Court cases highlight product liability for licensors

A common objective of a brand owner when entering into a licensing agreement is to ensure that its licensee assumes all responsibility for manufacturing the licensed products and all liability for consequences as a result thereof. While the typical trade mark licence includes certain indemnification provisions aimed at ensuring that the licensor achieves this objective, a few recent court decisions have highlighted instances where such standard indemnification provisions do not sufficiently protect licensors. Such decisions reveal an emerging issue with respect to product liability that brand owners engaged in licensing their trade marks must pay careful attention to, namely the possibility that they will be held liable for injuries resulting from the use of a product made by its licensee even when the brand owner is not directly involved in either the manufacture or sale of the products.

Specifically, recent court cases have held a non-seller trade mark licensor liable for injuries resulting from defective or dangerous products sold under a license agreement under the so-called apparent manufacturer doctrine. This doctrine provides that one who sells or distributes a product manufactured by another as if it were its own, is subject to the same liability as if it were the actual manufacturer. The doctrine assigns liability to a non-seller trade mark licensor on the basis that a trade mark licensor plays a role in placing the dangerous product into the stream of commerce through its participation in the design, manufacture, marketing or distribution of the product. In particular, courts have found that when a licensor consents to the distribution of a defective product, its liability arises from several factors including the risk created by approving the unsafe product, the licensor's ability to eliminate the unsafe nature of the product, the consumer's lack of knowledge of the danger and the consumer's reliance on the trade name, which gives the impression that the licensor stands behind the product.

The application by US courts of this apparent manufacturer doctrine creates a potentially difficult balance between, on the one hand, the licensor's desire to control the use of the licensed trade mark through quality controls and approvals and, on the other, its interest in avoiding imputed liability for defective products. A valid trade mark licence requires that a licensor maintain quality controls over the use of the mark and the products sold under the licensed mark. However, it is this very concept that potentially exposes the licensor to liability since it puts the licensor in the position of having expressly approved the use of a defective product.

Since a licensor is obliged to exercise approvals and quality control, in order to address this apparent tension with respect to potential exposure to liability claims, a licensor include language in its license agreement which provides that the licensee's indemnification obligations prevail even if the licensor approves the design or product. In addition, the licensor should insist that it be added to a licensee's insurance policies as an 'additional insured'. Another protective measure would include requiring licensees and any permitted contractors to comply with all applicable consumer product safety rules.

Although these recommendations are not absolute protections, they are potential defences in protecting a trade mark licensor against defective product claims.

Karen Artz Ash	Bret J Danow