COURT OF APPEALS FOR THE SEVENTH CIRCUIT, DECISION OF 10 MAY 2011, EVA’S BRIDAL LTD AND SAID GHUSEIN V. HALANICK ENTERPRISES, INC. AND NAYEF GHUSEIN, NO. 10-2863
The Court of Appeals for the Seventh Circuit held that the failure of a trademark owner to exercise reasonable control and supervision over a trademark licensee so that there is “consistent quality” resulted in the abandonment of trademark rights.
For nearly five decades, Eva’s Bridal Ltd and Said Ghusein (Eva's Bridal), and their family members operated a bridal store in the Chicago area under the name "Eva’s Bridal." The original owner, Eva Sweiss, operated the store as a family business and her children opened other locations of the store under the same name. The business eventually passed on to Said and Nancy Ghusein who operated locations in the Chicago suburbs of Oak Lawn and Orland Park. Continuing in the tradition of the family business the Ghuseins sold the Orland Park operation to Nayef Ghusein (Nayef) for $10 and licensed the "Eva’s Bridal" name and marks to Nayef and his company Halanick Enterprises (Halanick) for $75,000 a year.
In 2002, the license agreement expired but Nayef and Halanick continued to operate the Orland Park store under the name "Eva’s Bridal". Nayef, however, ceased making royalty payments and in 2007 Eva’s Bridal filed this suit under the Lanham Act.
The lower court dismissed the suit on the grounds that Eva’s Bridal had engaged in naked licensing and abandoned the "Eva’s Bridal" marks by failing to exercise reasonable quality control over the goods and services offered by its licensees. Specifically, the lower court noted that the written agreement with Nayef and Halanick did not include provisions requiring that they operate the Orland Park store in any particular way and did not provide Eva’s Bridal with any power of supervision over the business. Furthermore, in deposition testimony, Nancy Ghusein admitted that she and her husband Said did not attempt to control the licensee’s business.
On appeal, Eva’s Bridal conceded that a licensor must supervise to ensure quality control but argued that because they never doubted the quality of Nayef and his business, there was no reason to supervise the business. In support of this position, Eva’s Bridal argued that the dresses sold by Nayef and Halanick were from the same designers carried by the store when it was operated by the plaintiffs and that dress selection was important to consumers in this market.
The Court of Appeals held that there are numerous other factors important to the relevant customers, including, among others, the cleanliness of the store, helpfulness of the staff, and accuracy and timeliness of alterations – all of which were unsupervised by the plaintiffs. The court stated that licensors were not absolved of their duty to control quality merely because a licensee operates a “high quality” business and that the supervision level required was one that produces “consistent quality.”
In so doing, the court focused its attention on the trademark owner’s responsibility in providing the customer with a repeatable experience. The court also held that the requisite level of quality control in each situation would depend on the nature of the business and the customer’s expectations.
In view of the decision, trademark owners in the United States are well-advised to include sufficient quality control provisions in any license agreements, which include, among other things, the right to inspect and/or supervise the business as it pertains to the trademark license.