The doctrine of licensee estoppel prevents a trademark licensee from challenging the validity of a licensor's right to a trademark because, by taking a license, the licensee is seen to tacitly acknowledge the validity of the licensor's ownership. This can be contrasted with a patent licensee who generally cannot be estopped from challenging patent validity.

In some instances, such as when ownership is transferred, or when a trademark owner arguably abandons the mark by permitting another entity to use the mark without retaining the right to approve or disapprove of the entity's use of the mark, it may be less clear as to whether the licensee has acknowledged trademark ownership and whether the doctrine of licensee estoppel will prevent the licensee from challenging the new licensor's ownership of the mark. The United States Court of Appeals for the District of Columbia Circuit recently addressed these issues in John C. Flood of Virginia., Inc. v. John C. Flood, Inc., No. 10-7098 (D.C. Cir. June 17, 2011)1.

The John C. Flood Decision

The John C. Flood decision involved a number of similarly named entities in the plumbing, heating, and air condition business. The original John C. Flood began operating in the Washington, D.C. area under the service marks JOHN C. FLOOD and FLOOD. In 1988, the owners of the original Flood company and two of its employees incorporated a new Virginia business, John C. Flood of Virginia, Inc. The new Flood company of Virginia had a verbal license to use the disputed marks, and had continuously used the marks since 1989.

In 1993, the original Flood company declared bankruptcy and ceased operations. In 1995, the share of new Flood company of Virginia, initially owned by the founders of original Flood company was purchased by the other owners of the new Flood company of Virginia (who were formerly employees of the original Flood company). Also, in 1995, the original owners of original Flood company and two other individuals—the Smileys—started several new plumbing businesses, including John C. Flood of MD, Inc., and John C. Flood of DC, Inc. These new Flood entities of MD and DC misappropriated assets from the original Flood company, including the disputed marks. In order to preserve the assets of the original Flood company, the bankruptcy trustee caused the misappropriated assets and the stock of the additional Flood entities to be seized. The trustee then proposed a sale of all assets to the owners of the new Flood entities of MD and DC. Although the owners of the new Flood entities of MD and DC made a competing bid to purchase only the disputed marks and original Flood company's telephone numbers, the assets of original Flood company were sold to the Smileys in 1996. The Smileys then incorporated a new business, John C. Flood, Inc., with the purchased assets.

Since 1996, both the Flood company of the Smileys and the Flood company of Virginia had used the disputed marks. Also in 1996, the Flood company of the Smileys demanded that the Flood company of Virginia include the modifier "of Virginia" when it used the disputed marks, and the Flood company of Virginia conceded to that demand. In 2000, however, the Flood company of Virginia sought and obtained trademark registrations from the United States Patent & Trademark Office for the phrase "JOHN C. FLOOD" and a logo incorporating that phrase. Upon learning of the registrations, the Flood company of the Smileys sought to cancel the registrations in an action before the Trademark Trial and Appeal Board. That action, however, was suspended in 2006 when the Flood company of Virginia sued the Flood company of the Smileys for trademark infringement in United States District Court for the District of Columbia. In response, the Flood company of the Smileys filed a counterclaim for priority of the disputed marks.

Before the district court, the Flood company of Virginia argued that the original Flood company had abandoned its rights in the disputed marks by granting a "naked license" when it failed to protect the marks from misappropriation by the Flood entities of MD and DC during the bankruptcy proceedings. The Flood company of Virginia claimed that the unsupervised use of the marks by the Flood entities of MD and DC (when the Flood entities of MD and DC misappropriated the marks) broke the chain of priority, and Virginia Flood's continuous use of the marks throughout that time period established its ownership of the marks. The district court, however, concluded that the Flood company of Virginia was the proper owner of the disputed marks without even addressing whether or not the original Flood company had abandoned its ownership of the marks. Rather, the district court found that the Flood company of Virginia, as a licensee of the disputed marks, was estopped from challenging the original Flood company's ownership of the marks. The Flood company of Virginia appealed that decision.

The court found that the chain of title of the disputed marks—from the original Flood company (the undisputed original owner) to the 1996 Flood—was unbroken, despite any misappropriation by the New Flood entities. In particular, the Court held that companies that were excluded from the chain of title, such as the New Flood entities, could not break the chain and that their actions were irrelevant to any priority determination, even when, as here, the same individuals had ownership rights in both the misappropriating entities and entities within the chain of title.

The Court further held that Virginia Flood was appropriately estopped from challenging ownership of the marks because, as the licensee, Virginia Flood had recognized the validity of the licensors' (both 1984 Flood's and 1996 Flood's) ownership. First, the Court found that Virginia Flood's failure to appropriately object to 1984 Flood's ownership of the marks during the bankruptcy sale indicated recognition of ownership. Second, such recognition was further demonstrated by Virginia Flood's losing bid for the disputed marks. Third, the Court found that recognition of 1996 Flood's ownership was demonstrated by Virginia Flood's failure to raise ownership issues when 1996 Flood demanded that Virginia Flood use the modifier "of Virginia," and also by Virginia Flood's acquiescence to the demand.

Thus, having found that Virginia Flood was estopped from contesting 1996 Flood's ownership of the marks, the D.C. Circuit affirmed the ruling of the district court.

Strategy and Conclusion

This case provides useful lessons for parties in potential or actual trademark disputes, particularly for prospective trademark licensees who may wish to contest mark ownership in the future.

  1. Where trademark ownership is disputed, parties should contest the ownership of disputed marks at the appropriate time, including, in particular, when the disputed marks are licensed, sold, or transferred. Here, the Court found that Virginia Flood's failure to contest ownership during the bankruptcy sale (as well as its bid for purchase) was indicative of recognition of ownership.
  2. Concession to demands limiting use of a disputed mark may also indicate a recognition of ownership. Here, the Court found that Virginia Flood's acquiescence to 1996 Flood's demand to use the modifier "of Virginia" was evidence of acknowledgement of ownership.
  3. In contrast to patent licensees, who ordinarily cannot be estopped from challenging patent validity, trademark licensees can be estopped from challenging licensed trademarks.

Source: LES Insights