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Clarity on Manufacturer – Distributor Trademark Ownership in Third Circuit

May 2, 2017

On April 18, 2017, the Third Circuit issued an opinion in Covertech Fabricating, Inc. v. TVM Building Products, Inc., clarifying the test for determining trademark ownership between a manufacturer and distributor, where no written contract between the two exists. The court also decided issues of fraud, acquiescence and damages. The case was on appeal from the United States District Court for the Western District of Pennsylvania. This case underscores the importance of written agreements that set forth each party’s respective intellectual property rights and the value of applying to register trademarks prior to entering into relationships with other companies to manufacture, market or distribute products using the trademarks.

The parties in the case were Covertech, a Canadian corporation that manufactures and distributes protective packaging and reflective installation, and TVM, a Johnstown, Pennsylvania distributor. In 1998, Covertech and TVM entered into a verbal agreement, providing that TVM would be the exclusive marketer and distributor of Covertech’s rFOIL insulation products in the United States. Covertech terminated the agreement in 2007, when it found out TVM had been purchasing and passing off a competitor’s product as Covertech’s. Even though the parties entered a second verbal agreement, this time with TVM’s representation that it would not purchase products from Covertech competitors, TVM purchased millions of dollars’ worth of competitive products. Following termination, TVM continued to use Covertech’s brand names, such as rFOIL and ULTRA CONCRETE UNDERPAD, to market and sell non-Covertech reflective insulation products. In 2011, TVM tried to register ULTRA as a trademark with the United States Patent and Trademark Office (USPTO), even though TVM knew Covertech had obtained trademark registration for the same mark in Canada the year before.

The main issue before the Third Circuit was determining who owned the ULTRA trademark in the United States. The lower court held that under the “first use” test, which considers which party was the first to use an unregistered trademark in commerce, Covertech owned the ULTRA trademark. Although the Third Circuit agreed with the lower court that Covertech owns the ULTRA trademark, the court rejected the “first use” test, noting that “a different test accounting for the realities of the manufacturer-distributor relationship must control.”

The Third Circuit adopted the rule outlined in McCarthy on Trademarks and Unfair Competition, a well-regarded treatise on trademark law. Under this rule, “[w]here initial ownership between a manufacturer and its exclusive distributor is at issue and no contract exists, the manufacturer is the presumptive trademark owner unless the distributor rebuts that presumption using a multi-factor balancing test designed to examine the distribution agreement in effect between the parties.” The six factors to consider in rebutting the presumption of manufacturer ownership are: (1) which party invented or created the mark; (2) which party first affixed the mark to goods sold; (3) which party’s name appeared on packaging and promotional materials in conjunction with the mark; (4) which party exercised control over the nature and quality of the goods on which the mark appeared; (5) to which party did customers look as standing behind the goods, e.g., which party received complaints for defects and made appropriate replacement or refund; and (6) which party paid for advertising and promotion of the trademarked product. The Third Circuit found that the factors, on balance, weighed in favor of Covertech. To date, the McCarthy rule has been adopted in some form by the Seventh and Ninth Circuits and several District Courts.

The Third Circuit also affirmed the lower court’s findings on fraud and acquiescence. Regarding fraud, the court found that TVM intended to deceive the USPTO in registering the ULTRA trademark. The court also held that any delay by Covertech in filing suit against TVM did not constitute acquiescence—or implied consent—by Covertech to TVM’s infringement.

Finally, on the issue of damages, the Third Circuit reversed the District Court’s award of $4,054,319 in damages, finding that the District Court abused its discretion in considering a metric other than the defendant’s actual sales and profits to calculate damages. Under the Lanham Act, an award of damages for trademark infringement involving the use of a counterfeit mark is based on either of two calculations: (1) “evidence of defendant’s sales and profits” or (2) “damages of between $1,000 and $2 million per counterfeit mark for each type of good or service offered for sale or distributed,” i.e., statutory damages. According to the court, the lower court “calculated damages by using industry-wide gross sales figures and by selecting a random discount value to determine…that profits approximated 70% of gross sales of all industry products.” This was in error, as the lower court was required to “ground its estimate in the record.” In the alternative, the lower court calculated statutory damages to be $4 million, so the Third Circuit sent the case back to the lower court so that Covertech could recover $4 million in statutory damages.

This recent opinion underscores a few important lessons for businesses. First, it is crucial to memorialize business transactions into written agreements. A written contract sets forth the rights and obligations of parties and avoids situations where courts fill in gaps. Second, filing trademark applications early helps a party protect and enforce its rights in marks. Had Covertech filed trademark applications for its marks earlier, there may have been less cause for the parties to debate ownership of the ULTRA trademark. Finally, statutory damages are a powerful remedy for trademark infringement involving the use of a counterfeit mark, especially if it is difficult for a party to prove the defendant’s sales and profits. Statutory damages up to $2 million per mark are available if the defendant’s use of the counterfeit mark was willful. Possible damages should warn a distributor to exercise caution to not exceed the bounds of how a manufacturer has authorized the distributor to use its trademarks.

© 2017 McNees Wallace & Nurick LLC
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