Academic journal article Texas Law Review

Holdover Trademark Licensees and the Counterfeiting Loophole*

Academic journal article Texas Law Review

Holdover Trademark Licensees and the Counterfeiting Loophole*

Article excerpt

I. Introduction

In today's decidedly consumerist America,1 trademark law necessarily serves a critical function.2 Trademarks decrease consumer search costs, allowing the public to distinguish quickly between products and services by relying on brand name as an indicator of consistent quality.3 Consumers need not examine the attributes of a product or service before each purchase; once a consumer has knowledge of a particular brand, the trademark provides a shorthand signal of those attributes.4 Trademark law also benefits producers, encouraging expenditures to maintain consistent quality and protecting producers' goodwill in their marks from free-riding competitors.5

Trademark protection, however, is being significantly weakened by substantial breakdowns in statutory and common law.6 One of these breakdowns - the subject of this Note - manifests when an entity formerly licensed to use a mark continues to do so after the license has expired or terminated. In such a scenario, because the license has lapsed, continued use of the mark reflects an improper connection to now unauthorized, unlicensed products or services. Although courts often impose trademark-infringement liability on these "holdover licensees"7 (as one might expect), infringement liability alone is typically insufficient to satisfy trademark law doctrine and policy.8 Instead, as this Note will argue, holdover licensees should generally incur liability for a more severe and more appropriate cause of action: trademark counterfeiting.

Imagine the following scenario. A young entrepreneur, holding a freshly minted business degree from a top university, wants to put his education to work immediately. He decides to open a business, but rather than facing the difficulties involved with creating a startup, he elects to open a franchise location of a well-established company - McDonald's. Under the franchise agreement, the entrepreneur agrees to give McDonald's a 15% royalty of his total sales. In exchange, McDonald's provides him with regular shipments of its "delicious cuisine," along with menus, signage, and other materials bearing the MCDONALD'S marks and trade dress9 to be installed at the location. McDonald's licenses the entrepreneur to use these marks and trade dress, conditioned upon continued fulfillment of his obligations under the franchise agreement.

Sometime later, things begin to sour. The entrepreneur begins to shortchange McDonald's on his required royalty payments. Due to this underpayment, McDonald's exercises its right to cancel the franchise, thereby terminating the entrepreneur's license to use the MCDONALD'S marks and trade dress. The entrepreneur, however, continues to operate a burger joint at the location. Because McDonald's has stopped food shipments, the entrepreneur buys burger patties, fries, and other menu items from a small local distributor - completely unaffiliated with McDonald's - who offers remarkably low prices. The entrepreneur takes down the large MCDONALD'S sign on the street, but to conserve time and money, he leaves up portions of the MCDONALD'S menus, wall decorations, and exterior building dressing.

The new burger joint is a success. Customers, some of whom are initially drawn to the location by the remnants of the well-known MCDONALD'S marks and trade dress, are ultimately quite satisfied with the entrepreneur's proprietary, non-McDonald's food. The entrepreneur, not wanting to disturb his good fortune, decides to leave the location as is, only removing some of the interior MCDONALD'S signage as it becomes outdated.

In this fact pattern - a prototypical holdover-licensee scenario - courts should generally impose liability for trademark counterfeiting. Liability for mere trademark infringement10 does not sufficiently serve trademark policy. Moreover, from a doctrinal standpoint, counterfeiting is the most appropriate cause of action. The leftover MCDONALD'S marks used by the entrepreneur are identical to those displayed at legitimate McDonald's restaurants. …

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