Expressly adopting for the first time a test to determine whether a manufacturer or distributor is the owner of an unregistered trademark in the absence of a contractual ownership clause, the US Court of Appeals for the Third Circuit held that the manufacturer is the presumptive owner unless the distributor is able to rebut that presumption using the factors laid out in the McCarthy Test. Covertech Fabricating, Inc. v. TVM Building Products, Inc., Case No. 15-3893 (3d Cir., Apr. 18, 2017) (Krause, J).
Covertech is a Canadian corporation that manufactures protective packaging and reflective insulation. In 1998, Covertech entered into a verbal agreement with TVM, designating TVM as the exclusive distributor of Covertech’s rFOIL brand insulation products in the United States. The rFOIL brand includes several different products, some of which are registered trademarks. As part of the agreement, TVM was required to refrain from selling competitor products in the United States. In 2007, Covertech terminated the distribution agreement for untimely payments and because Covertech learned that TVM was purchasing products from another manufacturer and passing them off as Covertech’s. TVM assured Covertech that the sales were a mistake, and shortly thereafter the parties entered into a new verbal agreement. In late 2010 or early 2011, Covertech again terminated the agreement after learning that TVM was still purchasing products from Covertech’s competitors. TVM nevertheless continued to market products under the rFOIL brand, requiring Covertech to repeatedly demand that TVM discontinue the unauthorized sales and use of its trademarks.
Covertech ultimately sued TVM, and the district court found for Covertech on all claims. As part of the dispute, the district court relied on the First Use Test to determine that Covertech was the owner of an unregistered mark falling under the rFOIL brand. TVM appealed.
On appeal, the Third Circuit acknowledged that the First Use Test, which adheres to the “first-in-time, first-in-right” principle, is typically the proper test to determine ownership of unregistered trademarks, but that it is an “imperfect fit” for the “exclusive and noncompetitive manufacturer-distributor relationship,” where the distributor is often the one making the initial sale of goods at the manufacturer’s direction. As the Court explained, the McCarthy Test (named after Prof. Thomas McCarthy), not the First Use Test, is the proper test to determine whether the manufacturer or the exclusive distributor is the owner of an unregistered mark where there is no contract dictating otherwise. Under the McCarthy Test, the manufacturer is the presumptive owner of the unregistered trademark unless the distributor can rebut the presumption relying on the following six factors:
- Which party invented or created the mark?
- Which party first affixed the mark to the goods sold?
- Which party’s name appeared on the packaging and promotional materials in conjunction with the mark?
- Which party exercised control over the nature and quality of goods on which the mark appeared?
- To which party did customers look as standing behind the goods (e.g., which party received complaints and which party issued replacements and/or refunds)?
- Which party paid for the advertising and promotion of the products?
As the Third Circuit explained, “[t]he presumption and rebuttal factors of the McCarthy test place a thumb on the ownership scale in favor of the manufacturer, but invite courts to consider various indicia of ownership designed to elicit the roles and responsibilities of the parties and the expectations of consumers in order to gauge whether, in a given case, the distributor and not the manufacturer operated as the rightful owner of the contested mark.”
Applying the McCarthy Test to the facts at hand, the Court found that four of the factors favored Covertech, factor three was inconclusive, and factor six weighed in TVM’s favor. The Third Circuit concluded that Covertech was the proper owner of the mark. The Court also clarified that “[e]ven if the balance was in equilibrium, such a result would still be insufficient to overcome Covertech’s presumptive ownership.”