The Katten Kattwalk – Winter 2013

Court Ensures Trademark Protection for Fashion Colors

Fashion designers were recently handed an important victory by the Second Circuit Court of Appeals when it ruled that a single color in the specific context of the fashion industry could acquire secondary meaning and therefore serve as a source identifier for a particular fashion brand.

The eyes of the fashion world have been on the Second Circuit Court of Appeals as it decided the case of Christian Louboutin v. Yves Saint Laurent America Holding. Famed high-fashion footwear designer Christian Louboutin had sued design house Yves Saint Laurent regarding footwear incorporating a red sole, claiming that such footwear infringed Louboutin's federal trademark registration covering a lacquered red sole on footwear.

The district court denied Louboutin's request for a preliminary injunction blocking Yves Saint Laurent from selling certain shoes with a red bottom. In its opinion, the district court stated that, with respect to fashion, colors serve an aesthetic function and, as such, may not be entitled to trademark protection in the same manner that colors can serve as a trademark for other types of products or services. In doing so, the lower court made an exception to the general ability of a brand owner to establish exclusive rights in a single color by refusing to extend such ability to certain apparel items. The district court's decision potentially invalidated Louboutin's trademark registration for a red sole on footwear.

Louboutin subsequently appealed the district court's findings to the Second Circuit Court of Appeals.

In a decision issued on September 5, 2012, the court of appeals disagreed with the district court and held that when it comes to whether a single color can serve as a trademark, the fashion industry was no different from other industries.

The result of the decision is that a fashion house, just like companies in other industries, will be able to obtain exclusive rights to use a single color in a unique context (such as the sole of a shoe) if the color is so consistently and prominently used that it attains secondary meaning such that it identifies a particular brand and indicates its source.

Although the court of appeals reinstated Louboutin's trademark registration in and to a red sole on footwear, it limited such registration to a red sole that contrasts with the rest of the shoe. This holding seems to address the concern raised in the district court's decision regarding the functionality of colors and the unique characteristics of the needs of fashion designers by, as it relates to the case at hand, carving out an exception enabling third parties to use a red sole on a red shoe, thereby conveying a unitary, aesthetic impression. Therefore, while the court of appeals ruled in favor of Louboutin on the trademark issue, it affirmed the district court's refusal to grant the preliminary injunction that Louboutin had requested.

The end result of this heavily followed case is that there are no industry-specific limitations on the ability of a color to function as a trademark. Therefore, fashion designers will have the ability to develop a unique association between a non-functional color and their fashion products.

New Treatment of Trademark Licenses in Bankruptcy

A recent decision by the US Court of Appeals for the Seventh Circuit created a split among the circuits with respect to a licensee's rights to continue to use licensed trademarks after a debtor licensor rejects the license agreement in bankruptcy.

Section 365(n) of the US Bankruptcy Code allows for an election by a licensee of “intellectual property” to continue using a licensed property post-bankruptcy provided that the licensee has satisfied certain criteria.

However, although the definition of “intellectual property” in the Bankruptcy Code expressly includes patents and copyrights, it does not include trademarks. This exception has supported the treatment by US courts of licensees of trademarks differently from licensees of patents and copyrights during bankruptcy.

Specifically, the omission of trademarks has been interpreted by the Fourth Circuit as enabling a trademark licensor which has filed for bankruptcy to reject the entire trademark license agreement, thereby terminating the licensee's right to use the trademark (a right not available to copyright or patent licensors in bankruptcy). This interpretation has often left trademark licensees in a vulnerable position when its licensor files for bankruptcy because the licensee is left with only a pre-petition claim for damages, which remedy can fall far short of the actual financial injury that it may suffer.

The Seventh Circuit has now taken a very different approach. It looked at the definition of “intellectual property” in the Bankruptcy Code and held that the omission of trademarks does not mean that trademarks licenses are treated differently. Instead, it held that the exclusion may be construed to mean that the provision does not affect trademarks one way or the other and, as such, ruled that a trademark licensee does not lose the ability to use a licensed trademark when the license agreement is rejected by the licensor in bankruptcy.

Having effectively determined that trademark licenses could be categorized as “intellectual property” licenses, the Seventh Circuit held that the rejection of a trademark license by a licensor in bankruptcy constituted a breach of the license agreement in accordance with Section 365(g) of the Bankruptcy Code. By classifying the rejection of the trademark license as a breach, the Seventh Circuit ruled that in bankruptcy, just as outside of it, the non-breaching party's rights remain in place and the licensee could continue to use the licensed trademark.

As a practical matter, the decision potentially leaves licensees of rejected trademark license agreements in an untenable position since trademark licenses require that the licensor play an active role in approving the quality of products bearing the mark. In any event, the Seventh Circuit's ruling may support protection for a trademark licensee if its licensor seeks to reject the license agreement in bankruptcy. Given the split in opinion among the circuit courts, it is likely that the treatment of trademark licenses in bankruptcy has not yet been finalized and may end up in the US Supreme Court.

Fashion Licensing: The Use of Licensing Agents

Licensing agents are called on, from time to time, to help accomplish a wide variety of tasks. This, of course, depends on the type of field (i.e., the nature and complexity of the prospective licensed property), the relative sophistication of the parties seeking to exploit the future licensed property, the requisite experience required to exploit the particular property (e.g., if a unique manufacturing or distribution capability is necessary) and the geographical scope of the anticipated transactions, among other things.

In order to understand the capabilities and potential advantages of engaging a licensing agent, it is important to understand exactly what is an agent.

Specifically, in the broadest legal sense, an “agent” is one who is empowered to act on behalf of another person or entity.

This is a very broad, all encompassing definition, but it...