Licensors Beware: Substantial Participation In Design, Manufacture And/Or Distribution Of Licensee's Product May Impose Liability Under Apparent Manufacturers Doctrine (AMD)

Background

In a service-based economy, many industrial and consumer products are manufactured and sold through trademark licensing arrangements. Under these types of contractual agreements, the owner of the trademark licenses its brand name or mark to another company in exchange for a licensing fee. The authorized user of the trademark then has a contractual right to manufacture and sell the goods bearing the trademark. However, in some circumstances, the mere act of licensing the trademark to a manufacturer of a product for a fee can expose the licensor to a product liability claim under the Apparent Manufacturers Doctrine (AMD).

Recent case law decisions handed down by courts in various jurisdictions reveal that the liability of trademark licensors that neither manufactured nor sold the allegedly defective products that only bore their trademark may be limited to those licensors that substantially participated in the design, manufacture and distribution of the products.

Origin of AMD and Limitations on Passive Trademark Licensors

Courts have attempted to address the liability of trademark licensors under the AMD initially set forth in § 400 of the Restatement (Second) of Torts (1965). Under § 400, a product seller that puts out as its own an allegedly defective product manufactured by another will be held liable as an apparent manufacturer. Section 400 essentially substitutes the seller for the manufacturer in terms of liability on the rationale that the name/mark is an inducement for the purchase of the allegedly defective product based on the licensor's reputation and skill. However, Comment "d" to § 400 expressly sets forth that "one puts out a chattel as his own when he puts it out under his name or affixes to it his trade name or trademark." Thus, the language of Comment "d" seemingly imposes "apparent manufacturer" liability on any entity that had its name/mark on the product regardless of whether or not the entity played a role in the manufacture or distribution of the product. Therefore, some courts applied the AMD to trademark licensors who had no role in the chain of distribution of the allegedly defective product that simply bore its trademark.

In 1997, the American Law Institute promulgated the Restatement (Third) of Torts § 14, which attempted to clarify when trademark licensors who are not in the chain of distribution may be held liable for defective products under an "apparent manufacturer" theory. Comment "d" to § 14...