Property, intangible

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The Promiscuous Licensor

I recently took the federal courts to task for what I submit is a disconnect between the statutory definition of “abandonment” and the “naked license” defense. My argument is that trademark owners are simply being punished for behavior that is seen as too lax, without any regard for whether that laxness has actually effected a loss of distinctiveness, which is what an “abandonment” under the Lanham Act requires. On cue, we have a state court opinion comparing and contrasting the naked license defense under state law, Michigan in this case, and federal law.

The fact pattern is what you would imagine when hearing the words “naked license.” Plaintiff Movie Mania Metro, Inc. first operated a video rental business in 1989. (As the court did, I will just refer to the “plaintiff,” since, referring to the plaintiff as “Movie Mania” when those words are used as a mark by multiple parties would confuse things even more.) The plaintiff registered (gigantic pdf alert) the trademark with the State of Michigan and then, according to the court, “acted as a promiscuous licensor.” In 1999 the plaintiff sold one location to another company, CLD, and allowed CLD to continue to use the mark for $1 in royalties per year. Further, “[T]he licensing agreement placed almost no restrictions on the use of the mark, nor did it contain standards on advertising or store operations, or include any requirements related to the rental or sale of merchandise.”

In 2005 CLD sold the store to Adnan Samona. Samona asked the plaintiff if it could continue to use the name, which the plaintiff allowed without requiring any license agreement at all. In 2006 and 2007 Samona opened more stores with the “Movie Mania” name and the plaintiff imposed no restrictions on use of the mark. By the end of 2007 there were six Movie Mania stores, four owned by Samona and two by plaintiff. The plaintiff’s state trademark registration also expired in 2006.

In 2010 Samona closed one store and sold the rest of the business assets to the defendants. Defendant Zielke asked the plaintiff for permission to use the Movie Mania mark, but the plaintiff decided now was the time to demand a licensing agreement. The defendants refused and we have a trademark lawsuit.

The Michigan Court of Appeals considered the naked license defense under both federal and state law. We start with a bit of history:

Because naked licensing of a mark destroys the mark’s ability to serve as a source identifier for consumers—in other words, destroys the mark’s ability to function as a trademark—state courts held at common law that plaintiffs who engaged in naked licensing could not prevail in trademark-infringement actions against defendants who used the mark plaintiff nakedly licensed. In trademark-law terms, a mark that is the subject of naked licensing is not “distinctive,” and thus not a valid trademark that is properly protectable under trademark law.

But then we have the passage of the Lanham Act in 1946. The court, absolutely wrongly, suggests that the common law standard survived under the Lanham Act until 1988, when the Trademark Law Revision Act was passed, at which point “Congress revised 15 USC §1127(2) and codified the concept of naked licensing in a specific context: ‘abandonment.’” Well, no, the definition of abandonment on which the court relies was in the original Lanham Act of 1946 in largely similar language. NB, however, that the court’s misreading is understandable: early post-Lanham Act naked licensing opinions simply used the common law standard for naked licensing without a firm fix on how it all fit into the new Lanham Act.

But the point of the exercise is that the naked licensing defense has different statutory bases under federal and state law. Under federal law, the basis for the naked license defense is abandonment, where “any course of conduct of the owner, including acts of omission as well as commission, causes the mark to … lose its significance as a mark.” 15 U.S.C. § 1127(2). But Michigan state law doesn’t have this language. The only definition of abandonment in the Michigan Trademark Act is where the use has been discontinued with an intent not to resume use (the equivalent to the first definition of abandonment under the Lanham Act, for those of you keeping score).

So, rather than a question of abandonment, under the Michigan Trademark Law naked licensing is a question of validity, an element of the plaintiff’s case-in-chief. Here, “defendants have offered convincing evidence—plaintiff’s naked licensing of the ‘Movie Mania’ mark— that ‘Movie Mania’ is not ‘distinctive’ and thus not valid”:

Because plaintiff’s licensing arrangements placed little or no control or restrictions on the business operations of its licensees, it was impossible for consumers to use the “Movie Mania” mark to distinguish the videos and other merchandise on offer as coming from a particular source. Videos rented at Samona’s locations might have been of completely different quality or type than those on hand at plaintiff’s locations, and consumers had no ability, on the basis of the “Movie Mania” mark alone, to tell that the videos came from two separate providers. Accordingly, “Movie Mania” cannot be a valid mark because it is not distinctive, and thus does not function as a trademark: the mark does not “tell shoppers what to expect—and whom to blame if a given outlet falls short.”

But as the court points out, we get to the same place whether it is characterized as abandonment or lack of distinctiveness:

[L]abeling naked licensing as “abandonment” of a mark is simply another way of saying that naked licensing renders a trademark not valid. In each classification, the trademark holder’s conduct—uncontrolled licensing—causes the mark to lose its ability to function as a source identifier to consumers. Stated another way, naked licensing causes the trademark to lose all significance as a trademark. Calling the trademark “abandoned,” as 15 USC § 1127(2) does, or focusing on the mark’s validity, as the earlier cases did, are thus two ways of describing the same concept, and both mandate the same result….

Movie Mania Metro, Inc. v. GZ DVD’s Inc., No. 311723 (Mich. Ct. App. Sept. 9, 2014).

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One response to “The Promiscuous Licensor”

  1. […] matter is not without controversy. In this well-reasoned post, trademark blogger Pamela Chestek states, “My argument is that trademark owners are simply […]

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