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May the holder of a trademark be liable in tort for a personal injury arising from a defect in a promotional product bearing its mark when it did not sell or manufacture the product, which instead was made and sold by a licensee whom the trademark holder does not control? Most law students faced with this question would quickly answer “no,” noting that when a defendant did not sell or manufacture the product, a duty in tort can arise only from control over the product or a special relationship between the defendant and the plaintiff. Of course the answer to this question has real-world implications beyond a law school exam. If such liability can be imposed, the trademark owner may need to insure against such risk. And a company considering the purchase of the trademark holder may value the target quite differently, depending on the types of products that bear the target’s mark and their potential products liability risk. A surprising decision in ‘Kennedy v. Guess Inc.’ It was both surprising and notable, then, when the Indiana Supreme Court recently held that a trademark licensor may be subject to liability in negligence for injuries caused by products bearing its mark, even though it was not involved in the design, manufacture or sale of the promotional product. See Kennedy v. Guess Inc., 806 N.E.2d 776 (Ind. 2004). In Kennedy, the plaintiff’s wife had received with the purchase of a watch a free umbrella bearing the Guess logo. The plaintiff took the umbrella to work, where a co-worker swung the umbrella by the handle. The shaft separated from the handle, striking the plaintiff in the nose and sinus, causing injury. The plaintiff originally sued Guess and Callanen International Inc., which had a license from Guess to market products bearing the Guess logo. Callanen had not actually made the umbrellas, but rather had ordered them from a Hong Kong-based manufacturer and then distributed them. It was undisputed that Guess, as the trademark licensor, did not design, manufacture, distribute or sell the umbrellas. It merely licensed Callanen to place the Guess mark on various products, including the umbrellas. The court in Kennedy concluded that the trademark licensor could not be subject to strict liability because it was not “a person who sells, leases, or otherwise puts [the product] into the stream of commerce” as required by Indiana’s Products Liability Act. Id. at 780. Nevertheless, the court held that the trademark licensor could be liable in negligence as the “apparent manufacturer” of the product. It concluded that trademark licensors have “responsibility for defective products placed in the stream of commerce bearing their marks, but only so much of the liability for those defects as their relative role in the larger scheme of design, advertising, manufacturing and distribution warrants.” Id. at 786. Although the undisputed evidence demonstrated that Guess had no role in the design, manufacture and distribution of the free umbrella bearing its brand, the Indiana Supreme Court held that summary judgment for Guess was inappropriate, stating that “[t]he process of sorting out comparative fault in such settings can be left to juries.” Id. In reaching its conclusion, the Indiana Supreme Court rejected the approach taken by the Restatement (Second) of Torts and failed even to consider the refinement of that analysis in the Restatement (Third) of Torts. Section 400 of the Restatement (Second) articulates the basic rule that one who sells, under his own brand, a product that actually was made by someone else may be held liable as if he actually had made the product. Of course, imposing such a duty in that situation makes sense because the defendant is the actual seller of the product. The comment to this section makes clear, however, that this general rule does not apply to trademark licensors that are not sellers: “Such licensors are liable as sellers for harm caused by product defects only when they participate in the design, manufacture, or distribution of the products in question.” Restatement (Second) of Torts � 400. Under this rule, of course, Guess would have had no liability because it was not the seller and did not design, manufacture or distribute the free umbrellas bearing its mark. The Restatement (Third)-which the Indiana Supreme Court did not cite-makes this presumption of nonliability even clearer: “Trademark licensors are liable for harm caused by defective products distributed under the licensor’s trademark or logo when they participate substantially in the design, manufacture, or distribution of the licensee’s products. In these circumstances they are treated as sellers of the products bearing their trademarks.” Restatement (Third) of Torts � 14, cmt. d. Both the Kennedy court and the restatements appear to focus on similar things: the trademark licensor’s involvement in the design, manufacture and sale of the allegedly defective product. Their approaches, however, are diametrically opposed. The restatements start with a presumption that a trademark licensor is not liable; a duty arises only with an assertion of control over the design, manufacturing or distribution process. In contrast, the Indiana Supreme Court appears to presume the existence of a duty by affirming the reversal of summary judgment-even when the evidence demonstrates that the trademark licensor has not exerted any control over the design, manufacturing or distribution processes, other than approving the placement of its mark. Interestingly, the court appears to believe that it was doing trademark holders a favor. It noted that under the Lanham Act, trademark licensors have a duty to exercise control over the use of their mark. This may include providing specifications and standards and inspecting manufacturing facilities. The court reasoned that a products liability rule that “imposes liability identical to that of the manufacturer” when a trademark licensor exercises its Lanham Act responsibilities would encourage “the licensor to play as minor a role as possible in overseeing the design and manufacturing of products bearing the mark in order to preserve the ‘Sergeant Schultz’ defense.” 806 N.E.2d at 786. Thus, it appears to have concluded that by not imposing the full liability that a manufacturer would bear, but instead limiting trademark holders’ liability to “only so much of the liability . . . as their relative role in the larger scheme of design, advertising, manufacturing and distribution warrants,” it would encourage trademark holders to exercise more-rather than less-supervision of products bearing their mark. The court’s rule, however, seems to suffer from the same disincentive that it identified for the Restatement approach; under the Kennedy rule, the trademark holder’s potential liability share still would increase the more the trademark holder is involved in the design, manufacture and sale of its licensee’s products. Moreover, by presuming the existence of a duty and discouraging summary judgment, the rule threatens to embroil trademark holders in many more lawsuits. Indiana’s approach is certainly novel. Other states analyzing the “apparent manufacturer” theory of liability have held that when the defendant is a mere trademark licensor that is uninvolved in the manufacture, marketing or distribution of the product, it is entitled to judgment as a matter of law. See, e.g., Bur-kert v. Petrol Plus of Naugatuck Inc., 579 A.2d 26 (Conn. 1990). The ‘apparent manufacturer’ approach Those courts and commentators who have advocated imposing liability on trademark holders as the “apparent manufacturer” typically have relied on arguments harkening back to the early justifications for strict liability. They urge that imposing such liability is fair because the trademark holder makes money from the sales transaction, and that consumers view the trademark holder as the product manufacturer because it bears its mark. Thus, the consumer may rely on the trademark as a statement of quality, and the trademark holder may be easier to locate and sue than the actual manufacturer. See, e.g., Kennedy v. Guess Inc., 765 N.E.2d 213 (Ind. Ct. App. 2002). The trademark holder, they reason, can pass the cost of any judgment on to the product manufacturer or licensee. These arguments stray from the traditional bases for imposing a duty in negligence: control over the product and the defendant’s relationship with the plaintiff. Moreover, they contradict the trend in many state legislatures, identified in the Restatement (Third) of Torts � 1, cmt. e, against imposing liability on nonmanufacturing defendants merely because they are expected to pass the liability costs on to the manufacturer, by lawsuit or otherwise. Allowing suits to proceed against such nonmanufacturing defendants increases the transaction costs with little or no corresponding benefit to the plaintiff. Ironically, Indiana is one of the states that has revised its products liability act to immunize nonmanufacturing sellers, with certain exceptions. See Kennedy, 806 N.E.2d at 780. Commentators have observed that trademark licensing has “emerged as a preferred method of producing and marketing goods in the United States and abroad,” accounting for more than $50 billion in annual sales in the United States alone. See David J. Franklyn, “The Apparent Manufacturer Doctrine, Trademark Licensors and the Third Restatement of Torts,” 49 Case W. Res. L. Rev. 671 (1999). Legal rules imposing tort liability on trademark holders, such as those adopted by the Indiana Supreme Court, thus can be expected to have a significant economic impact. Courts seldom issue opinions on the subject of trademark holder liability for product defects, however, so the impact of the Kennedy opinion on other states’ jurisprudence may take time to evaluate. J. Russell Jackson is a partner at Skadden, Arps, Slate, Meagher & Flom of New York. He is a member of the firm’s complex mass torts and insurance litigation group.

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