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, shuttershadesonline.com, 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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1 Response to Court throws shade on TM claimant’s naked licensing

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