Third Circuit Rules “McCarthy Test” Determines Ownership of Unregistered Trademarks

The Third Circuit has held that where a manufacturer and its exclusive distributor have no written contract designating which party owns an unregistered trademark, the “McCarthy test,” rather than the “first use test,” should be used to decide ownership.

Covertech Fabricating, Inc. is a Canadian manufacturer of protective packaging and reflective insulation.  TVM Building Products, Inc. distributes specialty building materials.  For over fifteen years, Covertech sold numerous reflective insulation products under its rFOIL mark, which is registered in the United States.  The rFOIL brands include ULTRA NT RADIANT BARRIER and ULTRA CONCRETE UNDERPAD.  Covertech registered the ULTRA mark in Canada in 2010.    

In 1998, Covertech and TVM verbally agreed that TVM would be the exclusive marketer and distributor of Covertech’s rFOIL insulation products in the United States.  In return, TVM agreed to refrain from selling competitor products.  Covertech then terminated the agreement in late 2010/early 2011 and began selling directly into the United States after discovering that TVM had been purchasing comparable products from a rival manufacturer.  Nonetheless, TVM continued to market its products using rFOIL brand names, such as ULTRA CONCRETE UNDERPAD.  In 2011, TVM applied to register ULTRA at the USPTO.

Covertech filed suit in federal court.  Regarding ownership of the ULTRA mark, the  court ruled in favor of Covertech, relying on the “first use test,” which determines initial ownership by asking which party was the first to use an unregistered trademark in commerce.  TVM appealed.

Although the Third Circuit affirmed, it concluded that the “first use test” was the incorrect test to apply in the context of a manufacturer-distributor relationship.  In many such cases, the distributor makes the initial sale of goods bearing the mark to the public at the manufacturer’s direction.  The Court stated:  “To presume that in every case where ownership is not decided in advance, a distributor who makes the initial public sale thereby assumes the mark and the manufacturer cedes any claim to initial ownership would defy logic and common sense.”

Instead, the Court turned to a test propounded by Professor McCarthy.  In cases of manufacturer-distributor relationships where no contract exists, this test presumptively tips the ownership scales in favor of the manufacturer, but allows distributors to rebut that presumption through a multi-factor balancing test.  These factors include which party: (1) created the mark; (2) first affixed the mark to the goods sold; (3) appeared on the packaging and promotional materials in conjunction with the mark; (4) exercised control over the nature and quality of the goods; (5) received complaints for defects and made appropriate replacement or refund; and (6) paid for advertising and promotion of the product.  The Court noted that several other Circuits have endorsed some version of this test.

Applying the test, the weight of the McCarthy factors favored Covertech.  The Court noted, however, that “[e]ven if the balance was in equilibrium, such a result would be insufficient to overcome Covertech’s presumptive ownership of the ULTRA mark.”  Here, only the sixth factor favored TVM because it paid for advertising and promotion of the ULTRA product.  Factor three was neutral because promotional materials displayed both the Covertech and TVM logos in connection with the ULTRA mark.  All other factors favored Covertech because the record unequivocally showed that Covertech manufactured the product, handled labeling, bore responsibility for warranties, and had presented persuasive customer testimony that reflected the ULTRA products were associated with Covertech.

The case is Covertech Fabricating, Inc. v. TVM Bldg. Prods., Inc., Case No. 15-3893 (3d Cir.).