Archive for the ‘Trademark’ Category

A Star is Born: The Licensing of Blue Ivy

Friday, February 24th, 2012

We here at The Licensing Law Blog have a saying: “It’s never too early to teach your kids about licensing.”

Apparently mega-super-celebrities Beyonce and Jay-Z agree. With licensing in mind, they recently filed a trademark application for their newborn baby daughter’s name, Blue Ivy.

Here to explain the how and why, we are honored to have as a guest blogger our friend and former Beanstalk colleague, Oliver Herzfeld:

1.    How does one trademark a child’s name?

Trademarking a child’s name is no different than doing so for any other name or mark.  In many countries, one’s right to use a mark is conditioned on being the first to register it in the relevant jurisdiction (i.e., it is a race to the filing office).  However, in the U.S., one’s right to use a mark is conditioned on being the first to actually use the mark in commerce.  Federal trademark registration is not mandatory.  In general, registering a mark in the U.S. will not help permit one to use it, nor will a failure to register a mark in the U.S., by itself, prohibit one from using it.  In most cases, all registration will do is provide certain procedural advantages.  One exception to the foregoing is a so-called “intent to use” application (ITU).  In the U.S., if one has not yet commenced using a trademark, but plan to do so in the future, one may file an ITU based on a bona fide intention to use the trademark in the future.  Doing so provides the registrant with the benefits of constructive use and priority that “relates back” to the original filing date.  This is precisely the type of registration Blue Ivy’s parents, Jay-Z and Beyonce, have pursued.  In other words, they are not yet using the name “Blue Ivy” in commerce, but they are claiming that they intend to do so in the future and, if/when they do, in terms of priority, they will be deemed to have commenced their use on January 26, 2012, the date of their ITU registration application.

2.    Is this a first or is there precedent for it?

This is certainly not a first.  For example, Ford Motor Company registered “Edsel”, the first name of Edsel B. Ford, son of the company’s founder.  The Edsel was an automobile manufactured by Ford, but the name has become synonymous with failure because the car never gained popularity and Ford lost millions of dollars on it.  Nonetheless, Ford continues to maintain five live trademark registrations for the name Edsel covering a variety of product categories.

3.    What do Jay-Z and Beyonce gain from this?

Owning a federal trademark registration provides a number of advantages.  Most importantly, it provides a legal presumption of their ownership of, and exclusive right to use, the name nationwide on or in connection with the goods/services listed in their registration.  Other benefits include:

  • Public notice of their claim of ownership (to counter any defendant’s claim of innocent infringement);
  • The ability to bring an infringement action in federal court;
  • The use of the U.S. registration as a basis to obtain registration in other countries;
  • The ability to record the U.S. registration with the U.S. Customs and Border Protection (CBP) Service to prevent importation of infringing foreign goods;
  • The right to use the federal registration symbol ®; and
  • Listing in the United States Patent and Trademark Office’s online databases.

4.    What do you think Jay-Z and Beyonce will use the trademark for?

Blue Ivy’s parents were obligated to describe their intended uses in their ITU application.  Here are the products and services they included grouped in accordance with certain international trademark classification numbers: (more…)

Betty Boop Trademark Case Has A Happy Ending

Sunday, January 8th, 2012

Like a hero rescuing a damsel in distress, the federal Ninth Circuit Court of Appeals granted a happy ending to the brand licensing industry in the controversial Betty Boop trademark case.

After its original opinion in Fleischer Studios, Inc. v. A.V.E.L.A., Inc. appeared to not only reverse settled case law, but also undercut the foundations of the brand licensing industry, the Ninth Circuit withdrew the opinion and replaced it with one that omits the controversial ruling.

The court’s original ruling held that under the doctrine of “aesthetic functionality,” there is no trademark infringement if a third party uses a trademark for its consumer appeal, rather than to identify the goods as “official.”

This holding unleashed a firestorm of criticism from the brand licensing industry, and prompted a petition for rehearing by the full Ninth Circuit Appeals Court, supported by briefs from such industry heavyweights as INTA, the MPAA, Major League Baseball, the NFL, and the NBA.

The Ninth Circuit did not give the petitioners what they had asked for, but something better— dispensing with rehearing by the full appeals court, the original three judge panel withdrew its  opinion, and replaced it with a new opinion omitting all mention of aesthetic functionality. In its new ruling, the court stuck to the narrow issues at hand. It upheld the trial court by ruling that Fleischer Studios had not proved that it held a valid trademark in the Betty Boop image mark, but reversed the trial court by ruling that Fleischer Studios might have a valid trademark in the Betty Boop word mark, and sent the case back to the trial court for further hearings on the issue.

Takeaway: the Ninth Circuit Court of Appeals followed both common sense and its own recent case law by withdrawing its arbitrary expansion of the doctrine of aesthetic functionality, saving the brand licensing industry from free riders who could sell branded merchandise as long as they make clear the mark was used for its consumer appeal, and not to identify the goods as made or endorsed by the mark owner.

Boop Oop a Yikes! Did the 9th Circuit Just Torpedo the Brand Licensing Industry?

Sunday, June 19th, 2011

The Ninth Circuit's slip is showing

In a recent case involving the saucer-eyed, short-skirted Betty Boop cartoon character, the federal Ninth Circuit Court of Appeals in Fleischer Studios, Inc. v. A.V.E.L.A., Inc. appears to have torpedoed the legal foundations of the brand licensing industry by ruling that there is no trademark infringement if a trademark is used for its commercial appeal rather than its source-identifying value.

If read broadly, the case would give a free pass to merchandisers to sell unlicensed New York Yankee caps or Mercedes-Benz medallions, as long as buyers were purchasing the goods for their brand appeal, and not under the mistaken belief that they were “official” goods.

The court’s Betty Boop “slip” was doubly surprising, considering that it had torpedoed a similar argument just five years ago.

The case involved both copyright and trademark infringement claims of Fleischer Studios against unlicensed sellers of vintage posters and other merchandise featuring the Betty Boop character.

The main focus of the court’s opinion was whether Fleischer had in fact purchased the copyrights to the Betty Boop character. The court concluded that Fleischer had not, because the party from which Fleischer had purportedly purchased its rights did not have an unbroken chain of title. Accordingly, Fleischer’s copyright infringement claims failed.

The court then focused on Fleischer’s alternate argument, that because it (along with Hearst Publications) owned the registered trademarks in the Betty Boop name and image, even if the defendants had not infringed its copyright, their unlicensed use of Betty Boop infringed Fleischer’s trademarks.

The court did not decide whether Fleischer in fact owned the trademarks, but ruled that in any case there was no trademark infringement because the defendants’ use of Betty Boop was not for the purpose of indicating that Fleischer or any other party was the source or origin of the products, but only for Betty’s commercial appeal to consumers. In other words, since the primary function of a trademark is to identify the source or origin of goods and services, the defendants’ use was not a trademark use, and therefore such use could not infringe Fleischer’s trademark rights, if any. Furthermore, added the court, Fleischer had not submitted evidence that the defendants’ use of Betty Boop had mislead consumers that Fleischer was the source of the goods. (But that was not surprising, given that the court raised the issue for the first time on appeal (below)).

As precedent, the court cited its 1980 opinion in International Order of Job’s Daughters v. Lindeburg & Co., which held that a maker of jewelry incorporating the trademarked insignia of the Job’s Daughters young women’s organization did not infringe because, “Trademark law does not prevent a person from copying so-called ‘functional’ features that constitute the actual benefit that the consumer wishes to purchase, as distinguished from an assurance that a particular entity made, sponsored or endorsed a product.” In a nutshell, this is the doctrine of “aesthetic functionality,” which starts from the long-accepted premise that a functional feature of a product cannot qualify as a trademark, because to do so usurps the domain of patent law, but then extends that an extra layer by holding that features that contribute to consumer appeal, including trademarks themselves, are automatically “functional” in the same way as an attention-grabbing mechanical feature of a product.

There was just one problem. Neither the parties in their briefs nor the trial court in its opinion had cited Job’s Daughters, probably because the Ninth Circuit itself had put the case in a very narrow box in its 2006 opinion in Au-Tomotive Gold Inc. v. Volkswagen of America, Inc. In Auto Gold, a dealer in automobile accessories tried to sell keychains and other paraphernalia featuring Volkswagen and Audi logos, arguing that under Job’s Daughters, it was using the marks for their consumer appeal, not their source-identifying function, and had attached disclaimers stating that the goods were not produced or endorsed by Volkswagen or Audi.

The Auto Gold court flatly rejected that argument on the grounds that in Job’s Daughters and similar cases, the “aesthetic functionality” doctrine had only exempted aesthetic or ornamental features, like product color or shape, and only when they had some function “wholly independent of any source-identifying function.” The court contrasted those cases with the Volkswagen and Audi branded goods sold by Auto Gold, for which the “alleged aesthetic function is indistinguishable from and identical to the marks’ source identifying nature… The demand for Auto Gold’s products is inextricably tied to the trademarks themselves,” and not to independent economic or performance benefits of the designs. In other words, it is nonsensical to say that because a source-identifying symbol that is designed to have consumer appeal in fact has such appeal, that makes it per se “functional,” and therefore ineligible to receive trademark protection.

And in a footnote, the Auto Gold court marginalized Job’s Daughters directly by saying that the case only applied to “collective marks,” that is, a category of trademarks used by members of a collective group or organization, which typically have less of a source-identifying function than commercial trademarks, according to the court.

But the Fleischer opinion did not even mention Auto Gold, much less attempt to distinguish it from the Betty Boop facts. Making it extremely likely that another merchandiser will try to free-ride another famous brand, and the Ninth Circuit will have to hide its Betty Boop slip all over again.

Takeaway: brand owners selling products in the federal Ninth Circuit (California, Oregon, Washington, Nevada, Arizona, Idaho, Montana, Alaska, Hawaii, and Guam) should be vigilant to stop companies from selling unlicensed merchandise featuring their trademarks which claim that the marks are not used for their source identifying purposes, but rather for their consumer appeal. It will be especially helpful to gather evidence that consumers believe the unlicensed goods are “official” goods manufactured, sponsored, or endorsed by the brand owner.

Handling Trademark Licensees in Bankruptcy

Tuesday, May 31st, 2011

Don’t panic, trademark licensors with financially shaky licensees. In case it has already sold out at your local newsstand, here is a copy of Handling Trademark Licensees in Bankruptcy, Part 1, from the June issue of Royaltie$ magazine, written with our friend and former Beanstalk colleague, Oliver Herzfeld.

Part 2 will be out in August.

There Are 8 Million Lawsuits in the Naked Cowboy

Wednesday, February 23rd, 2011

This blog post is not authored by, endorsed by, or affiliated with the Naked Cowboy(R), and other stuff our lawyer made us say.

Photo Courtesy Ryan McGinnis

A New York New Year’s tradition is the dropping of the ball in Times Square.

Another is fast becoming the serving of the New Year’s lawsuit by Times Square’s scantily clad troubadour, the Naked Cowboy.

Robert John Burck, aka the Naked Cowboy, recently sued CBS and the producers of the soap opera “The Bold and The Beautiful” for an episode showcasing a character in “Naked Cowboy signature garb” of cowboy hat, cowboy boots, tighty whitey briefs, and strategically placed guitar. The suit seeks $15 million damages for a casebook worth of intellectual property-related legal injuries, including trademark infringement, trademark dilution, false advertising, misappropriation of right of publicity, and unfair business practices.

But guys, you missed the most obvious claim of all– infringement of trade dress.

The complaint claims that the suit was filed only after the defendants ignored multiple requests to take a $150,000 license, in order that the “integrity and propriety of the brand be kept in tact [sic].”

Would that have been a naked license?

In 2008, Burck sued candy maker Mars, Inc. on the grounds that Times Square billboards and a mural featuring a guitar-strumming, underwear-clad blue M&M infringed his Naked Cowboy trademark and rights of publicity. The judge dismissed the right of publicity claim on the grounds that Burck could not claim it for a fictional character; the parties later reached a confidential settlement regarding the trademark infringement claims.

In 2009, Los Angeles videogame maker Gameloft filed a preemptive lawsuit against Burck seeking a ruling that the appearance of a scantily clad, guitar strumming character in its videogame, New York Nights, was not an infringement of the Naked Cowboy trademark.

Also in 2009, Burck sued Clear Channel Communications, claiming that its Tampa radio station created and promoted a Naked Cowboy imposter.

In 2010, Burck sued Sandra Brodsky, a bikini-clad, guitar strumming ex-stripper who strolled Times Square as the Naked Cowgirl, after she refused to sign a Naked Cowboy franchise agreement (going price: $5,000 per year or $500 per month) and ignored a cease-and-desist letter to halt all Times Square performances. Burck’s complaint alleged that the Naked Cowgirl would cause confusion among potential consumers of Naked Cowboy services, and tarnish his wholesome image, by her frequent use of obscene language and gestures towards uncooperative tourists.

What Is A Reasonable Royalty?

Thursday, January 27th, 2011

Did somebody say royalty?

What is a reasonable royalty rate for licensed intellectual property?

According to the Court of Appeals for the Federal Circuit, it is not 25%–at least not as a rule of thumb.

The U.S. Patent Act requires that damages in a successful patent infringement lawsuit equal the reasonable royalty that a licensee would pay a licensor in a hypothetical license negotiation at the time the infringement began.

In Uniloc USA, Inc. v. Microsoft Corp., Uniloc prevailed at trial in its patent infringement claim and was awarded damages of $388 million, based in part on its expert witness’s testimony that 25% of Microsoft’s expected profits on its Office software suite was a reasonable baseline from which to calculate patent royalties. The infringed invention was a product activation key designed to deter illegal software copying.

The 25% rule of thumb starts with the infringer’s gross profit margin (profits divided by nets sales), multiplies that by 25%, then multiplies the resulting royalty rate by the infringer’s net sales from the infringing products, to calculate the patent owner’s damages. For example, if the present value of net sales of an invention is $6, and the present value of manufacturing expenses is $4, the gross profit margin is 33.3% (6 – 4/ 6), and the 25% rule royalty rate would be one-quarter of that, or 8.3% of net sales. The initial royalty rate is often adjusted upwards or downwards, according to the 15 factors detailed in the 1970 case, Georgia-Pacific Corp. v. U.S. Plywood Corp.

On appeal, Uniloc argued that academic studies had proven that the 25% rule of thumb was supported by evidence that patent royalties negotiated in the real world averaged around 25% of profits.

The CAFC conceded that it had tolerated the 25% rule of thumb in cases where the parties had not contested it, but ultimately overturned Uniloc’s damages award on the grounds that to be admissible, a general theory must be sufficiently tied to the facts of the case, however Uniloc’s expert had not laid the necessary groundwork to introduce the 25% rule of thumb in that case.

More broadly, the CAFC said the 25% rule failed because: 1) it did not account for the importance of the patent to the product in which it was incorporated; 2) it did not account for the difference in market power and risk assumed by the parties; and 3) it is essentially arbitrary, and does not fit within the model of a hypothetical negotiation assumed to occur prior to a finding of infringement.

So what then is a “reasonable royalty” for licensed IP?

The CAFC endorsed three of the 15 Georgia-Pacific factors for calculating a reasonable patent royalty: looking at royalties paid or received in licenses for the patent or in comparable licenses, and looking at the portion of profit that is customarily allowed in the particular business for use of the invention or similar inventions. But even these must be tied to the facts of the particular case.

By way of reference, a frequently cited rule of thumb for calculating a fair trademark royalty rate is 10% to 25% of the licensee’s expected gross profit margin, depending on the type of goods, the size of the market, and the strength of the mark. In the same ballpark as patent law’s deposed 25% rule of thumb, but with more flexibility to allow calibration of the licensed IP’s actual contribution to the profitability of the product that incorporates it.

Costco v. Omega: Supreme Court Punts On Another Big IP Case

Monday, December 27th, 2010

Photo Courtesy University of Wisconsin Digital Archive under the cc 2.0 license

The United States Supreme Court deadlocked 4-4 on the question of whether the “first sale doctrine” permits copyrighted goods manufactured overseas but not authorized for sale in the United States to be sold here on the “gray market,” upholding a Ninth Circuit opinion which ruled in favor of the copyright owner that the doctrine does not apply.

The unsigned opinion in Costco Wholesale Corp. v. Omega S.A. was one of the shortest in the Court’s history: “The judgment is affirmed by an equally divided Court.”

Recently appointed Justice Elena Kagan recused herself from the decision, because she participated on the case while serving as US Solicitor General.

The case involved Omega Seamaster watches manufactured in Switzerland that were engraved on the underside with a US copyrighted “Omega Globe Design.” Omega sold the watches only for distribution in South America, but they found their way to the United States, where they were resold by Costco stores in California at a price of $1,299, compared to the $1,999 suggested retail price for authorized US resellers.

Omega sued Costco for copyright infringement on the grounds that Costco’s unauthorized sales of the Seamaster watches infringed Omega’s exclusive right under Section 106(3) of the Copyright Act of 1976 to distribute its work by sale, rental, lease, or lending.

Costco countered that Omega’s exclusive distribution right was preempted by the so-called first sale doctrine of Section 109(a) of the Copyright Act, which states that, “the owner of a particular copy…lawfully made” within the meaning of the Copyright Act is not subject to Section 106(3), so that once a copyright owner consents to the sale of its work, it loses its distribution right with respect to those copies, and the purchaser is free to transfer ownership in any way it wishes. The federal district court ruled in Costco’s favor, on the grounds that Omega’s sale to the South American distributors had triggered the first sale doctrine. (The existence of the first sale doctrine is one reason that copyright owners are increasingly trying to recast their transactions as licenses not subject to the doctrine, rather than sales.)

The Ninth Circuit Court of Appeals reversed, ruling in Omega’s favor on the grounds that prior cases in the circuit had held that the first sale doctrine does not apply to copies manufactured overseas and not authorized for sale in the United States. Key to that opinion was the Ninth Circuit’s holding that copies manufactured outside the United States were not “lawfully made” for purposes of Section 109, and therefore did not trigger the first sale doctrine, so that they continued to be subject to the copyright owner’s exclusive distribution right even after the first sale.

Before the Supreme Court, Costco urged reversal on the grounds that the appellate opinion: was based on precedents not supported by the Copyright Act; was at odds with the Supreme Court’s 1998 opinion in Quality King Distributors, Inc. v. Lanza Research International, Inc.; and was bad policy, because it would encourage manufacturers of copyrighted goods to relocate their factories overseas to maintain resale prices.

Although the case was widely anticipated by both copyright owners (movie studios, record companies) and luxury goods manufacturers on the one hand, and retailers on the other hand, to bring clarity to the often tangled law of gray market goods, the Court’s split left in place the Ninth Circuit’s opinion for that circuit only, but set forth no single national standard and created no Supreme Court precedent. It is likely the Court will need to revisit the issue.

Similarly, in another widely anticipated IP case, delivered in June, the Court in Bilski v. Kappos fractured into three separate but overlapping opinions without setting forth a clarifying standard for what is patentable subject matter in the digital age.

Takeaway: For cases arising in the jurisdiction of the Ninth Circuit (California, Oregon, Washington, Nevada, Arizona, Idaho, Montana, Alaska, Hawaii, and Guam), copyright owners will be able to pursue copyright infringement lawsuits against gray market sellers of their copyrighted goods that they manufactured overseas, and did not authorize for resale in the United States. Although not addressed in the Costco case, note that manufacturers may also have rights to sue gray market sellers under trademark law (the Lanham Act) to prevent US sales of their trademarked goods, if there is any material difference between the foreign version and the authorized US version, such as different product features or warranty coverage.

Licensor Recovery of Attorneys’ Fees in Bankruptcy

Thursday, November 18th, 2010

Photo Courtesy tristam sparks under the cc 2.0 license

The only thing worse for a licensor than losing money when its licensee files for bankruptcy is paying attorneys’ fees on top of that to stop the bleeding.

Two of the most common bankruptcy proceedings that licensor creditors get involved in are: 1) hearings related to the licensee’s attempt to assume an executory license agreement; and 2) lawsuits against the licensor to recover so-called preferential transfer payments from the licensee.

But can a clever licensor recover attorneys’ fees incurred in post-petition bankruptcy proceedings, if it had the foresight to include a well-drafted attorneys’ fee provision in its boilerplate license agreement?

Since a 2007 Supreme Court decision, the answer has been “maybe,” which was a big improvement over the previous answer of “almost never.”

Until 2007, there were two hurdles against a licensor creditor recovering its attorneys’ fees in a bankruptcy proceeding. The first was that many courts invalidated attorneys’ fee provisions to the extent that they applied to bankruptcy proceedings, arguing that the Bankruptcy Code had a general policy to invalidate contractual clauses that were triggered by bankruptcy. The second was that some courts interpreted the Bankruptcy Code to prohibit recovery of attorneys’ fees by unsecured creditors under any circumstances.

In 2007, the US Supreme Court removed the first hurdle in Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co., which held that the Bankruptcy Code did not contain a blanket prohibition on recovery of attorneys’ fees for bankruptcy related proceedings, as long as the attorneys’ fees provision is valid under state law.

But the Travelers case did not address the second hurdle, and there is currently a split among various courts whether unsecured creditors can recover attorneys’ fees even pursuant to a contractual provision valid under state law. So far, the Second Circuit, Ninth Circuit, and Sixth Circuit federal appeals courts have permitted such recovery, while the First Circuit and Eighth Circuit (in pre-Travelers opinions) have not.

Sigh, so confusing. What is a licensor to do? Well of course, put attorneys’ fee recovery language in your boilerplate license agreement. The worst that can happen is the court says no.

A starter attorneys’ fee provision might read as follows:

“If any legal action, arbitration, or other proceeding is brought under or in relation to this Agreement, including but not limited to any legal action, arbitration, or proceeding under the U.S. Bankruptcy Code, then in addition to any other relief to which the Licensor is entitled, if the Licensor is the successful or prevailing party, then the Licensor is also entitled to recover, and the Licensee shall pay, all: (a) reasonable attorneys’ fees of the Licensor; (b) court costs; and (c) expenses, even if not recoverable by law as court costs (including, without limitation, all fees, taxes, costs and expenses incident to arbitration, appellate, bankruptcy and post-judgment proceedings); incurred in that action, arbitration, or proceeding and all appellate proceedings. For purposes of this Section, the term ‘attorneys’ fees’ includes, without limitation, paralegal fees, investigative fees, expert witness fees, administrative costs, disbursements, and all other charges billed by the attorney to the Licensor.”

Adjust the above to be valid under the state law that governs the license agreement. Check whether that state law makes the provision reciprocal, by deeming that if an agreement grants one party the right to recover attorneys’ fees, then the other party is automatically entitled to recover its attorneys’ fees under like circumstances. Then cross your fingers.

Witches, and Bozos, and IP, Oh My

Wednesday, October 13th, 2010

Trick or Tea!

Is she a witch?

And was her father a Bozo?

In observance of the upcoming Halloween and Election Day holidays, and in the spirit of fun, we take a look at the intellectual property issues raised by the candidacy of Christine O’Donnell, the Republican and Tea Party candidate for U.S. Senate from Delaware.

Almost as soon as Ms. O’Donnell upset the party favored candidate in the Republican primary on September 14, video surfaced of her on the “Politically Incorrect” television show confessing that as a young woman, she had “dabbled into witchcraft,” and had had a date on a satanic altar. Her confession made her the punch line of a thousand late night one-liners– and the subject of her very own witch action figure. Internet toy seller herobuilders.com has capitalized on the publicity by offering a 12 inch Christine O’Donnell witch action figure for $39.95, featuring a smiling likeness of Ms. O’Donnell dressed in sorceress basic black flowing cape and pointy hat (sorry, no broomstick).

Can they do that?

Rights of publicity laws in many states prohibit commercial usage of the name, image, signature, or other indicia of the identity of a person without her consent. However, rights of publicity can be superseded by the First Amendment rights of the speaker, for example if the identity is used in news reporting, political commentary, parody, or (at least in California) if significant original transformative content has been added.

At first glance, the O’Donnell action figure seems to qualify under the commentary and parody exceptions.

But even when it is a much closer call — for example, an action figure that is an outright copy of a political figure solely in order to free-ride on his/her popularity — politicians usually decide it is bad publicity to sue. Herobuilders.com also sells action figures and bobbleheads of President Obama, Sarah Palin, Nancy Pelosi, Dick Cheney, and others. A notable exception to the “no sue” rule was California Governor Arnold Schwarzenegger, who sued an online seller of Schwarzenegger bobblehead dolls in 2004, but later agreed to a settlement in which the company could sell the dolls after a few modifications, such as removing the Governator’s toy assault weapon.

IP issues seem to run in Ms. O’Donnell’s family. According to this hilarious clip from MSNBC’s “Countdown,” Ms. O’Donnell’s father was the “fill-in Bozo the Clown” for a Philadelphia television station. He could not be the “official” Bozo because he did not attend the official Bozo training school in Texas.

Indeed, “Bozo” is a registered trademark of Larry Harmon Pictures Corporation (“LHPC”) for “Entertainment Services In The Nature Of A Children’s Television Program; Entertainment Services In The Nature Of Live Performances By A Clown Character.” So as licensor of this trademark, LHPC had a duty to maintain Bozo quality standards, for example by requiring CBE (Continuing Bozo Education) of all those licensees who represented themselves as Bozos to the public. Licensing without such quality controls would have been a naked license– in effect, a naked Bozo license. And that is a thought even more scary than a witch in the Senate.

Trademark Licensees Catch a Tax Break

Thursday, September 2nd, 2010

The federal Second Circuit Court of Appeals has ruled that trademark licensees can in certain circumstances immediately deduct royalty payments as current expenses, rather than capitalizing and deducting them over time.

Overruling both the IRS and the United States Tax Court, the Second Circuit ruled in Robinson Knife Manufacturing Company, Inc. vs. IRS that where the royalty payments: 1) are calculated as a percentage of sales revenue from inventory, and 2) are incurred only upon the sale of that inventory, such payments are immediately deductible.

Robinson Knife designs, manufactures, and markets kitchen tools such as spoons, soup ladles, spatulas, and cooking thermometers, and sells them to retail customers such as Wal-Mart and Target. Sometimes it sells the products under the store brand. In this case, Robinson Knife sold the goods under the Pyrex and Oneida trademarks, which it licensed from Corning and Oneida respectively. Both license agreements required payment of royalties as a percentage of sales revenue only on sale to the retailers, with no royalty advance payments or minimum guaranteed royalties.

IRS rules under Section 263A of the Internal Revenue Code require the capitalization of, “all direct costs and certain indirect costs properly allocable to property produced,” and include, “licensing and franchise costs” as examples of indirect costs, “that must be capitalized to the extent they are properly allocable to property produced.” Examples of indirect costs not allocable to property produced include, “marketing, selling, advertising, and distribution costs.”

Robinson Knife argued that because the famous trademarks were intended to boost sales of their products, the royalties were in the nature of advertising expenses and thus currently deductible. It was overruled by both the IRS and the Tax Court, which ruled that the royalty expenses must be capitalized under complex inventory accounting rules and deducted over time.

But the Second Circuit ultimately agreed with Robinson Knife, on the grounds that the obligation to pay royalties was not incurred unless and until a sale was made, thus royalties were not incurred by reason of production activities, and did not directly benefit such activities.

This is an important victory for licensees, but its scope is unclear. It remains to be seen whether: 1) the IRS follows this ruling outside of the Second Circuit (New York, Connecticut, and Vermont); and 2) it applies as well to royalties paid on copyright, patent, and other intellectual property licenses. Logically it should, because the ruling was based on the timing of the royalty payments, not on the nature of the intellectual property.

Takeaway: trademark licensees based in New York, Connecticut, or Vermont that pay royalties as a percentage of sales revenue of goods only upon sale of those goods can immediately deduct the royalties as current expenses. It remains to be seen whether the IRS allows analogous treatment for licensees based in other states, as well as licensees of patents, copyrights, and other intellectual property.