In deciding cross-motions for a preliminary injunction, the Southern District of New York evaluated whether a licensee could resume use of its former name following entry into a license to use a substantially identical name and the subsequent termination of that license. In granting a preliminary injunction in favor of the licensor, the court held that any common law rights a licensee may have held in its former name were extinguished by the “merger rule,” pursuant to which a licensee relinquishes any independent rights it may have had in a licensed name upon entering into a license, as those rights are merged into the license and inure to the licensor’s benefit.
Plaintiff Dress for Success Worldwide (“Worldwide”), an international nonprofit organization that provides disadvantaged women with business attire and career support services, owns the federally registered trademark DRESS FOR SUCCESS. Defendant Dress 4 Success (“D4S”) operated independently in the Los Angeles area under the substantially identical name DRESS 4 SUCCESS. Each organization commenced use of its respective marks at approximately the same time.
In 2001, the parties executed a multiyear affiliation agreement pursuant to which D4S entered into a trademark license with Worldwide to use the name DRESS FOR SUCCESS LOS ANGELES. Following the termination of that license in 2008 for alleged poor performance, D4S resumed operations under its former name DRESS 4 SUCCESS. Worldwide sued for trademark infringement and moved to preliminarily enjoin D4S from using the DRESS 4 SUCCESS name and exploiting confusion over the organizations’ names following termination of the license. D4S cross-moved to preliminarily enjoin Worldwide from using its DRESS FOR SUCCESS mark in the Los Angeles area. For the purpose of deciding the parties’ motions, Worldwide stipulated that D4S had prior common law rights in its DRESS 4 SUCCESS mark in the Los Angeles area.
In granting Worldwide’s motion for a preliminary injunction and denying D4S’s cross-motion, the court held that any prior common law trademark rights D4S may have owned in its DRESS 4 SUCCESS mark were extinguished upon its entry into a license agreement with Worldwide pursuant to the “merger rule.” The merger rule provides that a licensee relinquishes any independent rights it may have in a licensed mark upon entry into a license agreement for that same or a substantially identical mark. The rule recognizes that, by definition, entry into a license requires that a licensee acknowledge that the licensor owns the mark that is the subject of the license and, further, that the licensee’s rights are derived from the licensor. The court noted that while the validity of the merger rule was a question of first impression in the Second Circuit, the Fourth Circuit and several district courts in other circuits had applied the rule under similar facts. The court found that D4S could not meaningfully distinguish any of these prior decisions, and also noted D4S’s failure to cite any case expressly rejecting the rule. Further, the court rejected D4S’s argument that the rule should not be applied in situations where the parties’ marks are not identical, citing a prior decision from the Central District of Illinois that applied the rule to “substantially identical” marks.
Because D4S relinquished any common law rights it had in the DRESS 4 SUCCESS mark upon entry into a license with Worldwide, the court held that D4S could not rely on such rights as a defense to infringement of Worldwide’s federally registered trademark. Noting D4S’s concession that a likelihood of confusion existed between its DRESS 4 SUCCESS and Worldwide’s DRESS FOR SUCCESS marks based on both the similarity of the parties’ marks and the similarity of their services, the court had little trouble finding that Worldwide was likely to succeed on the merits of its trademark infringement claim. The court also noted that irreparable harm is automatically presumed in licensor-licensee disputes once the plaintiff has demonstrated unlawful use of its mark and consumer confusion.
Trademark licensees with prior rights in a licensed mark (or in a substantially identical mark) should be aware of the merger rule prior to entry into a license agreement. If the licensee’s bargaining position permits, a licensee may consider contractually opting out of the rule, particularly in situations where the licensee has prior rights in a limited geographic area and wants to preserve those rights upon expiration or termination of the license.