Licensors Beware: Substantial Participation in Design, Manufacture and/or Distribution of Licensee’s Product May Impose Liability Under Apparent Manufacturers Doctrine (AMD)

Background
In a service-based economy, many industrial and consumer products are manufactured and sold through trademark licensing arrangements. Under these types of contractual agreements, the owner of the trademark licenses its brand name or mark to another company in exchange for a licensing fee. The authorized user of the trademark then has a contractual right to manufacture and sell the goods bearing the trademark. However, in some circumstances, the mere act of licensing the trademark to a manufacturer of a product for a fee can expose the licensor to a product liability claim under the Apparent Manufacturers Doctrine (AMD).

Recent case law decisions handed down by courts in various jurisdictions reveal that the liability of trademark licensors that neither manufactured nor sold the allegedly defective products that only bore their trademark may be limited to those licensors that substantially participated in the design, manufacture and distribution of the products.

Origin of AMD and Limitations on Passive Trademark Licensors
Courts have attempted to address the liability of trademark licensors under the AMD initially set forth in § 400 of the Restatement (Second) of Torts (1965). Under § 400, a product seller that puts out as its own an allegedly defective product manufactured by another will be held liable as an apparent manufacturer. Section 400 essentially substitutes the seller for the manufacturer in terms of liability on the rationale that the name/mark is an inducement for the purchase of the allegedly defective product based on the licensor’s reputation and skill. However, Comment “d” to § 400 expressly sets forth that “one puts out a chattel as his own when he puts it out under his name or affixes to it his trade name or trademark.” Thus, the language of Comment “d” seemingly imposes “apparent manufacturer” liability on any entity that had its name/mark on the product regardless of whether or not the entity played a role in the manufacture or distribution of the product. Therefore, some courts applied the AMD to trademark licensors who had no role in the chain of distribution of the allegedly defective product that simply bore its trademark.

In 1997, the American Law Institute promulgated the Restatement (Third) of Torts § 14, which attempted to clarify when trademark licensors who are not in the chain of distribution may be held liable for defective products under an “apparent manufacturer” theory. Comment “d” to § 14 expressly excludes from liability “the licensor who does not sell or otherwise distribute products.” However, Comment “d” further expressly states that “trademark licensors are liable for harm caused by defective products distributed under the licensor’s trademark or logo when they participate substantially in the design, manufacture or distribution of the licensee’s products … in these circumstances they are treated as sellers of the products [that] bear the marks.” Thus, a trademark licensor who neither manufactured nor sold the allegedly defective product but substantially participated in the design, manufacture, marketing and/or chain of distribution of the product may be held liable.

The Liability of a Trademark Licensor Is Generally Limited to Situations Where It Substantially Participated in the Design, Manufacture and Distribution
Under Comment “d” of § 14, the focus in determining liability is no longer whether the presence of the trademark was an inducement for the purchase but rather whether the trademark licensor substantially participated in bringing the product to market. This approach to apparent manufacturer liability is commonly referred to as the “enterprise liability” test. Under this test, no proof of reliance on the trade name or mark is necessary. Where the court recognizes the AMD as a means of imposing liability upon an entity that neither manufactured nor sold the product, courts have generally relied upon one or more of three tests for assessing liability of apparent manufacturers:

• The objective reliance test, which asks whether a reasonable consumer would have thought that the alleged “apparent manufacturer” actually manufactured the product
• The actual reliance test, which asks whether the plaintiff actually and reasonably relied upon the trademark in purchasing the product
• The enterprise liability test.

While all three tests are applicable to apparent manufacturers, the only test applicable specifically to a trademark licensor is the enterprise liability test, i.e., whether or not the licensor substantially participated in the design, manufacture and/or distribution of the product to have exercised control over the product. Courts that have addressed the AMD specifically in the context of trademark licensors apply this test and hold that where there is no substantial participation, the licensor cannot be liable.

Recently in Rublee v. Pfizer, Inc., 199 Wn. App. 364, 2017 Wash. App. Lexis 1488 (June 26, 2017), the Court of Appeals of Washington in addressing the AMD to determine the liability of Pfizer, Inc., albeit not an authorized trademark licensor but whose name appeared on bags of asbestos products manufactured by the Quigley Company, applied the enterprise liability test, among other tests, to conclude that Pfizer was not an apparent manufacturer of Quigley where there was no proof that Pfizer participated substantially in the design, manufacture and/or distribution of the Quigley product, among other reasons. Likewise, on May 31, 2016, another asbestos case addressing the apparent manufacturer liability of Pfizer, Inc., came before the Court of Appeals in Maryland. There, the Court of Appeals of Maryland applied the same tests and reached the same conclusion based on a similar factual scenario. See Stein v. Pfizer, Inc., 228 Md. App. 72, 137 A.3d 279, 2016 Md. App. LEXIS 51 (May 31, 2016).

A number of jurisdictions have limited the liability of trademark licensors to those who have substantially participated in bringing the product to the market:

• Colorado also has reiterated that the AMD does not apply to a trademark licensor with “no involvement in production, marketing, or distribution of product.” See Heinrich v. Master Craft, 131 F. Supp. 3d 1137 (D. Colo. 2015) applying Colorado law.
• Massachusetts also agrees. Applying Massachusetts law, the District Court explained that “a nonseller trademark licensor who participates substantially in the design, manufacture or distribution of the licensee’s product may be held liable under Massachusetts law as an apparent manufacturer.” See Anunciacao v. Caterpillar Inc., No. 07-10904-JGD, 2011 U.S. Dist. LEXIS 118374 (D. Mass. Oct. 13, 2011).
• New York also has held that a trademark licensor is not liable “where there is no evidence of a trademark licensor’s ‘actual control’ over the production, including the capacity to exercise control over product quality, or the distribution, including sales.” See Auto Ins. Co. of Hartford Conn. v. Murray, Inc., 571 F. Supp. 2d 408 (W.D.N.Y. 2008).
• In SSP Partners v. Gladstron Invs. (USA) Corp., 169 S.W.3d 27 (Tex. App. 2005), the court recognized “a trademark licensor may be liable as an apparent manufacturer when the licensor is significantly involved in the manufacturing, marketing, or distribution of the defective product.”
• In Schenepf v. Kansas Gas Service Company, No. 04-4143, 2005 U.S. Dist. LEXIS 4167 (D. Kans. Mar. 4, 2005), the court rejected a broad principle that the AMD did not apply to trademark licensors. Instead, the court suggested that a claim against a trademark licensor was viable should there be facts illustrating defendant’s “substantial or integral involvement in the manufacture, sale, distribution, or marketing of the alleged defective product.”
• Likewise, in Iragorri v. United Techs. Corp., 285 F. Supp. 2d 230 (D. Conn. Sept. 30, 2003), the court noted that “the Connecticut Supreme Court … refused to extend the apparent manufacturers doctrine to trademark licensor ‘not involved in the production, marketing, or distribution of the defective product.’” The court further explained that jurisdictions applying the AMD to trademark licensors have generally relied “on the trademark licensor’s involvement in the actual distribution, marketing, or manufacture of the product” and where such proof is lacking, a claim must fail.
• In Harrison v. B.F. Goodrich Co., 881 So. 2d 288 (Miss. Ct. App. 2004), the Mississippi Court of Appeals relying on § 14 noted “there is no liability for an allegedly defective product on the part of a trademark licensor who was not involved in the design, manufacture, or sale of the product.”

Non-Uniform Application of the AMD
Courts have generally limited the liability of trademark licensors to those that substantially participated in the design, manufacture and distribution of the product. However, some jurisdictions have continued to apply the AMD to licensors who did not substantially participate in the design, manufacture and distribution of the product. For instance in Kennedy v. Guess Inc., 806 N.E.2d 776 (Ind. 2004), a court in Indiana denied Summary Judgment to a licensor that did not design, manufacture and/or sell the product on the ground that the licensor exercised some control over the product inasmuch as it approved the placement of the logo on the product. However, even in that case, the Indiana Supreme Court noted that “Indiana common law should treat trademark licensors as having responsibility for defective products placed in the stream of commerce bearing their marks, but only so much of the liability for those defects as their relative role in the large scheme of design, advertising, manufacturing, and distribution warrants.”

Other jurisdictions, such as Arizona, Georgia and Michigan, have rejected the AMD entirely and not just specifically in regard to trademark licensors. In New Jersey, the Product Liability Act, N.J.S.A. § 2A:58C-1 et seq., which is generally the exclusive remedy for harm caused by a product, specifically defines a manufacturer as “any person who designs, formulates, produces, creates, makes, packages, labels or constructs any product or component of a product” and as a “product seller” − in other words, anyone who actually designed, manufactured and sold the product.

In short, where a plaintiff seeks to impose liability on a trademark licensor as an “apparent manufacturer” under the AMD theory, the licensor may avoid liability where the AMD is not recognized at all or by identifying its lack of a role or a limited role in the design, manufacture and distribution of the product showing that it did not exert the required amount of control over the allegedly defective product to be considered the “apparent manufacturer.”

This blog post was published originally on November 10, 2017.