Frachisors and brand licensors beware – You can be on the liability hook for products you don’t make or sell

Product manufacturers and distributors are typically liable when products are defective and cause injury under state products liability laws. However, when it comes to mere use of a brand on a product, can a brand licensor, whether through a franchise agreement or trademark licensing agreement, also be liable when the product does not originate from the franchisor / brand licensor? The answer is yes – the brand licensor can be liable, depending on the jurisdiction under consideration, even if the product came from another source, if the licensed brand is used in connection with the marketing / sale of the product.

This article provides a summary of jurisdictions of interest on this issue involving the intersection of brand licensing and products liability laws.

Arizona

In Torres v. Goodyear Tire & Rubber Co., Inc., the Supreme Court of Arizona held that a trademark licensor may be held strictly liable for a defective product marketed by the licensee where the licensor significantly participated in the overall process by which the product reached consumers and had the right to control incidents of manufacture or distribution. Torres v. Goodyear Tire & Rubber Co., Inc., 163 Ariz. 88, 91-97 (1990).

California

In Hunt v. Wolfgang Puck Enterprises, the court noted that under California law, a manufacturer is strictly liable for a product defect that causes injury. The court examined whether Puck Worldwide, as a trademark licensor, could be held strictly liable. California courts have extended strict liability to nonmanufacturing parties outside the vertical chain of distribution if they play an integral role in the producing and marketing enterprise of a defective product and profit from placing the product into the stream of commerce. The court applied a three-factor test, including (1) the direct financial benefit from activities and sales, (2) the integral role in the business enterprise, and (3) the control over manufacturing or distribution. Hunt v. Wolfgang Puck Enterprises, No. 2:22-cv-08826-NS-MRW, 2024 WL 4755604, at *4, 8 (C.D. Cal. 2024).

Connecticut

In Burkert v. Petrol Plus of Naugatuck, Inc., the Supreme Court of Connecticut held that a company that allows its name to be used on a product can be held liable for defects in that product under the apparent manufacturer doctrine. The court reasoned that the use of the company's name on the product creates an expectation in consumers that the company stands behind the product, thus making the company liable for any defects. The court noted that liability is appropriate only when the licensor is significantly involved in the manufacturing, marketing, or distribution of the defective product. Burkert v. Petrol Plus of Naugatuck, Inc., 216 Conn. 65, 81-82 (1990).

Illinois

In Connelly v. Uniroyal, Inc., the Supreme Court of Illinois addressed the issue of whether a trademark licensor can be held liable under products liability law for injuries caused by a defective product bearing its trademark. The court held that Uniroyal, Inc., the trademark licensor, was strictly liable in tort for injuries caused by a defective tire manufactured by its licensee, Englebert, a Belgian corporation. The tire bore the Uniroyal trademark and was manufactured under a licensing agreement that included Uniroyal providing technical know-how and specifications to Englebert. Connelly v. Uniroyal, Inc., 75 III. 2d 393, 407-11, 389 N.E.2d 155 (1979).

Mississippi

In Harrison v. B.F. Goodrich Co., the Court of Appeals of Mississippi held that a trademark licensor was not strictly liable under the apparent manufacturer theory in a products liability action because the licensor was not engaged in any aspect of the manufacture or distribution of the allegedly defective product marketed under its trademark. Harrison v. B.F. Goodrich Co., 881 So.2d 288, 290-91 (Miss. Ct. App. 2004).

New York

In Automobile Ins. Co. of Hartford Connecticut v. Murray, Inc., the court held that a trademark licensor could be liable on a strict products liability claim if it exercised control over the quality of the product. The court explained that the licensor's obligation to police its mark for purposes of maintaining the quality of the trademarked product can be seen as in tension with the licensor's desire to avoid exposure to strict products liability claims based on involvement in the licensee's manufacturing or distribution activities. However, the court also noted that New York law requires evidence of the licensor's "actual control" over the production or distribution of the defective product for liability to be imposed. Automobile Ins. Co. of Hartford Connecticut v. Murray, Inc., 571 F.Supp.2d 408, 421-25 (W.D.N.Y. 2008).

European Union

In the 2022 Keskinäinen Vakuutusyhtiö Fennia v. Koninklijke Philips NV case, the Court of Justice of the European Union established that the owner of a trademark affixed to a product can be held liable for defects in that product. This case involved whether Philips, as the trademark owner, could be held liable for defects in coffee machines that started a fire. Saeco manufactured the coffee machines and Philips sold them in the EU under the “Philips” brand in addition to the “Saeco” brand. The court ruled that the trademark owner, Philips, could be held liable. The CJEU noted that “…by putting his name, trademark or other distinguishing feature on the product at issue, the person who presents himself as a producer gives the impression that he is involved in the production process or assumes responsibility for it. Accordingly, by using such particulars, that person is effectively using his reputation in order to make that product more attractive in the eyes of consumers which, in return, justifies his liability being incurred in respect of that use.” Case C‑264/21, Keskinäinen Vakuutusyhtiö Fennia v. Koninklijke Philips NV, ECLI:EU:C:2022:536, ¶34 (July 7, 2022)..

Practice Tips

In order to reduce the above risks, there are some contractual provisions to consider when licensing one’s brand, whether by way of a franchise agreement or other trademark license agreement. Specifically, at least the following provisions should be considered:

• The licensor should have the licensee agree not to sell any products with the brand on such products without written authorization from the licensor. This can be done with itemization of the specific product, by model and/or SKU number, in an exhibit to the agreement or other way of specifying exact products to which the brand can be used in connection with the sale. As an aside, if authorization is provided, the licensor should make sure they have proper insurance coverage for products liability matters for sales under their brand.
• The licensor should limit what entity is entitled to the brand license (i.e., the license should not extend to licensee affiliates).
• The licensor should disclaim all warranties / liabilities as between the licensor and licensee, as well as obtain indemnification from the licensee.
• The licensor should cap their liability.
• The licensor should shift all fees, costs, and damages to the licensee for any liability that may be imputed to the licensor.
• The licensor should contractually only exhibit enough “control” over the licensor that is necessary to prevent a naked brand license (which could place the brand rights in jeopardy), and not include any further provisions on how the quality of the products is maintained or implemented.
• The licensor should consider having the laws of one of the less onerous states above as applying to the contract, including the obligations and potential liability thereunder, to the extent possible under the facts and circumstances.
• The licensor should also consider requiring the licensee to use warnings and other contractual provisions with their customers to minimize liability to the brand owner.

If you have questions about liability related to products sold by a brand licensee and how it may impact franchisors and brand licensors, or any other intellectual property law questions, contact attorney James Muraff.