• Mind Your Licenses

    by  • December 27, 2012 • trademark

    Mind your licenses – if you want the mark to remain valid, it behooves you to comply with the terms of the license.

    Non-party Ansell Incorporated, later called Ansell Healthcare Products (Ansell), owned the mark CONDOM SENSE for prophylactics, claiming first use in 1988. In 1992, it filed an intent-to-use application for the mark CONDOM SENSE for retail store services. Around the same time, it learned that a store was calling itself Condom Sense, so it threatened the store with an infringement suit and then granted a license to plaintiff Condom Sense, Inc. (CSI – link fairly safe for work) allowing the store to use the mark. Thereafter Ansell filed a Statement of Use based on CSI’s use of the mark and the registration issued.

    It was a five year license, expiring in 1999 unless CSI gave written notice of its intent to renew and was not in default. CSI could use the mark in only two locations within the Dallas metropolitan area, could not assign the agreement, and could not sublicense the mark.

    CSI missed its first royalty payment and essentially thereafter ignored the fact that it didn’t actually own the mark.* In 1997 it sold its store to defendant Mike Edwards and as part of the transaction licensed the CONDOM SENSE mark to Edwards. CSI also licensed other stores to use the CONDOM SENSE mark. Edwards also started opening more stores, in competition with CSI, claiming that his license agreement with CSI allowed him to do so.

    By the third quarter of 1996 Ansell gave up on any royalties from CSI and CSI never renewed the license. In 2001 Ansell filed a Declaration of Continued Use in order to maintain the trademark registration, even though Ansell was not itself using the mark for retail store services and CSI had been the only licensee.

    In 2003 CSI finally sued Edwards and the Edwards licensees. CSI’s lawyer informed Ansell of the suit, which was the first notice to Ansell that CSI was licensing the CONDOM SENSE mark. Ansell ended up assigning the mark to CSI for $4,000 — the trademark administrator for Ansell said it was a “no brainer” because Ansell was not using the mark; it was “either sell it or let it go.” In 2005, after CSI acquired the registration, it non-suited the 2003 lawsuit (no reason given by the court), then two years later filed a petition for a temporary retaining order and an injunction against Edwards.

    So who owns the mark?

    It is a thorough state appeals court opinion and I’ll only cover parts of it. The appeals court agreed with the the district court’s conclusion that Ansell had abandoned the trademark. The question turned on whether the CSI license had expired or not:

    It bears noting that the question of whether the license agreement expired is crucial to the determination of whether Ansell abandoned the mark before the February 2005 assignment. That is because the parties agree that Ansell’s rights in the mark can be maintained through the use by a licensee and that Ansell relied on its licensee’s use to support its registration of the mark for retail store services. The parties also agree CSI was the only entity to which Ansell granted a license to use the mark and that appellants have used the mark continuously since the first Condom Sense retail location opened in the early 1990s. So, if the license agreement remained in force, Ansell did not abandon the mark. But if the license agreement expired as the trial court found, then Ansell’s use of the mark ceased.

    The court found that the license agreement had expired by its terms; there was no notice of renewal and CSI had been in default on payments.

    The court correctly went further, though, since a trademark license can be oral or implied. CSI claimed that various acts extended the license; it continued to buy products from Ansell and claimed to have an oral extension. There was also a handwritten note, presumably written by someone at Ansell, to contact CSI about the Declaration of Continued Use, which CSI claimed was evidence of its license. But Ansell’s behavior wasn’t that of a licensor; the trademark administrators’ testimony was that the CSI was in default, that Ansell wouldn’t have extended the license orally, and the more recent administrator wasn’t even aware there had been a license until contacted by CSI about the litigation. The evidence supported the trial court’s conclusion that there was no license and therefore the mark was abandoned through non-use.

    So if Ansell abandoned the mark, who owns it, and as of when? If we assume that CSI could thereafter acquire the trademark based on its own use, when would that have happened? The opinion offers no help, since the court didn’t decide when Ansell had abandoned the mark, only that it was abandoned. CSI has state registrations that it obtained in 2005, after the suit was filed. It almost lost these, at least it did in the trial court, but the appeals court reversed on technicality. No mention of common law rights.

    Then we move on to lesson number 2 from the case. Even assuming CSI owned trademark rights to CONDOM SENSE independent from those flowing from Ansell, CSI’s loose licensing practices gave the defendants an unclean hands defense. CSI had licensed a trademark that it had no right to license, since at the time of CSI’s license grant to Edwards Ansell still owned the mark:

    When Kahn [owner of CSI] sold the 3609 Greenville location to Edwards, he had already entered into the license agreement with Ansell. That agreement did not permit Kahn or CSI to assign or sub-license the mark. Acting on his own, Kahn sold another party, Edwards, the rights CSI acquired in the license agreement. But unless a licensor explicitly grants its licensee the right to sub-license the licensed mark, any putative sub-license is invalid as a matter of law….

    Then, based on the rights he bought from Kahn, Edwards sold the right to use the name to the Smiths. Both Edwards and the Smiths have expanded on those rights. Thus, the original sale and each subsequent sale were all based on something that nobody had a right to do in the first place. The trial court specifically found the license agreement did not provide CSI with the ability to grant sublicenses for the use of the Condom Sense name or mark and that Ansell never gave CSI permission to assign its rights as licensee under the license agreement.

    So CSI struck out twice because of its failure to comply with the terms of its original license. It’s acquisition of the Ansell federal registration was worthless because its own breach of the license — noncompliance with the royalty provisions and failure to renewal — caused an abandonment of the mark before the assignment. CSI’s noncompliance with the prohibition against sublicensing meant that its own attempt to license was unenforceable. Abandoning the Ansell license may have seemed like a good idea in the short run, but it turns out not to have been.

    Condom Sense, Inc. v. Alshalabi, No. 05-10-01024-CV (Tex. App. Dec. 21, 2012)

    * The court doesn’t say, but since CSI was using the mark before it entered into the Ansell license, and only licensed up after being threatened, it was no doubt a reluctant licensee. In my experience, these types of licenses are difficult because the unwilling licensee doesn’t really accept the role of licensee and instead still thinks of itself as independent of the licensor, just with some pesky document to get the other party out of its hair. So it doesn’t surprise me that CSI acted as the trademark owner; in its mind it was.

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