Trademark Infringement Case Demonstrates Need for Licensing Agreements

A recent trademark infringement case highlights the need for small businesses that are manufacturers to have iron-clad trademark licensing agreements with their distributors. Similar to situations involving copyright ownership in the work product of graphic designers hired to create websites or logos, you cannot assume that you, as a manufacturer, own the trademarks associated with your goods, as Covertech Fabricating, Inc. v. TVM Building Products, Inc. shows. The case dealt with the question on appeal of whether the manufacturer, or the distributor of the manufacturer’s goods, was the rightful owner of unregistered trademarks.

Trademark rights accrue either through registration or actual use without registration. In the U.S., the former can be based on actual use or an intent-to-use, while the latter must be based on actual use in commerce, known as “common law trademark” rights. Without the benefit of a registration date, common law trademark ownership is generally determined by the principle of “first-in-time, first-in-right,” or the “first-use” test.

The Covertech court noted that the “often exclusive and noncompetitive manufacturer-distributor relationship” was an “imperfect fit” for the traditional “first use” test, which was applied by the district court. In this situation, the distributor would be the first party actually using the mark in commerce, because manufacturers relying on distributors are not generally engaged in marketing, advertising, and selling products. To account for these situations, the court looked to the McCarthy test, under which six factors are considered for determining who owns the trademark, and who is liable for trademark infringement.

The threshold premise of the McCarthy test is, most importantly, a rebuttable presumption that the manufacturer is the trademark owner. To rebut the presumption, the distributor must have the balance of the six factors in its favor as determined by the trier of fact. The six factors are:

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. To which party did customers look as standing behind the goods,e.g., which party received complaints for defects and made appropriate replacement or refund; and
6. Which party paid for advertising and promotion of the trademarked product.

The court concluded that on the balance, Covertech the manufacturer was the rightful owner of the trademark. Although the third factor was essentially a wash because both parties’ names appeared on the product bearing the mark, the court left undisturbed the district court’s findings that Covertech created the mark initially and was the party affixing labels with the mark on the products. The fourth and fifth factors both tipped in Covertech’s favor because it was the party guaranteeing the quality of the goods and the products’ warranties. The only factor in TVM’s favor was the sixth, because they paid for advertising and promotion of the goods using the mark.

The case is also instructive because it shows how far things can run amok if there is no written agreement that accounts for trademark ownership. TVM, despite a verbal contract under which it was obliged to refrain from selling other manufacturers’ goods, nevertheless did so and sold those goods under Covertech’s trademarks. This practice continued for years both during the life of the oral agreement and, for purposes of infringement, after it as well. And to add insult to injury, TVM attempted to register one of Covertech’s marks at the USPTO, even though Covertech registered the same mark with the Canadian trademark office.

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