The court’s adoption of the McCarthy test is welcome news for manufacturers with common law trademarks. However, manufacturers would be wise to expressly address mark ownership in their agreements with distributors. 

Covertech Fabricating, Inc. v. TVM Building Products, Inc., No. 15-3893, April 18, 2017 (3d Cir.)

Court rejects infringer’s “acquiescence” defense

The defendant in Covertech Fabricating, Inc. v. TVM Building Products, Inc., also argued that Covertech’s claims should have been barred due to acquiescence. An alleged infringer can assert the defense when the trademark owner conveys implied consent to the defendant’s use of a mark.

In this type of defense, the court considers whether:

  • The owner actively indicated that it wouldn’t assert a right,
  • The owner’s delay between the indication and its assertion of the right was excusable, and
  • The delay caused the defendant undue prejudice (meaning the loss of legal rights).

Once the use becomes infringing, the relevant date as far as the delay is when the owner either knew — or should have known — of the existence of a provable infringement claim.

These considerations led the appellate court to conclude that Covertech didn’t acquiesce to TVM’s infringement. Covertech never expressly or impliedly authorized the infringement, and TVM didn’t show that the delay in filing the lawsuit was inexcusable or unduly prejudicial. The court upheld the trial court’s ruling that Covertech’s delay in initiating its lawsuit didn’t demonstrate implied consent.

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