The Public Policy Argument Against Trademark Licensee Estoppel and Naked Licensing.

• Author: Astrachan, James B.

TABLE OF CONTENTS ABSTRACT 927 TABLE OF CONTENTS 928 I. INTRODUCTION 929 II. TRADEMARKS, GENERALLY SPEAKING 934 A. Infringement of a Trademark 936 B. Remedies for Infringement 938 II. LICENSING THE TRADEMARK 939 A. Licensee Estoppel 941 B. True Competition in Ideas Which do not Merit Patent 944 Protection III. QUALITY CONTROL AND THE TRADEMARK LICENSE 948 A. Why is Quality Control Essential? 950 B. The Consumers' Interest in Licensor's Quality Control 952 C. Naked Licensing Results in Abandonment of Trademark Rights 953 IV. TRADEMARK LICENSEE ESTOPPEL 955 A. The Doctrine of Licensee Estoppel is Against Public 958 Policy and Should be Generally Abandoned V. LICENSEE ESTOPPEL SHOULD NOT BAR A LICENSEE FROM 961 CHALLENGING A LICENSOR'S MARK ON THE GROUNDS OF NAKED LICENSING VI. CONCLUSION 963 I. INTRODUCTION

This Article examines whether a licensee of a trademark (1) should be estopped from challenging its licensor's ownership of the mark, or the enforceability or validity of the mark, when that licensor has licensed its mark but has failed to impose quality control standards or, having imposed such standards, has failed to monitor the quality of goods or services sold by the licensee under the mark. (2)

Through a comparison of the United States Supreme Court's decision in Lear v. Adkins, holding that a licensee of a patent should not be estopped on public policy grounds from challenging the validity of its licensor's patent, (3) to cases barring trademark licensees from challenging their licensors on the grounds of licensee estoppel, this Article posits that the consuming public benefits from the proper use of trademarks and that a strong public policy exists to permit a trademark licensee to challenge the validity or ownership of its licensor's mark under certain conditions - particularly where the licensor has engaged in naked licensing. (4) This is because uncontrolled, or "naked," licensing may result in the trademark ceasing to function as a symbol of quality and source because the licensor has abandoned the mark and its exclusive rights to use the mark. (5) Consider, for example, the family driving cross country, stopping at McDonald's restaurants for meals. When burgers are sold under the McDonald's trademark, the family has the right to expect that the taste, quality and size of the product will not vary, whether bought in Maryland, Missouri or California.

Trademarks can be extremely valuable. A valuation expert engaged by Forbes Magazine in 2011 opined on the values of well-known marks owned by some American companies. (6) At the time, the APPLE mark was valued at $29.5 billion; in 2019, its value reached $205.5 billion. (7) In 2011, the GOOGLE mark was valued at $44.3 billion; by 2019, its value was $167.7 billion. (8)

While patents and copyrights have life spans established by federal statutes, (9) trademarks generally do not and can therefore exist as a proper designator of the source of goods and services for decades or even centuries, as long as rights in the mark are not lost by some omission or commission on the part of the mark's owner, such as allowing the mark to be abandoned or the mark becoming the generic name for the goods or services sold under it. (10) The world's oldest recognized trademark is BASS, a beer mark that was registered with Great Britain's Intellectual Property Office in 1876 and remains valid to this day. (11) Another beer mark, STELLA ARTOIS, has roots to 1366 and the Den Hoorn brewery, in Leuven, Belgium, which adopted the mark ARTOIS in honor of its early 18th century brew master. The STELLA ARTOIS mark, first used in 1926 as a seasonal Christmas beer, was registered with the United States Patent and Trademark Office (the "USPTO") in 1981. (12) These trademarks are intended to convey to a consumer that no matter where in the world one of these beers is purchased and consumed it will be of consistent taste and quality with any other beer so branded and dispensed anywhere else in the world. Imagine the diversity of quality and taste if every licensee of STELLA ARTOIS was permitted to employ its own recipe in the brewing of this beer.

The Lanham Act (the "Act") (13) defines a "trademark" as:

any word, name, symbol, or device, or any combination thereof-used by a person, or which a person has a bona fide intention to use in commerce and applies to register on the principal register established by this Act, to identify and distinguish his or her goods, including a unique product, from those manufactured or sold by others and to indicate the source of the goods, even if that source is unknown. (14) A trademark can be a "word, name, symbol, or device, or any combination" of the forgoing. (15) A trademark may be based on a shape, a product configuration, (16) or even a color. (17) At least one court has held that a trademark is not a property right; rather, it is an identifier of source which ostensibly provides more benefit to the consuming public than to the mark's owner. (18) While a trademark's purpose is to indicate the source of the goods, its protection is based upon a mark's informative value to consumers. (19)

Although a trademark's life can span centuries, a trademark does not possess eternal life. Abandonment is to a trademark what kryptonite is to Superman - which is to say that abandonment results in an owner's loss of all rights associated with the mark. A mark shall be deemed abandoned if either of the following occurs:

When its use has been discontinued with the intent not to resume such use. Intent not to resume may be inferred from circumstances. Nonuse for 3 consecutive years shall be prima facie evidence of abandonment. "Use" of a mark means the bona fide use of such mark made in the ordinary course of trade, and not made merely to reserve a right in a mark. When any course of conduct of the owner, including acts of omission as well as commission, causes the mark to become the generic name for the goods or services on or in connection with which it is used or otherwise to lose its significance as a mark. Purchaser motivation shall not be a test for determining abandonment under this paragraph. (20) A mark's owner, then, can lose its right to exclusive use of the mark if it abandons use of the mark without intent to resume use in a reasonable time frame. (21) The mark's owner can also lose its exclusive rights in the mark through its own omissions or commissions, where the result of the failure to act or the actions taken is that the mark loses its ability to designate a single source of the goods or services that consumers associate with the mark. (22) One of the contexts in which abandonment by omission is often claimed, and which is the subject of this Article, is when the owner of a mark has licensed its mark to a third party and has failed to exert quality control over the licensee's use of the mark. (23)

The stakes are high when a party claims a mark has been abandoned. Once abandoned, the mark's owner has lost the exclusive use of the mark, the mark is available for anyone's use, and priority of use will determine who has superior rights. (24) A mark can lose its significance as a source identifier due to the manner in which the mark's owner (the licensor) licensed a third party (the licensee) to use the mark. (25) In part, this comes about because the consumer of the trademarked goods has the right to expect that all goods branded with the mark will be of equal quality, whether made of steel or ground beef, and regardless of who actually produced or sold those goods. If a hamburger is branded MCDONALD'S, it should taste the same and be made from the same recipe whether purchased at a MCDONALD'S restaurant in Washington State or Washington, D.C.

Two examples of a licensor's conduct that can result in the loss of a mark are assignments in gross and naked licensing. (26) Assignments in gross occur when the mark's owner assigns use of the mark to a licensee unassociated with the licensor's product. (27) Naked licensing by the mark's owner, on the other hand, occurs when the licensor "does not exercise adequate control over its licensee's use of a licensed trademark such that the trademark may no longer represent the quality of a product or service the consumer has come to expect." (28) A license that fails to restrict or control the quality of goods or services imparts a finding of naked licensing. (29) Naked licensing can arise even where the license agreement requires adherence to the licensor's standards of quality, but the licensor fails to enforce the terms it has imposed on a licensee for trademark use. (30) A licensor can, of course, engage in naked licensing by failing to impose terms for the licensee's use of the mark. (31)

Licensors sue their licensees for trademark infringement, (32) and some licensees attempt to raise the affirmative defense of abandonment, often because of the licensor's actions or the licensor's failure to act to protect the integrity of its mark, including the licensor's naked licensing. (33) The basis for the claim of abandonment by naked licensing is that when the mark is used on goods of varying quality or uneven kind, consumers can be deceived and misled and the mark will cease to serve as an informational device or a source of origin. (34)

In most situations where the licensor is challenged by its licensee on the basis of alleged naked licensing, the licensor counters that a written licensing agreement between the licensor and the licensee bars the licensee from asserting such a claim, or, absent such a prohibition, that the equitable doctrine of licensee estoppel bars the licensee from challenging the licensor's ownership of the disputed mark. (35)

This Article examines the equitable doctrine of licensee estoppel and argues that a trademark licensee should be permitted to challenge ownership of its licensor's mark on the basis that the licensor has engaged in conduct that has eroded the licensor's...