Thursday, June 18, 2015

Court throws shade on TM claimant's naked licensing

Amscan Inc. v. Shutter Shades, Inc., No. 13-CV-1112 (S.D.N.Y. Apr. 30, 3015)
Plaintiff Party City is a party goods retailer, and plaintiff Amscan makes party goods that it distributes to many retail outlets, including Party City.  Defendant Shutter Shades sells eyewear and t-shirts on its website,, and defendant Wilkerson is SSI’s principal.  Sunglasses with slats over the eyes (“slotted sunglasses”) made a comeback in the summer of 2007 after Kanye West wore a pair in a music video and during a concert performance. After seeing this, Wilkerson decided to make replicas of them and filed an ITU for “Shutter Shades” for sunglasses. He also received a design patent for “Sunglasses Without Lenses but Having Six Horizontal Slats Crossing the Field of Vision of Each Eye.”  (What is up in design patent land?)

from the design patent

CTS, an eyewear distributor, opposed Wilkerson’s ITU, arguing that “shutter shades” was a generic term that had been used since as early as 1990 to refer to a particular type of sunglasses. In a 2009 settlement agreement, CTS agreed to withdraw its opposition and refrain from filing any future oppositions in exchange for a royalty-free license from Defendants to continue using the “Shutter Shades” trademark. The registration issued in late 2010, but Shutter Shades had already been sending demand letters to 25 companies selling slotted glasses claiming patent infringement.  Instead of demanding a cessation of sales, Wilkerson offered a license in many of these letters, and ended up with six agreements granting a license to the design patents and the trademark in return for royalty payments.
Shutter Shades also sent demand letters to the plaintiffs here, first in November 2010 and then in October 2012.  Rather than licensing, plaintiffs sued for a declaration of noninfringement and invalidity as to the design patent and a declaration of noninfringement, invalidity, and cancellation as to the trademark.  Defendants counterclaimed for trademark infringement.  Here, plaintiffs moved for and received summary judgment only on their trademark claims.
Shutter Shades abandoned its mark through naked licensing.  Trademark owners have a duty to exercise control and supervision over a licensee’s use of the mark. This protects the public from inconsistent quality, and in addition naked licensing may cause the mark to lose its source significance.  Because of the forfeiture of rights involved, showing naked licensing requires a “high burden of proof,” though the court declined to say whether that required clear and convincing evidence or merely a preponderance; the difference didn’t matter here.
Avoiding abandonment requires a licensor to exercise a “reasonable degree of supervision and control over licensees under the facts and circumstances of the particular case.”  Policing adequately to guarantee quality is key—the sort of supervision required is that which produces consistent quality.  If a licensor doesn’t play a “meaningful role” in holding its licensee’s products to a standard of quality, it will be found to have abandoned its mark.
Plaintiffs argued that defendants exercised no supervision whatsoever; defendants argued that they didn’t have to do anything because the products were so simple.  There were only six licensing agreements with formal terms, as well as the settlement with CTS. Wilkerson testified that he “speak[s] with [the] licensees frequently,” and his affidavit averred that the defendants “maintain contact with their licensees, are familiar with their licensees’ products, . . . have no complaints about their license[e]s’ product quality . . . [and] have indeed confirmed that their licensees’ products meet Defendants’ standards.”  No reasonable jury could find adequate policing.
First, the licenses gave defendants nothing but money: the agreements “do not permit them to dictate product specifications, monitor manufacturing, inspect product samples or otherwise control any aspect of the quality of the eyewear sold by their licensees under the ‘Shutter Shades’ mark.”  There were no specific terms about quality control.  One provision stating that the licensee shall “promote and sell the [glasses] in such a manner as it deems fit, in the sole discretion of [the licensee],” for example, deprived defendants of control.  Defendants also disclaimed liability for the licensee’s products and the licensee agreed to indemnify Defendants for any liabilities arising from the “workmanship or material.” This was a disclaimer, not a quality control provision.  The settlement agreement with CTS was even more permissive.  The other agreements licensed the trademark for use with “patent-related products” only, but the settlement agreement permitted CTS to use the mark with any type of product or service. The absence in any license of an express contractual right to police the licensees’ operations, while “not conclusive evidence of lack of control,” supported a finding of naked licensing.
Even without a contractual right to control quality, actual control through inspection or supervision could avoid naked licensing.  But on this record, defendants never supervised licensees’ operations or inspected their products.  A claim that Wilkerson spoke with licensees “frequently” didn’t concern product quality, and his vague and conclusory statement in an affidavit that Defendants have “confirmed that their licensees’ products meet Defendants’ standards” couldn’t create a triable issue of fact as to whether they ever ever inspected any of their licensees’ eyeglasses or supervised their manufacture. “Even were one to interpret ‘confirmed’ to mean ‘inspected’ (which I do not), a reasonable jury could still not find that Defendants played a ‘meaningful role,’ in the supervision of their licensees where Mr. Wilkerson failed to provide any details about the methods or frequency of such inspections.”
There was no record evidence of any standards of product quality, let alone that defendants tried to enforce those standards.  Reliance on licensees’ own quality control measures did not satisfy defendants’ duty of supervision.  Wilkerson stated that the indemnification provision gave him confidence because that meant that defendants “weren’t going to take on any claims that came from [the licensee’s] customers.” Though licensees might have had an incentive to engage in quality control to protect themselves from product liability, “Defendants could not justifiably rely on those measures for a different purpose – to produce slotted glasses of a quality consistent with their own (and those of the other licensees).”  Without “marching orders” from the trademark owner, the licensees had no way of keeping glasses sold under the mark consistent enough to protect the mark as a signifier of origin. 
Moreover, even if the indemnification provision/disclaimer had something to do with product quality, it didn’t have anything to do with consistent quality, just minimum quality.  “It is important to keep in mind that ‘quality control’ does not necessarily mean that the licensed goods or services must be of ‘high’ quality, but merely of equal quality, whether that quality is high, low or middle.” There was no evidence that Wilkerson was familiar with and relied upon the licensee’s own efforts to control quality, as had been the situation in other cases that had declined to find naked licensing as long as there was some sort of informal relationship.  The most that Wilkerson’s claims to be “familiar” with his licensees’ products did was show that he knew they made slotted sunglasses, not that he was familiar with their products’ quality or their quality control procedures.  There was no evidence of a “close working relationship” that might entitle them to rely on their licensees to produce glasses of a quality consistent with their own.  Instead, the record was one of minimal contact, limited almost entirely to royalty collection.
Finally, the court rejected defendants’ argument that they satisfied their control duty based on the simplicity of their product.  Defendants maintained that plastic novelty sunglasses are simple products with no moving parts, electronics, or machinery. While the extent of supervision required varies depending on “the facts and circumstances of the particular case,” including the nature of the product, there was still no supervision whatsoever.  Despite the simplicity of the product, there were still many relevant factors that could influence whether consumers believed that all glasses sold as “Shutter Shades” came from a single source, “including their exact design (including the number of slats and their positioning), their sizing and dimensions, the type of materials used (including their thickness, heft and ‘feel’), the selection of colors and patterns available, the type of hinge mechanism used and the appearance and placement of the trademark on the glasses.”  Defendants never exercised control over these or any other characteristics, so they couldn’t have participated in managing consumer expectations.
Abandonment was grounds for cancellation as well as for a declaration that plaintiffs didn’t infringe the mark.  The mark had been abandoned since at least 2009, when defendants granted the naked licenses, and plaintiffs only began selling their version in 2010.

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