September 2010 Issue

Civil Cases

Lou v. Otis Elevator Co.,
77 Mass. App. Ct. 571 (Sept. 3, 2010)

ABSTRACT
In a question of first impression, a three-judge panel for the Massachusetts Appeals Court affirmed a multimillion-dollar jury verdict against Otis Elevator Co. for liability as a trademark licensor under the “apparent manufacturer” doctrine for injuries resulting from an escalator accident in China, despite the fact that defendant did not sell or manufacture the escalator.  The court held that there was ample evidence for a jury to find that defendant “participated substantially in the design or manufacture of the escalator,” as required under the court’s interpretation of the apparent manufacturer doctrine, by licensing its trademarks and providing product-design information, production-method rights, technical know-how, and managerial support to the manufacturer.

CASE SUMMARY

FACTS
In October 1998, while traveling with his family to visit his grandparents in China, four-year-old plaintiff Kevin Lou caught his hand between the skirt panel and treads of a department store escalator.  Lou was dragged down the escalator and his hand was almost completely severed at the mid-palm, resulting in a thirty-one percent whole-body impairment.

The escalator was manufactured and sold in China by China Tianjin Otis Elevator Co. (“CTO”) under license from defendant Otis Elevator Co. (“Otis”).  CTO was a joint venture formed among Otis and two Chinese companies for the manufacture of elevators and escalators in China pursuant to Otis design standards and bearing the Otis trademark.  Otis and CTO entered into (1) a trademark license agreement allowing CTO to use the Otis trademark in China, and (2) a technical cooperation agreement whereby Otis would supply, among other things, product-design information, production-method rights, technical know-how, and managerial support to CTO related to its manufacture and sales of elevators and escalators in China under the Otis trademark.

Lou and his family sued Otis for breach of warranty and loss of consortium in Massachusetts Superior Court, and after a lengthy jury trial, they were awarded over $3 million in damages plus prejudgment interest.  Otis appealed the jury verdict based on, among other things, the trial court’s jury instructions regarding application of the “apparent manufacturer” doctrine.

ANALYSIS
In a question of first impression, a three-judge panel for the Massachusetts Appeals Court analyzed whether the apparent manufacturer doctrine, as embodied in the Restatement (Third) of Torts: Products Liability § 14, comment d, reflected the law of Massachusetts.  The Restatement provides that “[t]rademark licensors are liable for harm caused by defective products distributed under the licensor’s trademark or logo when they participate substantially in the design, manufacture, or distribution of the licensee’s products.”  Otis argued on appeal that the trial court’s jury instructions regarding application of this language improperly expanded the scope of the apparent manufacturer doctrine.

The court first analyzed case law from other jurisdictions and found that a “clear majority” of jurisdictions, including Massachusetts, recognized the apparent manufacturer doctrine in some form.  The court identified a split among those jurisdictions regarding application of the doctrine to nonseller trademark licensors, as Otis was in this case, and separated the relevant case law into three categories.  The first category consisted of cases holding that a nonseller trademark licensor could be liable under the doctrine if it exercised substantial control over the production of the product.  The second category included cases holding that a nonseller trademark licensor could be liable under the doctrine despite having little or no involvement in the production of the product if users of the product would rely on the trademark as an assurance of quality.  The third category consisted of cases reaching the opposite result of the cases in the second category (i.e., nonseller trademark licensors could not be liable under the doctrine where they had little or no involvement in the production of the product). 

The court concluded that the Restatement language was designed to resolve the inconsistency between the second and third categories by limiting, rather than expanding, application of the doctrine to cases where the defendant licensor had participated substantially in the production of the product.  In other words, according to the court, the Restatement language was intended to preclude application of the doctrine to nonseller trademark licensors who had little or no involvement in the design or manufacture of the product, while preserving application of the doctrine to cases in which the licensor participated substantially in the design or manufacture of the product.

Turning to the case at hand, the court held that there was ample evidence for the jury to find that Otis “participated substantially in the design or manufacture of the escalator,” as required under the court’s analysis of the apparent manufacturer doctrine.  Specifically, Otis licensed its trademarks to CTO and provided product-design information, production-method rights, technical know-how, and managerial support to CTO in its manufacture of escalators in China. 

The court rejected Otis’s argument that application of the doctrine would ignore the separate corporate identities involved in the case (i.e., Otis and CTO), stating that, “[t]o the contrary, a trademark licensor who is held liable by virtue of its substantial participation in design, manufacture, or distribution of a product is held liable as a result of its own role in placing a dangerous product in the stream of commerce.”  The court also distinguished the cases relied upon by Otis, holding that they did not involve situations in which there was sufficient evidence that the defendant licensor participated substantially in the design or manufacture of the product.

Accordingly, the appeals court concluded that the trial judge correctly instructed the jury on the apparent manufacturer doctrine as embodied in the Restatement, and affirmed the jury’s multimillion-dollar verdict in favor of Lou.

CONCLUSION
This case serves as a stark example of the potential product liability risk inherent in trademark licensing arrangements in which the licensor participates substantially in the licensee’s manufacturing process.  The apparent manufacturer doctrine can subject trademark licensors to liability arising from products bearing the licensor’s mark despite the fact that the licensor did not actually manufacture or sell the product.