Black + Decker and Walmart Lose Appeal in Class Action Lawsuit
Main Takeaways:
- Black + Decker and Walmart are successfully sued for selling a coffeemaker that was branded by Black + Decker, but manufactured by licensee Applica Consumer Products
- SPLiCE contends the ruling could “potentially undermine the licensing industry as a whole”
- SPLiCE Corporate Counsel warns, “If the New Mexico ruling stands, all licensing programs throughout the country are at risk.”
By Gary Symons
TLL Editor in Chief
The Society of Product Licensors Committed to Excellence (SPLiCE) says a recent ruling in New Mexico threatens the common practice of trademark licensing.
Specifically, the ruling by New Mexico’s Court of Appeals would impact any company that licenses its brand for a product that is made by another company.
The case involves a coffeemaker sold under the Black + Decker brand in Walmart stores in New Mexico.
In a ruling handed down in 2018, District Court Judge C. Shannon Bacon ruled that selling a coffeemaker under the Black + Decker brand, when it was manufactured under license by Applica Consumer Products, was a deceptive trade practice under the state’s Unfair Practices Act (UPA).
In August this year, the Court of Appeals upheld that decision, despite the protests of SPLiCE through an amicus brief.
The coffeemaker in question was manufactured by Applica Consumer Products under license from Black + Decker in a practice that is extremely common across the licensing industry. According to court documents, the licensing agreement included terms requiring Applica to live up to quality standards set by Black + Decker.
One of those coffeemakers was purchased by New Mexico couple Bruce and Kathleen Puma. According to testimony before the court, Bruce Puma chose that particular coffeemaker because he owned tools made by Black + Decker, and therefore trusted the brand’s quality.
When they discovered the small appliance was made by another company under license, the Pumas became the lead plaintiffs in a class action suit involving more than 40,000 people.
The defendants argued that the products were not sold through deceptive practices, as Black + Decker had a common type of licensing agreement in place with Applica, committing the licensee to live up to the quality specifications demanded by Black + Decker.
But while the court did not side with the plaintiffs on their claim the coffeemaker was less reliable because it was not made by Black + Decker, the judge did agree the practice of branding the coffee maker was in fact a deceptive trade practice under New Mexico law.
“The fact that Applica had Black + Decker’s consent to use the Black + Decker trade name and trademarks does not justify (the) Defendant’s conduct,” Bacon ruled. “Defendants’ knowing and willful statements that the Coffeemaker was a Black & Decker product is an unfair or deceptive trade practice, as defined in Section 57-12-2(D)(1) of the UPA.
“Because Defendants permitted and approved the use of false or misleading statements in selling the Coffeemakers, they are liable for any damages suffered by Class members,” Bacon concluded.
In the ruling, Bacon came to the conclusion that, “Section 57-12-2(D)(2) of the UPA states that a statement or representation that causes confusion or misunderstanding as to the source of goods is an unfair or deceptive trade practice. Defendants’ knowing and willful statements that the Coffeemaker was a Black + Decker product is an unfair or deceptive trade practice, as defined in Section 57-12-2(D)(2).
“As regards the ‘name brand’ claim,” Bacon ruled, “Defendants’ knowing and willful use of ambiguity as to material fact, when doing so deceived or had a tendency to deceive, is an unfair or deceptive trade practice.”
Both Black + Decker and Walmart felt the ruling failed to take into account the federally mandated Lanham Act, which underpins the rules by which licensing can occur, and the rights that accrue to the licensor and the licensee. They appealed the decision, and in addition, when SPLiCE learned of the case, they also intervened through the preparation of an amicus brief.
In response to written questions sent by TLL to SPLiCE, the organization explained, “In October 2020, Kimberly Kociencki, CEO, SPLiCE, and Laura Colca, SPLiCE Corporate Counsel, Goldberg Segalla, learned of a case that had recently been decided by the New Mexico State District Court at the trial level. The case posed a significant threat to the licensing industry.
“The New Mexico trial court ignored the Federal Lanham Act that specifically authorizes trademark licensing for use by persons other than the trademark owner and found that the licensing arrangement between Black & Decker and Applica violated the New Mexico State Uniform Deceptive Trade Practice Act.”
Kociencki also explained why SPLiCE felt it had to intervene in the appeal.
“We knew we had to act on behalf of our membership base and the licensing industry,” said Kociencki. “The New Mexico trial court’s ruling was shocking as it established a dangerous precedent that could potentially undermine the licensing industry as a whole.
“Given the gravity of the New Mexico District Court’s decision, SPLiCE offered support on the appeal on behalf of the licensing industry as a whole.”
THE CASE FOR THE LICENSING INDUSTRY
The issue addressed in the Puma case was focused on a single coffeemaker from Black + Decker, but according to SPLiCE, it will potentially impact every company dealing in the US that has a licensing agreement with a manufacturer. That would include, for example, a cosmetic or health product company that has a line produced by another company, or a consumer electronics company that sells a speaker or headphones produced by a manufacturing partner; or a major fashion brand that produces a clothing line through an offshore producer.
Colca, the corporate counsel for SPLiCE, says the ruling is a direct threat to the viability of the entire licensing industry.
“Upon learning of the New Mexico Court’s devastating decision, we had no choice but to act,” said Colca. “The implications of this precedent cannot be understated.
“If the New Mexico ruling stands, all licensing programs throughout the country are at risk. Accordingly, we felt that it was essential to inform and educate the court on the licensing industry and explain, in layman’s terms, how the Court’s decision could topple a multi-billion dollar industry.”
The case for the licensing industry, both sides agree, hinges on the Lanham Act, which states that registered trademarks may “be used legitimately by related companies.” That would include “any person whose use of a mark is controlled by the owner of the mark with respect to the nature and quality of the goods or services on or in connection with which the mark is used.”
That argument was used in the Puma case, as Black + Decker pointed out that its licensing contract with Applica required the manufacturer to live up to the brand’s detailed requirements for quality assurance. Those clauses are common in licensing agreements, and are intended to protect consumers from harm, but also to protect the licensor from reputational damage.
As Black + Decker maintained control over quality standards, it argued that selling the coffeemaker under its trademark was valid, even though the actual machine was produced under contract by Applica.
THE APPEALS COURT RULING
However, the New Mexico Court of Appeals disagreed that the Lanham Act provides protection against claims of misrepresentation.
“Defendants argued that their collective use of the Black + Decker trademark comported with the Lanham Act because Black + Decker and Applica entered into a trademark licensing agreement that permitted Applica to market the Coffeemaker under the Black + Decker name and mandated that Black + Decker exercise control and oversight to ensure the Coffeemaker met Black + Decker’s quality standard,” the Appeals Court explained in its Aug. 9, 2022 ruling.
“In essence, Defendants argue that if the Lanham Act allows Applica to market the coffee maker, the arrangement cannot constitute a violation of the UPA. We disagree.”
The core of the Appeals Court ruling is that the Lanham Act was created to protect the commercial interests of companies that enter into licensing agreements. The court said it does not see evidence that the Lanham Act is primarily meant to cover the issue of consumer protection, while New Mexico’s Unfair Practices Act is explicitly intended to protect consumers.
“We, therefore, conclude that our Legislature did not intend to require courts to apply Lanham Act precedent in deciding UPA claims,” the Appeals Court ruled. “Accordingly, the district court did not err in declining Defendants’ invitation to apply Lanham Act precedent in ruling on the Pumas’ UPA name brand claim.”
The court also went further, saying both Black + Decker and Walmart had failed to address the “ambiguity” created by the absence of any mention of Applica as the manufacturer.
“Even if we assume Defendants’ use of the Black + Decker trademark by itself did not actively misrepresent the Coffeemaker’s source or manufacturer, Defendants do not address the ambiguity created by Defendants’ use of the Black + Decker trademark together with the absence of any disclosure on the Coffeemaker, or in Wal-Mart’s coffeemaker display section, which might indicate to a reasonable consumer either (1) the relationship between Black + Decker and Applica; or (2) that the Coffeemaker was in fact an Applica, rather than Black + Decker, product.”
As a result, the Court of Appeals ruled that in cases of consumer protection, the UPA takes precedence over the terms of the Lanham Act.
THE FALLOUT IN THE LICENSING INDUSTRY
If the ruling stands, then similar licensing deals in any of the US states could be vulnerable to a class action suit, provided that state has similar provisions in its consumer protection laws.
The problem is, according to SPLiCE, that this ruling could impact on all types of licensing agreements that today are considered standard.
TLL has acquired a summary copy of the amicus brief to the court, which states, “A licensing agreement is a legal contract between two parties, known as the licensor and the licensee. In a typical licensing agreement, the licensor grants the licensee the right to produce and sell goods, apply a brand name or trademark, or use patented technology owned by the licensor.
“In exchange, the licensee usually submits to a series of conditions regarding the use of the licensor’s property and agrees to make payments known as royalties.”
The brief also explained to the court that the ruling could impact US companies in unexpected ways.
“Licensing agreements cover a wide range of well-known situations. For example, a retailer might reach an agreement with a professional sports team to develop, produce, and sell merchandise bearing the sports team’s logo. Or a small manufacturer might license a proprietary production technology from a larger firm to gain a competitive edge rather than expending the time and money trying to develop its own technology. Or a greeting card company might reach agreement with a movie distributor to produce a line of greeting cards bearing the image of a popular animated character.
“From the SPLiCE perspective, a critical element of licensing is the robust processes that brand owners employ to protect their brands/reputation with the licensee and the licensed products,” the amicus brief adds. “SPLiCE has many examples of that work. For many licensee brands, their company name provides no frame of reference for the consumer. Consumers pay more for a trusted brand because it lowers the risk/cost of searching for a product that meets the consumer’s quality requirements.”
Critically, the SPLiCE amicus brief, which represents the views of many of America’s largest corporations, says the idea that licensing agreements are deceptive will threaten a massive global industry, not to mention the relationships among thousands of companies around the world.
Even the portion of the industry represented by the top 150 companies in licensing generates approximately $290 billion in revenue, and by TLL’s calculations, the global industry is worth more than half a trillion dollars annually.
SPLiCE is an organization representing some of the world’s largest licensors, and its 75 members alone account for roughly 20% of the S&P index. Those companies each hold dozens or in many cases hundreds of licensing deals around the world, many of which could be unravelled by the ruling in New Mexico.
Particularly in a world dominated by global trade policies, licensing deals like the one between Black & Decker and Applica have become a common and—according to SPLiCE—almost universally accepted way of dealing with the complexities of cross-border trade.
That is why, according to the Amicus brief, the Puma case constitutes an existential threat to the licensing industry as a whole.
“If the District Court’s decision equating a lawful licensing arrangement to a deceptive trade practice remains as established precedent, it will threaten the ability of intellectual property holders, including but not limited to trademark, service mark and trade name owners
(i) to develop, enhance and grow their businesses,
(ii) to protect their intellectual property rights, and
(iii) to provide quality and reliable products which are trusted by consumers.
(iv) Further, if the District Court’s holding is not overturned, it will have the unintended consequence of defunding countless philanthropic and humanitarian programs and causes which are funded, in whole or in part by revenue generated from trademark and brand licensing.”
The parties are currently appealing the decision to a higher court. A new trial date has not been set.