New Test Replaces "First Use" in Trademark Disputes

The relationship ended in 2007 when Covertech discovered TVM had been purchasing competitors' products and selling them under Covertech brand names. Covertech had previously registered several of its marks with the United States Patent and Trademark Office, but did not register the ULTRA NT RADIENT BARRIER mark in the U.S. Immediately after Covertech terminated the distribution agreement, TVM applied for registration of the ULTRA NT RADIENT BARRIER mark with the USPTO. In response, Covertech sued TVM for trademark infringement and fraud on the USPTO.

At trial, Covertech argued that it created the ULTRA NT RADIANT BARRIER mark and had been using it continuously in interstate commerce since 2003. TVM countered that it registered the mark in the U.S., and that a sale to a distributor is not a sale in interstate commerce. The district court awarded ownership of the mark to Covertech, holding that Covertech's sale of the product to TVM constituted "first use" because it was "sufficiently public to warrant a finding that Covertech has sold the product in interstate commerce."

Right Result, Wrong Justification

The United States Court of Appeals for the Third Circuit affirmed the decision, but rejected the district court's reasoning. The Third Circuit found that the first-use test would often inure to the distributer's benefit "based simply on the fact that the distributor, albeit at the manufacturer's direction, made the initial sale of goods . . . which defies logic and common sense." The Third Circuit held that the appropriate test must take into account "the realities of the manufacturer-distributor relationship" and expressly adopted the McCarthy test.

Under the McCarthy test, the manufacturer is the presumptive trademark owner. A distributer can rebut that presumption by showing that any combination of the six McCarthy factors weigh in its favor. These factors include: which party created the mark; which party first affixed the mark; which party's name appeared on the product; which party exercised control over the quality of the mark; which party handled product complaints; and which party paid for advertising. In Covertech, the Third Circuit found "the weight of the McCarthy factors is indisputably in Covertech's factor."

The McCarthy test is not new to trademark disputes. "Ownership disputes between a manufacturer and distributor regarding unregistered trademarks do not often see the light of a court room. However, the McCarthy test, or a variation thereof, has been applied or endorsed by a number of appellate courts, including the Second, Seventh, Eighth and Ninth Circuits," explains Shane Delsman, cochair of the ABA Section of Intellectual Property Law's Trademark Litigation Committee. "Further, the presumption that the manufacturer owns an unregistered trademark has been applied by the Trademark Trial and Appeal Board, as well as many circuits, for decades," notes Delsman.

Protecting Trademarks in the Business Chain

Some ABA leaders agree that the McCarthy test's presumption is better for manufacturers. "I think a pure first-use test could be bad for business, especially when the manufacturer is in another country. The default based on first actual use in that scenario in particular could be to the distributor, absent a clear license agreement," reasons Joan K. Archer, cochair of the ABA Section of Litigation's Intellectual Property Committee's Trademark Subcommittee. In other words, "if a foreign manufacturer itself never sold its product in the U.S., then the only party with proper trademark use would be the distributor and the rights to the mark would, under the first-use test, go to the distributor," observes Archer.

Although the McCarthy test provides flexibility, "it will often be difficult for a distributor to overcome the presumption using those factors," argues Delsman. "I would therefore advise distributors to include language in a supply or distribution agreement clearly delineating who owns intellectual property, including trademarks, used in or developed during that relationship," suggests Delsman.

Distributors "should develop their own trademarks and enter into trademark license agreements with the manufactures. The license agreement should include language acknowledging the distributor as the owner of the trademarks," says Delsman. Whether a manufacture or a distributor, "the true lesson is that all distributor agreements should address trademark ownership and, if the manufacturer is to retain rights in the mark, a proper license agreement must be in place," concludes Archer.

Kristen L. Burge is a contributing editor for Litigation News.

Keywords: securities fraud, opinion statements, fraud pleading, goodwill valuation

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