IP-Blitz

Supreme Court Holds that Offensive Marks Are Registrable

Author: Lara Garner

As predicted in an earlier post here, the Supreme Court has held that the Lanham Act’s prohibition on registration of “immoral[ ] or scandalous” trademarks violates the First Amendment. Iancu v. Brunetti, No. 18–302, 588 U.S. ___ (2019).

Erik Brunetti, a counter culture artist, sought to trademark “FUCT.” Brunetti’s streetwear clothing line used the brand, which stands for “Friends U Can’t Trust” and is pronounced as the four letters “Eff U Cee Tee.” The Court noted one might read it differently, and if you did “you would hardly be alone.” Because of that common perception, when Brunetti discovered knockoffs using the brand, he attempted to register the trademark. His application was denied under a provision of the Lanham Act that prohibits registration of trademarks that consist of or comprise “immoral[ ] or scandalous matter,” 15 U. S. C. §1052(a). Brunetti challenged the denial under the First Amendment. The Federal Circuit invalidated the “immoral or scandalous” bar.

Two years ago, in Matal v. Tam, 137 S. Ct. 1744, 1763 (2017) the Court had declared unconstitutional the Lanham Act’s ban on registering marks that “disparage” any “person[ ], living or dead.” §1052(a). The ban was found to be the essence of viewpoint discrimination: allowing marks that are “positive” about a person and disallowing marks that are “derogatory.” In Brunetti, Justice Elena Kagan wrote for the majority, “[t]oday we consider a First Amendment challenge to a neighboring provision of the act.” In a 6-3 vote, the Justices held that the ban on “immoral[ ] or scandalous” trademarks also violates the Constitution: “We hold that this provision infringes the First Amendment for the same reason: It too disfavors certain ideas.”

The divided Court in Matal had agreed on two propositions: (1) if a trademark registration bar is viewpoint based, it is unconstitutional; and (2) the disparagement bar was viewpoint based. In Iancu, the Court found the “immoral or scandalous” bar similarly flawed because it discriminates on the basis of viewpoint. Supported by a review of the dictionary definitions of “immoral” and “scandalous,” the statute was found facially biased in favor of messages that are in accord with society’s sense of decency. And in practice, the Court noted, the PTO has refused to register marks that are at odds with society’s views regarding topics such as drug use, religion, and terrorism but has approved registration of marks on those same topics that comport with society’s views.

The Government argued that the statute could be preserved by a limiting construction, narrowing the bar to marks that are lewd, sexually explicit, or profane. But the language is not ambiguous and to do so, the Court found, would be to rewrite, rather than interpret, the statute. Fairly interpreted, the viewpoint bias of the bar ends the inquiry and the bar must be invalidated.

Separate opinions dissenting in part with the majority were written by Chief Justice Roberts and Justices Breyer and Sotomayor. Each agreed with the majority in striking the “immoral” portion of the law. But all three agreed with each other that “scandalous” can be read to prohibit only marks that are “obscene, vulgar, or profane.” The three, along with Alito in his concurrence, expressed concern for a flood of new, crude trademarks and the creation of public spaces that would be repellant to some. As Justice Sotomayor explained, lamenting the expected result of the Court’s decision, the Government will have no choice but to begin registering the “coming rush” of “marks containing the most vulgar, profane, or obscene words and images imaginable.”

Justice Alito noted in his concurrence that the mark at issue could be denied under a narrower statute banning vulgar terms as the mark expresses no idea (and signifies the “severely limited vocabulary” of its user). But, that “[a]t a time when free speech is under attack, it is especially important for this Court to remain firm on the principle that the First Amendment does not tolerate viewpoint discrimination.”

Justice Roberts, concurring in part and dissenting in part, observed that the trademark registration system merely confers additional benefits. Denying registration does not restrict or punish speech. And First Amendment protections do not extend to require “the Government to give aid and comfort to those using obscene, vulgar, and profane modes of expression.”

Justice Breyer concurred in part and dissented in part at length, writing that precedents warn against interpretation of statutes that renders them unconstitutional. Agreeing with Justice Sotomayor’s narrow interpretation of “scandalous,” he proceeded to address the question of whether the benefits of trademark registration can be denied on the basis of the narrowly construed statute without offending the First Amendment. He concluded in the affirmative.

According to Justice Breyer, the category-based approach taken by the majority is inadequate. The speech-related categories for First Amendment analysis (such as “viewpoint discrimination”) should be viewed, not as outcome-determinative rules but rather as “rules of thumb.” They are not absolute rules; they sometime give weight to competing interests. And they are sometimes applied, as here, too rigidly. Justice Breyer urged that the Court look to the values the First Amendment seeks to protect and refrain from striking down ordinary regulations that pose little threat to free speech interests. The Court should ask whether the regulation at issue “works speech-related harm that is out of proportion to its justifications.”

The statute in this case, Justice Breyer wrote, does not fit neatly into the categories. It is an open question whether the trademarks statue merely regulates “commercial speech.” And it cannot be straightforwardly described as regulating “government speech.” The concept of “public forum” does not apply, although “limited public forum” may have some application as may cases involving government subsidies of private speech. The bounds between “viewpoint discrimination” and “content discrimination” may be hazy, and the denial of the benefits of federal trademark registration to highly vulgar or obscene words would not offend the Constitution. While emotion-laden, such words do not, standing alone, convey a viewpoint labeling them content-based should not be, according to Justice Breyer, outcome determinative.

A proportionality analysis of the statute, as interpreted by Justice Sotomayor, results in a conclusion that it does not offend the Constitution. A ban merely on registration does not bar businesses from using the words, and trademarks are highly regulated with the specialized aim of assisting customers with identification of goods. Those regulations necessarily limit speech. The Government has an interest in avoiding involvement in, and protecting children from such speech, which scientific evidence suggests may be different in kind – they have a physiological and emotional impact that most words do not. As such, in Justice Sotomayor’s view, risks to the First Amendment are minor in light of these objectives.

Justice Sotomayor’s concurrence in part and dissent in part was joined by Justice Breyer. An alternative to the majority’s interpretation is, according to Justice Sotomayor, “equally possible” and saves the statute rendering it a reasonable, viewpoint neutral-restriction. The Government does not have to confer trademark benefits at all but also cannot do so in a viewpoint-discriminatory way. However, the term “scandalous” should not be collapsed with “immoral” as the majority does because the term is ambiguous and the text of the statute comports with a narrow reading of its meaning.

In Justice Sotomayor’s view, “scandalous” can be read broadly to cover both idea and manners of expressing them, or narrowly to cover only manners of expression. Congress used the “scandalous,” “immoral,” and “disparage” to describe separate prohibited features. While “immoral” and “disparage” target offensive ideas, “scandalous” can be read, not as a synonym of “immoral,” but with a distinct, non-redundant meaning, as offensive due to the mode in which it is expressed. The most obvious such mode of expression is with the use of obscenity, vulgarity, or profanity. Justice Sotomayor does not propose a list (other than “the apparent homonym of Brunetti’s mark,” and “at least one particularly egregious racial epithet”) but would leave it to the USPTO to identify the “small group” of such words.

A limiting construction, according to Justice Sotomayor, is appropriate here and consistent with precedent. It is reasonable in the context of an ancillary benefit as compared to, for example, criminal statutes that threaten freedom. Brunetti would not even be prohibited from using his mark, merely from registering it. “Properly narrowed, ‘scandalous’ is a viewpoint-neutral form of content discrimination that is permissible in the kind of discretionary governmental program or limited forum typified by the trademark-registration system.”

The impact of this decision remains to be seen. But, notwithstanding the worries of some Justices, it seems unlikely that the USPTO will see a flood of attempts to register vulgarities. The value of a trademarks is in the goodwill associated with it. Building a mark’s positive reputation takes a considerable investment of time and care. The novelty of registering a mark that is unlikely, by its nature, to appeal to a wide class of consumers is outweighed by the expense of doing so. Registrations may still be rejected on the basis of other criteria, such as similarity to exiting marks. And it remains to be seen whether Congress will address the issue as it seems likely that a narrower prohibition would be upheld. As Justice Alito wrote in his concurrence, it is up to Congress, if it wants, to devise a “more carefully focused statute that precludes the registration of marks containing vulgar terms that play no real part in the expression of ideas.”

About the author: Lara Garner is a partner in Gordon Rees Scully Mansukhani’s Intellectual Property Practice Group. Her practice focuses on Intellectual Property litigation and counseling for patents, copyrights, trademarks, and trade secrets, and in a broad range of matters, including contract, technology, and privacy issues. Ms. Garner’s biography can be found here.

The Tightrope Between First Amendment Violations and Lawful Regulation of Vulgar Trademarks

Author: Sean Flaherty

Trademark attorneys and brand owners alike know that trademark applications are not to be refused registration by the USPTO unless they fall within certain codified prohibitions. 15 U.S.C. § 1052(a) (“Lanham Act Section 2(a)”), for example, bans trademarks which “[c]onsists of or comprises immoral, deceptive, or scandalous matter; or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt, or disrepute . . .”

But in 2017, the Supreme Court ruled in Matal v. Tam, 137 S. Ct. 1744, 1763 (2017), that the “disparagement clause” of Section 2(a) was unconstitutional as amounting to viewpoint discrimination. This set the stage for subsequent challenge to the remaining part of 2(a)—the “immoral/scandalous” clause. This issue was recently argued on April 15, 2019 before the Supreme Court in Iancu v. Brunetti, Case No. 18-302.

Trademark Application and TTAB Appeal

In 2011, Erik Brunetti, “an artist and entrepreneur whose graphics are infused with cultural strands from skateboarding, graffiti culture, punk rock music, and remnants of Situationist Ideal ideologies” sought to register the trademark application no. 85310960 for “FUCT.” In re Brunetti, 2014 TTAB LEXIS 328, *3-4 (T.T.A.B. August 1, 2014). The PTO rejected the application under the prohibition against “immoral/scandalous” marks, and Brunetti appealed to the TTAB. There, Brunetti attempted to argue that the mark did not carry any particular meaning, was not being used for its phonetic equivalent, and instead was “an arbitrary made up word” which evoked an edgy aesthetic. Brunetti further argued that to the extent the term had any meaning, it correlated to each of the first letters of the phrase FRIENDS U CAN’T TRUST. However, the TTAB stated that the foregoing arguments “stretche[d] credulity.”

The TTAB affirmed the refusal, noting that “the threshold for objectionable matter is lower for what can be described as ‘scandalous’ than for ‘obscene,’” citing In re McGinley, 660 F.2d 481, 211 USPQ 668, 673 n.9 (CCPA 1981). The also TTAB recognized its own statutory limitations in noting it was not “the appropriate forum for re-evaluating the impacts of any evolving First Amendment jurisprudence within Article III courts upon determinations under Section 2(a) of the Lanham Act.” In re Brunetti, 2014 TTAB LEXIS 328 at *16.

Federal Circuit Appeal

Brunetti appealed the TTAB to the Federal Circuit. The Court of Appeals did not disturb the TTAB’s factual finding that the mark was vulgar and therefore fell within Section 2(a)’s prohibition against the registration of scandalous marks. In re Brunetti, 877 F.3d 1330, 1338 (Fed. Cir. 2017) (“Dictionaries in the record characterize the word as ‘taboo,’ ‘one of the most offensive’ English words, ‘almost universally considered vulgar,’ and an ‘extremely offensive expression.’”) But, while the case was on appeal, Matal v. Tam¹ was decided. Applying that holding to Brunetti’s application, the Federal Circuit found the “immoral/scandalous” prohibition as an unconstitutional content-based restriction on speech. In re Brunetti, 877 F.3d at 1341. The Federal Circuit held that the regulation did not survive even intermediate, much less strict scrutiny, because (i) “the government ha[d] failed to identify a substantial interest justifying its suppression of immoral or scandalous trademarks”; (ii) the government could not show that the “regulation directly advance[d] the government’s asserted interest” (because the ban does not prevent actual use of the vulgarity and thus “does not protect the general population from scandalous material”); and (iii) the government failed to show that the regulation was “carefully tailored” given the significant evidence of inconsistent application and “vague nature of the scandalous inquiry.”

Finally, the Federal Circuit denied the government’s last-stand argument, which was to interpret the ban narrowly so as to uphold its constitutionality, by making the prohibition coextensive with a ban on obscenity. However, the Federal Circuit noted that due to the language used in the statute, no basis was provided to the Court to rewrite the law. Id. at 1357 (“We do not see how the words ‘immoral’ and ‘scandalous’ could reasonably be read to be limited to material of a sexual nature. We cannot stand in the shoes of the legislature and rewrite a statute.”).

Supreme Court Review

The Supreme Court granted certiorari and recently held oral argument.

Brunetti primarily argued that there was no principled distinction between the unconstitutionality of the prohibition against the offensive viewpoints targeted by “disparagement clause” in Tam and the offensive viewpoint targeted by the “immoral/scandalous clause” presently before the Court. Further, the applicant argued that all examination of trademarks necessarily implicated an evaluation of content, and thus the government could not argue that the prohibition amounted only to regulation of the “mode of expression.”

In light of Tam, the government was hard pressed to maintain the facial validity of the regulation. Instead, the government conceded the statute should be narrowed so as to preserve its validity.

At oral argument, Justice Kagan asked: “[J]ust so I could understand, you’re asking us to narrow this statute to exactly what?” Deputy Solicitor General Malcom Stewart replied, “To marks that are offensive, shocking to a substantial segment of the public because of their mode of expression, independent of any views that they may express.” Here, the government essentially argued that the PTO should be permitted to restrict speech akin to fighting words, which are susceptible to regulation because they are not based on viewpoint, but instead voiced merely to anger and incite. The government also distinguished Tam by arguing the prohibition against scandalous words is viewpoint-neutral and applied regardless of the applicant’s intended message.

The oral argument lasted nearly an hour with the Court peppering each party with a great number of questions. At several instances, the Court indicated uneasiness with vagueness of the regulation, as evidenced by the PTO’s track record of inconsistent application. But that is not to suggest an unconstitutionality ruling is assured. The Justices probed whether any speech in the context of trademarks could thereafter be regulated in the event this provision were ruled unconstitutional. Could a trademark registrant owning a vulgar mark for example, not be denied advertising space on the side of a public bus, given that its trademark registration was now approved by the federal government?

Justice Breyer repeatedly raised the point that even today, a limited number of dirty words and racial slurs are well defined and well documented to have a physiological effect on the hearer, and asked why the government should not be permitted to ban those words from the trademark registration program. Similarly, Justice Gorsuch asked with regard to the trademark registration program, “why can’t the people choose to withhold the benefit [of registration] on the basis that there are certain words that are profane and that we, as a matter of civility in our culture, would like to see less of rather than more of, and you can use – you’re free to use them . . .but we are not going to trademark them, and we’ve held just last year that a patent is a public benefit that can be withdrawn without a judge. Why isn’t this also similarly a public benefit rather than a private right?” Additionally, Justice Sotomayor posited, “Why can’t the government say, no, we’re not going to give you space on our public registry for words that we find are not acceptable?”

Although the expected bet is on another decision striking down the prohibition as unconstitutional in light of Tam, don’t be surprised if the Court instead decides to walk a tightrope and find that certain vulgarities do not implicate bona fide viewpoints, are used for no more than to create a shocking response in the hearer, and are thus susceptible to regulation without running afoul of the First Amendment.

About the author: Sean Flaherty is a partner in Gordon Rees Scully Mansukhani’s Intellectual Property Practice Group. His practice focuses on litigation matters involving copyright, trademarks, trade secrets, and patents, as well as transactional matters related to intellectual property licensing. Mr. Flaherty is a registered patent attorney with a degree in Civil Engineering. Mr. Flaherty’s biography can be found here.
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¹ Prior to this Supreme Court decision, the Federal Circuit had held Section 2(a)’s disparagement provision as unconstitutional under the First Amendment, failing to survive either intermediate or strict scrutiny. See In re Tam, 808 F.3d 1321, 1358 (Fed. Cir. 2015)

Brewery Near Me: Why You Should Name Your Brewery After a Location and Related Trademark Considerations

Author: Michael Kanach

Home for the Holidays

Whether you are traveling home for the holidays or visiting an old friend, the holiday season is a time to return to old favorites. For craft beer fans visiting home and looking for a place to gather, they will notice the brewery landscape has changed over the last few years. Whether you are visiting a large city or a small town, the number of new breweries may surprise you. In fact, the number of breweries in the United States has more than tripled recently, increasing from less than 2,000 in 2010 to more than 7,000 in 2018.¹ On November 20, 2018, the Brewers Association’s Bart Watson tweeted “Here are the ~1,000 breweries that have opened since last Thanksgiving,”² with a link to a google map showing new breweries that opened between November 25, 2017, and November 17, 2018.³ In addition, numerous breweries have recently shut down, been acquired, or changed names based on trademark disputes.

Searches for “Brewery Near Me” will be trending on Google and other search engines. For example, when you type “Brewery” into Google.com or Bing.com, both search engines will propose the search “Brewery Near Me.” Alternative results include “Brewery Near My Location,” or nearby city names, such as “Brewery San Francisco” and “Brewery Oakland.” With consumers searching on maps, in search engines, and in beer-focused applications such as Untappd and RateBeer, breweries need to stand out when their name shows up on the list.

From a trademark and branding perspective, you want consumers to recognize your name – and recognize it as a source of great beer. You want your name to communicate the quality of your product and differentiate your brewery from the others in your neighborhood. In other words, you want consumers to know what they can expect when they choose to visit your brewery or drink your beer. Are you known for your rotating selection, your hazy IPAs, your flagship lager, your barrel aged stouts, your sours, or your Belgians? Or maybe you’re known for your food, your staff, or other non-beer-related aspects of running a restaurant or brew pub.

Drink Local = Higher Brand Awareness

When the message is “drink local,” and thousands of smaller breweries are opening up to serve their local communities, it can be beneficial to tell your consumers where you are located. For many breweries, their location is not simply an address in a city or a town. It is also their brand.

In a discussion with Robert Cartwright of DataQuencher, which performs surveys of beer drinkers for breweries, his surveys have shown that location names can help certain breweries increase their brand awareness. The data shows that, for breweries up to about the 20,000 barrels mark, the breweries that have a location in their name have significantly higher brand awareness than other breweries. In other words, microbreweries may benefit from their location-based names, but regional brewers may not see much additional impact.

For example, in Virginia, Blue Mountain Brewery, located in the heart of the Blue Ridge Mountains has a higher than anticipated awareness from beer drinkers in the State of Virginia. Given their production numbers (less than 15,000 barrels in 2017) and the size of the Virginia market, it would be normal for Blue Mountain to have a brand awareness in the high 20% to 35% range. Instead, DataQuencher’s recent survey results show that Blue Mountain Brewery has a brand awareness of 49% among VA beer drinkers. This location-based name may also help in each of the states through which the Blue Ridge Mountains extend—namely, Georgia, South Carolina, North Carolina, Tennessee, Virginia, Maryland, and Pennsylvania.

With respect to the San Francisco Bay Area, certain microbreweries rank higher than anticipated in “brand awareness” based on their location-based names, including San Francisco Brewing Co., Alameda Island Brewing Company, Marin Brewing Company, and Oakland Brewing Company. See the recent chart below prepared by DataQuencher. It is not surprising to see some larger breweries with location-based names, such as Sierra Nevada and Russian River, at the top of the list.

Chart reproduced and used with permission.

DataQuencher’s recent survey evidence, which shows higher brand-awareness for breweries with location-based names, is consistent with the breweries who have earned their brand awareness through decades of sales and advertising, as well as distribution through large retail chains and to multiple states. Not surprisingly, many of the largest breweries in the United States have location-based names.⁴ In fact, about a third (17 of 50) of the Brewers Association’s list of the 50 top selling breweries in the United States in 2017 have location-based names.

The chart below includes a list of those breweries with an explanation of their location-based name for those unfamiliar with the local references. The cites to Wikipedia are because the USPTO will often cite to Wikipedia (or Urban Dictionary!) and other websites as a basis for refusing to register geographically descriptive trademarks.

In addition to the chart above, two more breweries in the top 50, DogFish Head (#12) and Allagash (#36), are named after small towns in the State of Maine,²⁸ which – while nowhere close to their brewery locations^{29 30} – both help tell a story about the brewers’ roots and the breweries’ small beginnings.

How Does a Brewery Obtain a Trademark for its City, Town, Mountains, River, Lake, or Street?

First, a little background about trademarks. Your trademark is your name, logo, or anything else that indicates your brewery is the source of a product or service.

A mark can be:

• a name of a beer or the brewery,
• a drawing (e.g., The Alchemist’s Heady Topper, 21^st Amendment’s various can designs),
• a color or color scheme (e.g., Russian River’s Pliny the Elder’s red circle on a forest green label),
• a shape (e.g., Bass’s red triangle, Heineken’s red star),
• a design,
• a slogan, or
• even the unique overall “look and feel” of the brewery, product, or packaging (or other forms of “trade dress”).

You obtain common law trademark rights when you begin to use the mark. If someone else used it first, you are a junior user and they are the senior user. To obtain nationwide rights to your trademark, you can file an application to register your trademark with the United States Patent and Trademark Office (the “USPTO”).

One myth is that you don’t want to name your brewery after a location because it’s hard to get a trademark. While it is true that location-based names have inherent hurdles, including from a trademark perspective, there are also potential benefits from a trademark and branding perspective.

Those hurdles include difficulty in proving that your name is an indication that your brewery is the source of the beer. In trademark language, we call that “acquired distinctiveness,” or “secondary meaning.” It may take years for your brewery to build distinctiveness in the eyes of consumers, while a more unique and arbitrary name may obtain a registered trademark much faster.

Because locations are descriptive, the USPTO often refuses to register marks with a location is in the name. On one hand, the USPTO may refuse to register the mark because you are describing where you are located. In that case, the name is “geographically descriptive” and other breweries located there should be able to use that name to describe their brewery. One the other hand, if your name is a location where you are not located, the USPTO may refuse to register your mark on the basis that it is “geographically deceptively misdescriptive.” This means your name makes people believe you are from a location from which your beer does not originate, and that description is misleading and deceptive.

Relatedly, if you advertise your products as coming from a geographic location – but your beer is not from there – those false statements could give rise to a class action lawsuit for false advertising. Numerous lawsuits have been filed over the past several years. For example, class action lawsuits have been filed against Fosters (not imported from Australia),³¹ Becks (not imported from Germany),³² Kirin (not imported from Japan),³³ and Red Stripe (not imported from Jamaica).³⁴ While the breweries named as defendants in those class action lawsuits were some of the largest alcohol producers in the world – Miller Brewing Co. (Fosters), Anheuser-Busch (Becks, Kirin), and Diageo (Red Stripe) – plaintiffs could file similar lawsuits against craft beverage producers as well. So it is wise to clearly label where your brewery (or winery, meadery, or distillery) is located.

To avoid such misrepresentations in labeling and advertising, you will notice the labels for some breweries list more than one location. For example, Lagunitas clearly advertises that it is brewed in Petaluma, California and Chicago, Illinois.  Likewise, Sierra Nevada’s labels clearly advertise that it is brewed in Chico, California and Mills River, North Carolina.

While there are many considerations when it comes to branding and trademarks, these are several of the considerations with respect to location-based names. As is the case with all intellectual property, it is prudent to talk to an attorney about your strategy for obtaining and enforcing your trademarks.

For more information about trademarks and intellectual property, you can reach Michael Kanach a partner in the Intellectual Property and Food and Beverage groups at Gordon Rees Scully Mansukhani. Mike is also a practice group leader for the Beer, Wine, and Spirits Law group and the Entertainment and Recreation practice group. Mike’s email is mkanach@grsm.com and his phone number is 415-875-3211.
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¹ “Number of Breweries, Historical U.S. Brewery Count,” Brewers Association, https://www.brewersassociation.org/statistics/number-of-breweries/ (as of November 19, 2018).
² Bart Watson (@BrewersStats), https://twitter.com/brewersstats/status/1064927306571964416?s=11 (accessed (November 20, 2018, 9:03 AM)
³ “Breweries Opened in Last Year – New breweries that have opened between 11/25/2017 and 11/17/2018.” https://www.google.com/maps/d/viewer?mid=1Bw583n55Vu4ghUsUyuOcOVFzjymeBU4p&usp=sharing
⁴ “Brewers Association Releases 2017 Top 50 Brewing Companies By Sales Volume,” Brewers Association, March 14, 2018, located at https://www.brewersassociation.org/press-releases/brewers-association-releases-2017-top-50-brewing-companies-by-sales-volume/
⁵ https://en.wikipedia.org/wiki/Boston
⁶ https://en.wikipedia.org/wiki/Sierra_Nevada_(U.S.)
⁷ https://en.wikipedia.org/wiki/Deschutes_River_(Oregon)
⁸ https://en.wikipedia.org/wiki/Deschutes_County,_Oregon
⁹  https://en.wikipedia.org/wiki/Deschutes_National_Forest
¹⁰ https://en.wikipedia.org/wiki/Brooklyn
¹¹ https://en.wikipedia.org/wiki/Sweetwater_Creek_(Chattahoochee_River_tributary)
¹² https://en.wikipedia.org/wiki/Sweetwater_Creek_State_Park
¹³ https://en.wikipedia.org/wiki/New_Glarus,_Wisconsin
¹⁴ https://en.wikipedia.org/wiki/Alaska
¹⁵ https://en.wikipedia.org/wiki/Abita_River
¹⁶ https://en.wikipedia.org/wiki/Abita_Springs,_Louisiana
¹⁷ https://en.wikipedia.org/wiki/Stevens_Point,_Wisconsin
¹⁸ https://en.wikipedia.org/wiki/Long_Trail
¹⁹ https://en.wikipedia.org/wiki/Rogue_River_(Oregon)
²⁰ https://en.wikipedia.org/wiki/Rogue_Valley
²¹ https://en.wikipedia.org/wiki/Uinta_Mountains
²²  https://en.wikipedia.org/wiki/Uinta_National_Forest
²³ https://en.wikipedia.org/wiki/Uintah_and_Ouray_Indian_Reservation
²⁴ https://en.wikipedia.org/wiki/Uinta_National_Forest
²⁵ https://en.wikipedia.org/wiki/Lost_Coast
²⁶ https://en.wikipedia.org/wiki/North_Coast_(California)
²⁷ https://en.wikipedia.org/wiki/Mount_Wachusett
²⁸ “How Your Favorite Brewery Got Its Name” Thrillist, Lee Breslouer, located at www.thrillist.com/amphtml/drink/nation/dogfish-head-name-how-your-favorite-brewery-got-its-name
²⁹ DogFish Head is a name of a small location in Southport, Maine, over 9 hours away and 573 miles away from the DogFish Head Craft Brewery location in Milton, Delaware
³⁰ Allagash is a town and river in northern border of Maine, 5.5 hours away and 341 miles away from the Allagash Brewery location in Portland, ME.
³¹ “Man Sues Over Foster’s Beer Being Brewed in Texas, Not Australia,” Time, Sarah Begley (December 15, 2015), http://time.com/4148740/man-sues-fosters-beer/
³² “Anheuser-Busch Admits Beck’s Isn’t Actually German, Looks to Settle Class Action Lawsuit” Food and Wine, Mike Pomranz (June 22, 2017),  https://www.foodandwine.com/fwx/drink/anheuser-busch-admits-beck-s-isn-t-actually-german-looks-settle-class-action-lawsuit
³³ “If You Bought Kirin Beer In The Last 5 Years, You Could Get $12,” Huffington Post, Harry Bradford (January 7, 2015 5:16 pm ET, January 9, 2015, https://www.huffingtonpost.com/2015/01/07/kirin-beer-money_n_6430732.html
³⁴ “Red Stripe Is the Latest Beer to Get Sued Over Mislabeling Where It Is Brewed,” Food and Wine, Mike Pomranz (June 22, 2017) https://www.foodandwine.com/fwx/drink/red-stripe-latest-beer-get-sued-over-mislabeling-where-it-brewed

U.S. Supreme Court to Resolve Circuit Split Regarding Trademark Licensees’ Rights Upon Licensor Bankruptcy

Author: Benni Amato

According to the International Trademark Association (“INTA”), “whether a debtor-licensor can terminate a trademark license by rejection, thereby ‘taking back’ trademark rights it has licensed and precluding its licensee from using the trademark” is “the most significant unresolved legal issue in trademark licensing.” It likely will not stay unresolved for much longer; on October 26, 2018, the United States Supreme Court granted a petition for certiorari to resolve this specific issue as part of the Mission Product Holdings Inc. v. Tempnology LLC case.

Tempnology is a New Hampshire-based company that developed chemical-free cooling fabrics. It used this fabric to produce clothing that were designed to remain cool during exercise. Tempnology and Mission entered into a distribution agreement in November of 2012 that gave Mission the non-exclusive right to sell certain patented and trademarked Tempnology products throughout the world and the exclusive right to sell some of those products within the United States.

After a complex factual and procedural history, Tempnology filed for Chapter 11 bankruptcy in September 2015. The day after the filing, Tempnology moved to reject the agreement under 11 U.S.C. §365(a). After two appeals, a split First Circuit panel held that Tempnology’s rejection terminated the trademark rights licensed to Mission under the agreement.

As explained by the majority in the First Circuit decision, after a debtor-licensor files for Chapter 11 bankruptcy, it may secure court approval to “reject” any executory contract so that the other party to the contract is “left with a damages claim for breach, but not the ability to compel further performance.” Mission Prod. Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC), 879 F.3d 389, 404 (1st Cir. 2018). “When the rejected contract, however, is one ‘under which the debtor is a licensor of a right to intellectual property,’ the licensee may elect to ‘retain its rights . . . to such intellectual property,’ thereby continuing the debtor’s duty to license the intellectual property.” The problem begins, however, with the fact that Congress left trademarks off the definitional list of intellectual properties in 11 U.S.C. §101(35A).

The First Circuit found that it made sense for Congress to have excluded trademarks. After all, “the effective licensing of a trademark requires that the trademark owner—here the debtor, followed by any purchaser of its assets—monitor and exercise control over the quality of the goods sold to the public under cover of the trademark.” Should the licensor fail to exercise reasonable control, that could result in the abandonment of its trademarks.

Thus, the First Circuit reasoned that should Mission be allowed to continue to use Tempnology’s trademarks, that would force Tempnology to choose between performing executory obligations in monitoring and controlling the quality of goods or risk losing its trademarks and diminishing their value to Tempnology. The loss of the contractual licensing value to Mission should instead be compensated via damages.

The First Circuit decision, however, was a direct split from the Seventh Circuit decision six years prior in Sunbeam Prods. v. Chi. Am. Mfg., LLC, 686 F.3d 372, 377 (7th Cir. 2012). The Seventh Circuit, with an opinion from its Chief Judge Easterbrook, stated that “[t]he limited definition in §101(35A) means that §365(n) does not affect trademarks one way or the other. According to the Senate committee report on the bill that included §365(n), the omission was designed to allow more time for study….” “What §365(g) does by classifying rejection as breach is establish that in bankruptcy, as outside of it, the other party’s rights remain in place. After rejecting a contract, a debtor is not subject to an order of specific performance…The debtor’s unfulfilled obligations are converted to damages…But nothing about this process implies that any rights of the other contracting party have been vaporized.”

Mission and its amici have urged the Supreme Court to adopt the Sunbeam approach, which allows licensees to keep their licensed trademark rights even when the debtor-licensor has successfully rejected the contract. Their reasons include:

• Enabling the debtor to take back rights already granted to a licensee encourages them to “cut a better deal for those rights” to the detriment of the licensee through no fault of licensee’s. (Mission’s petition for writ of certiorari.)
• “If the debtor believes its trademarks are worth the cost of monitoring, it will presumably incur that cost to preserve the value of the asset…. That decision is no different than the cost-benefit analysis debtors undertake every day when deciding whether to make an investment in an estate asset to maximize its value. It has no bearing on the question whether rejection terminates a licensee’s trademark rights.” (Mission’s petition for writ of certiorari.)
• “A licensee who is confident that the licensor’s bankruptcy will not upend its continued right to use licensed trademarks or sell the debtor’s products under an exclusive-distribution agreement will be more inclined to enter into an agreement that creates net efficiencies for distribution and production arrangements.” (Mission’s petition for writ of certiorari.)
• “Licensors benefit because licensees will pay more up front or in royalties for licensed rights that survive a potential bankruptcy filing by the licensor.” (INTA’s amicus brief.)
• “Licensees, who have substantial reliance interests in the licensed trademarks (g., having hired employees and/or established manufacturing capacity to take advantage of the rights), will not suddenly find their rights rendered valueless by the licensor’s decision to terminate a trademark license agreement through rejection in bankruptcy.” (INTA’s amicus brief.)
• “Under the First Circuit’s rule, a debtor/licensor can use the power to reject to destroy a licensee’s business or hold the licensee hostage, forcing it to pay twice for a license it had already purchased.” (Law professors’ amicus brief.)

Tempnology, on the other hand, sought to distinguish its case from that of Sunbeam’s. Sunbeam involved a “short term transitional license for sale of a finished product,” whereas the Tempnology-Misson agreement was a complex joint venture/joint marketing and distribution arrangement with a two-year wind-period that would require post-rejection interaction between the parties to ensure maintenance of quality control.

Regardless of how the Supreme Court eventually rules, having this issue settled will at least provide clarity for trademark licensors and licensees in the event of bankruptcy. We will report on the high court’s final decision.

About the author: Benni Amato is a partner in Gordon Rees Scully Mansukhani’s Intellectual Property Practice Group. Her practice focuses on litigation matters involving trademarks, copyright, trade secrets, patents, internet issues, cybersecurity, and contractual disputes, as well as domain name arbitrations and trademark and copyright prosecution and licensing. Ms. Amato’s biography can be found here.