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Quality Control Critical in Trademark Deals, Appeals Ruling Shows

Nov. 5, 2020, 11:04 AM

A clearly written quality control provision paved the way for a disaster relief organization’s victory over a former trademark licensee in the Second Circuit.

Team Rubicon Inc. convinced the U.S. Court of Appeals for the Second Circuit that it would suffer irreparable harm without a preliminary injunction against Team Rubicon Global Inc.

Team Rubicon terminated the right to use its trademarks by using protocols laid out in a licensing agreement with Rubicon Global after Rubicon Global allegedly failed to satisfactorily address sexual assault allegations against its sister organizations’ CEOs, the court said.

Quality control provisions allow a trademark owner to prevent licensees from hurting the brand’s reputation among consumers, which is at the core of a brand’s value. Team Rubicon’s ability to quickly halt Rubicon Global’s use stemmed largely from contractual protocols it followed while its licensee didn’t, attorneys said.

It also produced what the court deemed sound evidence it would be irreparably harmed absent an injunction, satisfying a controversial burden many trademark attorneys say shouldn’t exist.

Quality Control

The quality control provision of a licensing agreement is “the touchstone of a valid license,” trademark attorney Virginia Wolk Marino of Brinks Gilson & Lione said.

Marino also said that it’s critical to act on perceived violations of such a provision. Otherwise a court could later find they had abandoned any rights they might try to enforce under the provision later.

“If the licensor fails to maintain adequate control over use of the mark, the license becomes a ‘bare’ or ‘naked’ license,” Marino said. “Quality control has to be in there, and the trademark owner has to act on it if they see the quality slipping in any way.”

The Second Circuit on Tuesday said that while a provision stating that a breach would cause irreparable harm doesn’t bar the court from finding otherwise, it is “relevant evidence.”

Irreparable harm—a key factor in injunction decisions—isn’t assumed in trademark cases in the Second Circuit, and other circuits have explicitly extended a Supreme Court patent ruling that it is not assumed to trademark law.

Team Rubicon Trademark

Team Rubicon was founded by a pair of U.S. Marine Corps veterans after the 2010 earthquake in Haiti, and Rubicon Global was later founded to export the brand and philosophy internationally, the Second Circuit said.

Rubicon Global also started sister companies to which the original licensing agreement applied. In 2019 CEOs of two of the companies allegedly sexually harassed a volunteer from another.

Rubicon Global failed to respond after being told its letters to the sister organizations weren’t enough, and Team Rubicon rescinded rights to the marks. Rubicon Global kept using them and sued in March.

The clarity in the contract made it easier for Team Rubicon to put an immediate halt to the trademark use, trademark attorney Margaret A. Esquenet of Finnegan Henderson Farabow Garrett & Dunner LLP said.

“It really shows the critical nature of including details in quality control provisions—even if at the time there was a pretty good handshake deal,” Esquenet said. “From a license-drafting perspective it’s a good lesson—not only do you want quality control provisions in there, but a system in place for how they’re supposed to be enforced.”

Rubicon Global argued the U.S. District Court for the Southern District of New York erred in granting the injunction by concluding that Team Rubicon showed irreparable harm, failed to consider the balance of hardships that would result, and misconstrued evidence. But the Second Circuit said Team Rubicon made solid showings that it would succeed on the merits and that it would be irreparably harmed.

Irreparable Harm

Courts don’t grant a presumption of irreparable harm in trademark cases. Legislation has been proposed to reverse that, because trademark attorneys say damage to trademark goodwill is inherently difficult to remedy with money.

But Esquenet and Marino both said Team Rubicon’s production of evidence showing confusion and harm satisfied the controversial burden, and the Second Circuit agreed.

One fundraiser believed she was raising money for Team Rubicon rather than Rubicon Global. Two corporate partners had said they’d consider ending their relationship over the sexual assault allegations involving Rubicon Global, the appeals court noted. Esquenet said the existence of a presumption wouldn’t have changed Team Rubicon’s legal team’s practical approach.

“Of course if they had that evidence in hand they were going to bring it either way,” she said. “They’re not going to say, ‘Sit back and relax.’”

Esquenet said she found it interesting that the case turned on behavior unrelated to the products at issue, given that trademark law is primarily a consumer protection law.

“It might not have stuck even 10 years ago,” she said. “Not in '#MeToo’ era, but I could see a court saying, ‘I don’t know how closely tied your trademark quality control issues are to the loose morals of a subcontractor’s CEO.’”

The case is Team Rubicon Global Ltd. v. Team Rubicon Inc., 2020 BL 425356, 2d Cir., 20-1852, 11/3/20.

To contact the reporter on this story: Kyle Jahner in Washington at kjahner@bloomberglaw.com

To contact the editor responsible for this story: Kibkabe Araya at karaya@bloomberglaw.com; Keith Perine at kperine@bloomberglaw.com

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