In 1998, then 4-year-old Kevin Lou was severely injured in the PRC by an escalator made and sold by China Tianjin Otis Elevator Company, Ltd. (CTOEC), under license from the defendant, Otis Elevator Company (Otis). After trial, a jury returned a $3.35 million verdict for Lou, plus $3.3 million in prejudgment interest. Based on the evidence, the jury could have found the following: CTOEC is a joint venture with Otis and two Chinese companies for manufacturing in China elevators and escalators pursuant to Otis design standards and bearing the Otis trademark. Otis entered into a trademark license agreement and a technical cooperation agreement with CTOEC, allowing CTOEC to use the Otis trademark within China and furnishing CTOEC with Otis’s know-how, including a broad range of technical and managerial support. The escalator that caused Lou’s injuries was made by CTOEC. “It prominently bore the Otis trademark … and the escalator bore no other trade name or mark.”
The question was the applicability of the Restatement (Third) of Torts § 14, comment d, which is the current version of the “apparent manufacturer doctrine.” Liability may attach to someone who “puts out” a product. That could be read to require participation in the distribution or supply chain, but comment d to the Second Restatement §400, the parent of the Third Restatement’s §14, says that an actor “puts out a chattel as his own product” when it appears to be the manufacturer. Comment d goes on to explain that “one puts out a chattel as his own product when he puts it out under his name or affixes to it his trade name or trademark. When such identification is referred to on the label as an indication of the quality or wholesomeness of the chattel, there is an added emphasis that the user can rely upon the reputation of the person so identified.”
By the time of the Third Restatement, a majority of jurisdictions had recognized the rule of §400. There are three categories of cases: (1) a trademark licensor can be held liable as an apparent manufacturer if it exercised substantial control over the production of the product; (2) a trademark licensor may be held liable as an apparent manufacturer, despite having had little or no participation in the design or manufacture of a product, because of the likelihood that buyers or users of the product would rely on the trademark as an assurance of the product's quality; and (3) cases departing from (2) and declining to hold licensors liable where they had little or no involvement in design or manufacture. The court noted that the Lanham Act imposes quality control obligations on licensors, but courts generally have declined to base liability as an apparent manufacturer solely on the theory that trademark law requires supervision.
Against this background, comment d to §14 of the Third Restatement says: “Trademark licensors are liable for harm caused by defective products distributed under the licensor's trademark or logo when they participate substantially in the design, manufacture, or distribution of the licensee's products. In these circumstances they are treated as sellers of the products bearing their trademarks.”
The court held that this is not an unwarranted extension of the apparent manufacturer doctrine, but rather resolves the inconsistency between categories (2) and (3) based on the amount of involvement in the design or manufacture of the product. (I’d be happier with sticking strongly with (2), because the licensor should have to take the bitter with the sweet. The licensor obviously wants consumers to rely on the trademark, but then doesn’t want to take responsibility for the flaws of the licensee. It’s a natural impulse to want to externalize risk and internalize reward, but that doesn’t mean the law has to support that impulse.)
But there was still the question of whether Massachusetts should follow comment d. Until this case, no reported Massachusetts case had applied the apparent manufacturer doctrine to an entity outside the distribution chain. The court was persuaded, however, by cases from other jurisdictions which had done so. Thus, there was no error in the trial court’s instruction that a nonseller trademark licensor who participates substantially in the design, manufacture, or distribution of the licensee's products may be held liable under Massachusetts law as an apparent manufacturer. The instruction included the following language: “Substantial participation means participation and some importance in the design, manufacture, or distribution of the products bearing the corporation's mark as opposed to participation in merely minor, incidental, or trivial respects.” This result doesn’t ignore the separate corporate entities of the various entities involved; rather, the licensor is held liable as a result of its own role in placing a dangerous product into the stream of commerce.
The prejudgment interest award was also upheld as proper under Massachusetts law.