A brand is a brand is a brand…or so it would seem. Purveyors of fashion understand the allure of a brand in connection with sales. While knock-offs are ubiquitous and virtually a religion in the United States, apparel which is branded with a recognized label has a greater cachè and commands both prestige and better pricing. The trademark serves not only to identify the source of the garment but the quality and standards associated with the trademark. So when a consumer opts to buy a branded product as opposed to a knock off, there is an implied guaranty of certain quality standards associated with such a brand.
Licensing brands and ancillary thereto franchising have become integral to the growth and breadth of a brand’s expansion. Because of the consumer’s understanding, a licensor who engages in naked licensing can lose its trademark. A naked license is one in which the licensor does not retain or enforce quality controls. The reason should be obvious, if a trademark is indeed to represent a value associated with the brand, a diminution due to lack of controls makes the brand at best deceptive.
Failure to maintain quality can lead to claims that the licensor granted a naked license which is a defense against trademark infringement. The antithesis occurs when one imposes quality controls and seeks to enforce the same. Under those circumstances the courts will seek to enhance the remedies available to a trademark holder, such as granting an injunction against the sale of grey market goods, an equitable remedy, which would otherwise be unavailable.
The courts will look to three (3) key factors in determining if a license constitutes a naked license; all of those factors pivot on the issue of quality. First, did the brand owner retain the right to determine quality standards? Second, even if the brand owner retained the right to exercise control over quality, did he in fact exercise the control, or did he just sit back. Third, was there a reasonable reliance to rely upon the licensee to maintain control?
The first and third quality factors in determining a naked license are obvious. However the exercise of control is what often trips up the licensor. What steps should a licensor undertake to maintain control? Zino Davidoff (“Davidoff”) exemplifies the extent to which some manufacturers will go to protect quality and as a concomitant the added value to the brand by doing so.
In Zino Davidoff SA v. CVS Corp., No. 07-2872 (2nd Cir. 2009), Davidoff sued CVS due to its removal of uniform protect code (“UPC”) symbols form Davidoff packaging for its Coty licensed “Cool Water” fragrance packaging. This UPC code permitted Davidoff to protect against both diversion from the specified channels of distribution and from counterfeiting. The Davidoff UPC contained information regarding each unit including where and when it was produced, ingredients used and distribution path.
Davidoff restricted Coty’s rights of distribution to maintain the luxury, prestige reputation of “Cool Water”. CVS was not part of those channels of distribution. So when Davidoff discovered CVS was selling “Cool Water” packaged goods, it sent a cease and desist letter. Eventually CVS agreed to cease selling goods that were known to be counterfeit. However, since the UPC codes had been removed but the genuiness was not in doubt, CVS argued it should be allowed to sell off its remaining, legitimate inventory. On its face this appears reasonable since no one disputed the Cool Water goods being sold in CVS were genuine, Coty produced goods.
Davidoff pivoted the dispute to trademark infringement. Relying on Warner-Lambert Co v. Northside Dev. Corp., 86 F.3d 3 (2nd Cir. 1996) which held that a trademark holder was entitled “to an injunction against one who would subvert its quality control measures upon a showing that (i) the asserted quality control procedures are established, legitimate, substantial, and nonpretextual, (ii) it abides by these procedures, and (iii) sales of products that fail to conform to these procedures will diminish the value of the mark”, the Court in Davidoff held the removal of the UPC code which qua quality control measure to prevent harm to the brand’s good will and reputation, resulted in trademark infringement entitling Davidoff to an injunction against the CVS sale of the goods, again even though those goods were genuine. Further Davidoff did not have to prove injury just the risk of injury.
By using a UPC as a proactive measure to protect the quality of its brand, Davidoff was able to secure an injunction against CVS for trademark infringement. By moving aggressively to promote, retain and defend the quality of a brand, one is rewarded beyond avoiding the issue of a naked license. The brand holder is rewarded for its vigilance by being granted remedies such as an injunction against the sale of non-counterfeit goods. The court recognized the inherent contradiction to on the one hand require a licensor to protect the quality of its brand or otherwise be deemed a naked licensor and to withhold the remedies which would enable the licensor to protect its brand and control its licensees. The take away is that creative qualitative enforcement of one’s branded products is not only smart business practice but also leverages equitable and legal rights.