The Flynt family, of HUSTLER fame, has been embroiled for years in several lawsuits over the ownership of the business and use of the HUSTLER mark. As you might expect for a business based on pornography, the corporate form was ever-changinga “morass” as described by the court—as the family tried to limit its liability, and corporate formalities were not always strictly observed.
An earlier decision in the lawsuit held that brothers Larry and Jimmy did not have a partnership and instead Larry was the sole owner of the Hustler business. The instant decision is one that addresses a likelihood of confusion claim for Jimmy’s use of the HUSTLER mark for a store in Cincinnati.
There was “no dispute” that Larry and corporations that he controlled owned the registered trademark HUSTLER, originally for the magazine and later for many other goods and services. Jimmy wasn’t helped by his testimony in an earlier divorce proceeding (in an effort to avoid paying more alimony) that “Hustler is Larry Flynt, you know.” But Jimmy had opened the first store that used the HUSTLER mark, Hustler News and Gifts in Cincinnati, and was president of Hustler Entertainment, Inc. (“HEI”), the operating company for west coast “Hustler Hollywood” stores. Hustler News & Gifts originally paid no license for the use of the mark, but a “Hustler Hollywood” store in Monroe, Ohio had a license agreement and was paying licensing fees to HEI. In 2004 the successor to Hustler News & Gifts, Hustler Cincinnati, started paying licensing fees, although only an unsigned copy of a license agreement was produced.
In 2007 the family had a falling out—Jimmy was no longer president of HEI and Larry fired Jimmy’s sons from the business. Jimmy stopped paying licensing fees but nevertheless claimed a right to use the HUSTLER mark for the Hustler Cincinnati store, arguing that as senior user he was the owner of the HUSTLER mark for stores, or that at most the mark was nakedly licensed to him. Larry retorted that licensee estoppel precluded Jimmy’s naked license defense.
Jimmy was entirely unsuccessful. The most notable precept to take from the case is that implied license is not only a defensive weapon, where it is most commonly used, but an offensive one as well. Jimmy’s use was not on his own behalf, but as licensee to Larry:
|Larry and Jimmy indisputably entered into an implied licensing arrangement by their conduct. Jimmy may have initially used the “Hustler” mark for [Hustler News and Gifts] and Hustler Cincinnati with Larry’s implicit permission and for free. But, whatever their original arrangement, it changed by mutual consent and without protest when Jimmy acquiesced with Larry’s wishes, and restructured the relationship between Hustler Cincinnati and [parent company] LFP. Thereafter, Hustler Cincinnati paid licensing fees for years to LFP, uninterrupted and without protest, until family dynamics soured their relationship and Jimmy refused to pay.
The unsigned licensing agreement and the parties’ objective conduct demonstrate that Hustler Cincinnati operated just like the Monroe store arrangement. The proceeds from these highly successful southern Ohio stores flowed back to LFP largely in the form of licensing fees.
Jimmy argued that the licenses to the Hustler Cincinnati store was “naked” for lack of quality control. The court expediently disposed of the claim in two ways. First, it noted that in some cases a licensor’s close relationship to the licensee is enough to ensure quality. Here, the court found that Larry’s daughter’s, Jimmy’s, and Jimmy’s sons’ involvement in the store operations, combined with the lack of any allegation that quality had slipped, were sufficient control on Larry’s part. Second,
|the purpose of the control requirement is the protection of the public because where a licensor does not maintain control of his licensees in their use of the license, the public may be damaged by products that, despite their trademark, do not have the normal quality of such goods. Neither party suggests the quality of the Hustler goods was changed in any way when they were sold at the Hustler Cincinnati location as opposed to the other Hustler retail stores around the country.
There was therefore no naked license.
Further, though, Jimmy couldn’t raise a naked license defense at all under the doctrine of licensee estoppel. Jimmy’s license, even though implied, was an acknowledgement that Larry owned the mark and therefore Jimmy did not. As a result Jimmy is precluded from now making a contrary argument. Jimmy tried to claim that licensee estoppel only applies to “written, clear and signed licensing agreements.” Not so, says the court:
|By entering into the license agreement, the licensee recognizes the licensor’s ownership of the mark and by-implication, covenants not to challenge the licensor’s rights. This implied covenant also estops the licensee from claiming that the licensor abandoned his rights by failing to exercise adequate quality control during the terms of the license.
And further, a licensee claiming that its own license is a naked license essentially seeks to benefit from its own misfeasance. By asserting a naked licensing defense, the licensee contends that the licensed trademark or trade name has lost its significance as a source of origin because the licensor has failed to police the licensee’s operations. Thus, by relying on its own ability to offer inferior or nonuniform goods and services under the trademark or trade name, the licensee seeks to free itself of the constraints imposed by the licensor’s ownership of the trademark or trade name. Not surprisingly, the Restatement (Third) of Unfair Competition observes that the case for applying licensee estoppel is strongest in such a case.
[Italics in original.] Jimmy will be enjoined from using the HUSTLER mark for stores.
L.F.P.IP., Inc. v. Hustler Cincinnati, Inc., Civ. No. 1:09cv0913 (WOB) (S.D. Ohio Oct. 20, 2011).
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