Mark ownership affirmed despite use of improper test; damages award vacated


April 18, 2017

The U.S. Court of Appeals in Philadelphia has vacated and remanded a district court’s order holding a distributor of specialty building products liable for approximately $4.05 million in actual damages for infringing trademarks owned by owned by a manufacturer of reflective insulation. The district court abused its discretion in applying an arbitrary reduction to a gross revenue figure in calculating the damages award, without examining evidence supporting a reasonable estimation of actual profits. On remand, the district court was instructed to give the complaining manufacturer an opportunity to opt for an award of statutory damages. The appellate court affirmed the district court’s decision that the manufacturer, not the distributor, was the rightful owner of one of the marks at issue, even though the district court had applied the wrong test in reaching that conclusion. The court also affirmed a ruling that the distributor had obtained a federal registration for one of the marks at issue via fraud on the USPTO, and it rejected the distributor’s contention that the manufacturer had acquiesced in its infringing mark uses (Covertech Fabricating, Inc. v. TVM Building Products, Inc., April 18, 2017, Krause, C.).

Plaintiff Covertech Fabricating manufactured reflective insulation products and sold them—under the brand name rFOIL—using product names such as NT RADIANT BARRIER, ULTRA NT RADIANT BARRIER, CONCRETE BARRIER FOIL, CONCRETE UNDERPAD, and ULTRA CONCRETE UNDERPAD. Covertech registered the marks rFOIL and CONCRETE BARRIER with the USPTO but did not register the remaining marks in the United States. Defendant TVM Building Products registered the mark ULTRA in the U.S., representing to the USPTO that it was the only entity with the right to use that mark.

Until October 2007, TVM sold Covertech’s products under an exclusive distribution agreement. When the agreement terminated, TVM sold Covertech’s products under a "private label" arrangement, under which Covertech manufactured products for TVM and TVM sold those products under the TVM brand. Despite that arrangement, TVM still bought and sold some of Covertech’s reflective insulation under Covertech’s rFOIL brand and other trademarks, without permission.

After learning of TVM’s ULTRA registration, Covertech filed an adverse petition with the USPTO seeking registration of ULTRA in its own name and filed suit against TVM for trademark infringement. After a one-week bench trial, the district court granted judgment in favor of Covertech on all claims and calculated TVM’s ill-gained profits of $4,054,319 and alternative statutory damages of $4 million for TVM’s infringement of the rFOIL and CONCRETE BARRIER marks. Because Covertech elected to receive the profit calculation, judgment in its favor was awarded in that amount for the infringement of those marks. The district court subsequently denied TVM’s omnibus motion for amended and additional findings, altered and amended judgment, and a new trial, and awarded Covertech attorney fees and expenses. TVM appealed.

Ownership of mark. In determining which party was the the rightful owner of the ULTRA mark, the district court relied on the "first use test," which determines initial ownership by asking which party was the first to use an unregistered trademark in commerce. According to the Third Circuit, the first use test was not the correct test, given the unique context of the manufacturer-distributor relationship. However, the district court’s decision on ownership was nonetheless affirmed because Covertech still qualified as the rightful owner when the correct test was applied.

The first use test is generally proper for unregistered trademarks, the appellate court said. However, this test was often a poor fit for the manufacturer-distributor relationship, where ownership rights would inure to the benefit of the distributor in many cases based simply on the fact that the distributor—albeit at the manufacturer’s direction—made the initial sale of goods bearing the mark to the public. The court explained that, when initial ownership between a manufacturer and its exclusive distributor was at issue and no contract existed, the manufacturer was the presumptive trademark owner unless the distributor rebutted that presumption. The factors considered in determining whether the distributor had overcome the presumption were: (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 goods on which the mark appeared; (5) which party did customers contact in order to make complaints for defects and to seek appropriate replacement or refund; and (6) which party paid for advertising and promotion of the trademarked product.

Applying the test to the current case, the Sixth Circuit first noted that the district court had found that Covertech had developed and used the ULTRA brand. This finding was not clearly erroneous and was supported by the testimony of Covertech’s vice president. Second, the record unequivocally demonstrated that labeling was handled by Covertech. Third, there were examples of promotional materials that displayed both the Covertech and the TVM logos in connection with advertisement of the ULTRA mark and associated products; this factor was therefore neutral. Fourth, the evidence showed that Covertech exercised control over the nature and quality of the goods on which the mark appeared. The parties did not dispute that Covertech bore responsibility for warranties and manufactured the ULTRA product. Fifth, although the record reflected TVM’s high-visibility roles in marketing, sales, and fielding customer complaints, it was undisputed that Covertech provided the warranties for ULTRA products and that this was made plain in product advertisements. Additionally, customer testimony indicated that the ULTRA products were associated with Covertech. The last factor—which party paid for advertising and promotion of the trademarked product—was the only one that favored TVM. It was undisputed that TVM was responsible for advertising and promoting the products for sale in the United States, including ULTRA. Balancing those factors, the court concluded that the test supported Covertech’s presumptive ownership of the ULTRA mark. Therefore, the district court’s determination of the rightful owner of the mark was affirmed, even though the lower court failed to apply the correct test.

Fraud on the USPTO. TVM challenged the district court’s cancellation of TVM’s registration of the mark based on a finding that TVM’s president made intentional misrepresentations in TVM’s application to register the ULTRA trademark and its legal conclusion that TVM committed fraud. The Third Circuit rejected these challenges. The district court was justified in finding that, due to prior interactions with Covertech, TVM’s president must have known or believed that Covertech had a right to use the mark, and that his representations to the USPTO that he believed no other entity had the right to use the mark must have been made with the subjective intent to deceive the USPTO.

Acquiescence. The Third Circuit also rejected TVM’s argument that the district court should have found Covertech’s claims barred by the doctrine of acquiescence. TVM did not identify any affirmative statement or act on the part of Covertech that expressly or impliedly authorized TVM’s infringement. Nor did TVM show that Covertech’s delay in initiating suit was either inexcusable or unduly prejudicial. Although Covertech learned on at least three occasions in 2007 and 2008 that TVM was passing off other manufacturer’s goods under its brand names, TVM led it to believe these incidents were isolated and merely accidental, the court said. Covertech did not discover until late 2010 or early 2011—in a deposition for an unrelated matter—the true magnitude of TVM’s infringement. After that point, Covertech’s escalating responses were timely and reasonable.

Damages. TVM was successful, however, in arguing that the district court had abused its discretion in awarding to Covertech $4,054,319 million of TVM’s profits for TVM’s infringement of the rFOIL and CONCRETE BARRIER trademarks. In the absence of any evidence in the record of TVM’s actual profits for sales of the infringing products, the district court based its calculation on TVM’s total sales in the metal building industry. That is, rather than awarding $4 million in statutory damages, the district court relied on evidence of TVM’s gross sales between 2009 and 2013 and then spontaneously reduced this figure by 30 percent to avoid an excessive award. An estimate of actual profits had to be "reasonable," the Third Circuit said, and the district court failed to meet this standard when it calculated damages by using industry-wide gross sales figures and by selecting a random discount value to determine that profits approximated 70 percent of gross sales of all industry products. A bare showing of gross sales was not sufficient to fashion an equitable award without some evidence to support a reasonable estimation of actual profits, such as business records, credible witness testimony, expert testimony, or industry data. Therefore, the damages award was vacated and the case was remanded with instructions to give Covertech the opportunity to elect statutory damages.

The case is No. 15-3893.

Attorneys: Brian W. Shaffer (Morgan, Lewis & Bockius LLP) for Covertech Fabricating Inc. J. Michael Baggett (McCann Garland Ridall & Burke) for TVM Building Products Inc.

Companies: Covertech Fabricating Inc.; TVM Building Products Inc.

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