Authored by D. Brian Kacedon, John C. Paul, and Andrew J. Ra Jr.
Trademark law traditionally requires a trademark licensor to exercise sufficient quality control over a licensee that provides goods or services bearing the mark. Because a trademark is intended to denote to consumers what to expect from particular merchandise, it is expected that the trademark owner should ensure that its licensees meet that expectation. The failure to exercise such control can have severe consequences including the abandonment and loss of all rights in a mark. In Eva's Bridal Ltd. v. Halanick Enterprises, Inc.,1 No. 10-2863 (7th Cir. May 10, 2011), the Seventh Circuit reaffirmed this traditional view that failure to exercise control over the quality of goods or services results in abandonment of the mark.
Plaintiffs, Eva's Bridal Ltd. and Said Ghusein, owned the "Eva's Bridal" mark. The mark was first used in 1966 when Eva Sweis started a bridal shop called "Eva's Bridal" that sold wedding dresses. Sweis allowed her children to open shops under the same name, and the business eventually passed to Said and Nancy Ghusein. Said and Nancy continued the practice of licensing the "Eva's Bridal" name to relatives and agreed to sell a store to Defendants Nayef Ghusein and his corporation Halanick Enterprises. The license agreement required Nayef to pay $75,000 a year for the right to use the "Eva's Bridal" name and marks.
The license agreement expired in 2002, but Nayef continued to operate the store under the "Eva's Bridal" name without remitting a royalty. In 2007, Plaintiffs sued under the Lanham Act for using the "Eva's Bridal" mark without payment. The district court found that the license agreement did not require Defendants to operate the store in any particular way and did not give the licensor any power of supervision over how the business was conducted. Because Plaintiffs engaged in naked licensing—that is, allowing others to use the mark without exercising reasonable control over the nature and quality of the goods, services, or business on which the mark is used by the licensee—the district court dismissed the suit and concluded that Plaintiffs abandoned the "Eva's Bridal" mark and that Defendants could therefore use the mark without payment.
The Eva's Bridal Decision
On appeal, the Seventh Circuit affirmed the lower court's ruling that the "Eva's Bridal" mark had been abandoned and that Defendants could use the mark without payment. Plaintiffs argued that no quality control was needed because 1) they never doubted the high standards of Nayef and his firm and 2) Defendants sold dresses made by the same designers as other Eva's Bridal shops. The Seventh Circuit rejected the first argument that no control was needed as long as the business was "high quality." Rather, the Court stated that the control required for a trademark license is control sufficient to produce consistent quality. Because a trademark's function is to tell consumers what to expect, the licensor must ensure the consumer is satisfied by ensuring a repeatable experience.
The Court noted that the amount of control necessary varies from case to case and depends on the nature of the business and consumers' expectations. In this case, Plaintiffs did not retain any control, via the license agreement or course of performance. Because Plaintiffs exercised no control, a consumer who visited different Eva's Bridal shops may not have found a common ambience or means of doing business.
The Court also rejected the second argument that the presence of the same goods meant no quality control was required. The mere fact that the Defendants' shop carried the same dresses was insufficient to distinguish "Eva's Bridal" shops from any other bridal shop. The Court noted that the trademark would not be doing any work if identical dresses could be found in other stores and the Eva's Bridal shops were dissimilar except for the dresses that they carried. Since Plaintiffs exercised no control over the appearance, operations, or inventory of Defendants' business, the Seventh Circuit affirmed the findings of the district court that the mark was abandoned.
Strategy and Conclusion
This case reaffirms that trademark licensors must exercise control over the quality of the goods or services licensed under the mark to ensure that the quality is consistent with consumer expectations. The consequences of failing to exercise quality control are extremely severe and can result in abandonment of the mark and loss of all rights in the mark. Thus, any trademark license agreement must include provisions providing for some quality control by the licensor.
1 The Eva's Bridal decision: http://www.ca7.uscourts.gov/tmp/840OT7RN.pdf (link no longer active as of 5/1/2012).
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