It turns out that SpongeBob Squarepants is more than just an absorbent, yellow and porous cartoon character who lives in a pineapple under the sea.  He can also teach us an important lesson about trademark licensing and liability.  Nautical nonsense, you say?  Read on about the recent 9thCircuit decision, Gibson Brands v. Viacom International.

Viacom owns the SpongeBob Squarepants franchise, a wildly popular and enormously profitable cartoon and merchandising enterprise that would make thrifty Mr. Krabs green with envy.  Viacom owns multiple copyrights and trademarks to the SpongeBob character.  Viacom granted JHS a license to reproduce SpongeBob and the Nickelodeon trademark on what JHS called its SpongeBob Squarepants “Flying V” ukulele.  Gibson happens to own a variety of trademark and trade dress registrations for the shape of its guitar, including the so-called “Flying V” shape.  Unhappy that JHS was riffing on the Flying V design, Gibson sued JHS for “direct” trademark infringement and sued Viacom for “secondary” trademark infringement.

A party can be found secondarily liable under either a “contributory infringement” or a “vicarious infringement” theory.  Contributory infringement occurs when the defendant either intentionally induces a third party to infringe the plaintiff’s mark or supplies a product to a third party with actual or constructive knowledge that the product is being used to infringe the mark. Inwood Lab., Inc. v. Ives Lab., Inc., 456 U.S. 844, 853–54, 102 S.Ct. 2182, 72 L.Ed.2d 606 (1982).  Vicarious infringement occurs when a party has the right and ability to supervise the infringing conduct and has a direct financial interest in the infringing activity.  Perfect 10, Inc. v. Visa Int’l Serv. Ass’n, 494 F.3d 788, 802 (9th Cir. 2007).

The trial court found insufficient facts alleged to establish either theory of infringement.  The 9th Circuit affirmed.

First, Gibson failed to state a claim for contributory infringement.  Importantly, when an alleged contributory infringer supplies something other than a product to a direct infringer, liability turns on the extent of control exercised over the direct infringer.  According to the Court’s analysis, the mere fact that Viacom licensed its marks was not, in and of itself, sufficient control over JHS even though the licensed marks were “prominent” on JHS’s end product.  There must be “direct control and monitoring” over the means of infringement.  The Court did not elaborate as to the degree of control or monitoring that would be sufficient, but it’s a pretty safe bet that a trademark license with customary “quality control” provisions would not be enough.  There needs to be more control than that.

Second, Gibson also failed to adequately allege facts to state a claim for vicarious infringement.  In this regard, the court noted that there were no facts showing that Viacom “directly controlled the body shape or name of the ukulele”, and “the degree of control necessary for a trademark licensing agreement did not, by itself, provide the degree of control necessary to impose vicarious liability with respect to any aspect of the allegedly infringing product.”

So, what is the IP lesson bubbling up from Bikini Bottom?  If you are asserting secondary liability claims against a trademark licensor due to the infringing product produced by a licensee, you will need to allege something more than the mere fact that there is a trademark license between the licensor and the licensee.  The licensor needs to exercise some sort of meaningful control over the licensee such as dictating how the licensee makes or markets the product in order for either contributory or vicarious liability to attach.  A trademark license containing customary “quality control” provisions is not, in and of itself, enough.  There needs to be something more.  If this enhanced degree of control is lacking, a claim of secondary liability will—as the Captain so eloquently puts it at the beginning of each SpongeBob episode—“drop on the deck and flop like a fish!”