Can Uncle Sam take the trademarked shirt off your back?

In United States v Cavazos (Case CR 08-1201, October 22 2008), pursuant to a racketeering indictment, the US District Court for the Central District of California has ordered the forfeiture of a biker gang’s federally registered trademark.

The Mongol Nation gang owned a US registration for the trademark MONGOLS (Registration 2,916,965) for “association services, namely promoting the interests of persons interested in the recreation of riding motorcycles”.

On October 9 2008 a grand jury returned an indictment alleging racketeering activities by members of the gang. The indictment identified the MONGOLS mark as an asset that the US government sought to forfeit.

The district court ordered as follows:

"[T]he defendants in this criminal action, and any of their agents, servants, employees, family members and those persons in active concert or participation with them, shall surrender for seizure all products, clothing, vehicles, motorcycles, books, posters, merchandise, stationery or other materials bearing the MONGOLS trademark upon presentation of a copy of this order."

As stated by an assistant US attorney, “if a Mongol is wearing a vest or a jacket bearing the Mongol’s [trademark], that item is [subject] to seizure based on this order”. However, the order goes well beyond gang members. One can readily imagine circumstances where a good-faith purchaser of a trademarked product would be considered to be “in active concert” with one of the more than 70 defendants.

The court’s order raises interesting trademark issues. At the outset, there is no question that trademarks are a form of property (eg, an intangible asset) and, therefore, are subject to forfeiture or seizure by the US government. IP rights are ordinarily subject to the concept of exhaustion. Trademarks, by their nature, must be used. Once the trademark owner has sold a good bearing the trademark, the exhaustion doctrine prohibits the trademark owner from precluding the resale or transfer of the trademark product. The owner’s rights are exhausted by the first sale. The application of the exhaustion doctrine allows goods to move through the stream of commerce without assertions of infringement by the trademark owner. The Ninth Circuit has stated that “the right of a producer to control distribution of its trademarked product does not extend beyond the first sale of the product”. The Eleventh Circuit has likewise stated as follows:

“Under what has sometimes been called the ‘first sale’ or ‘exhaustion’ doctrine, the trademark protections of the Lanham Act are exhausted after the trademark owner’s first authorized sale.”

Against this background, the US government’s attempt to use the Mongols’ mark as a vehicle to prevent use or display of the MONGOLS trademark is, while laudable, suspect from a trademark perspective. First, it seems safe to presume that the government does not intend to use the MONGOLS mark for “promoting the interests of persons interested in the recreation of riding motorcycles”. Rather, it would seem that the government prefers abandonment of the mark as it tries to stop use or display of the mark by others. The government seeks to end any association with the gang, not to promote goods or services associated with the Mongols. Even so, on what trademark basis can the government preclude one who has lawfully obtained a jacket or vest bearing the trademark MONGOLS from wearing that item? The exhaustion doctrine holds that a trademark owner’s right to control the trademarked product does not extend beyond the first sale or transfer of that product. Thus, the US government may be unable to stop such uses or displays.

The key to the exhaustion doctrine is that genuine trademarked goods are resold or transferred without change. The doctrine exempts only the resale of genuine goods. Perhaps the US government can successfully argue that the Mongols’ trademarked goods are akin to grey goods (eg, not genuine) and that the exhaustion doctrine should not apply. The government may argue that the gang’s allegedly unlawful activities place the Mongols in a position akin to a grey goods importer and effectively render the trademarked goods illegitimate, in the nature of a counterfeit (see Société de Produits Nestlé SA v Casa Helvetin Inc (982 F2d 633 (1992)). The US government may also contend that:

the exhaustion doctrine should not apply because the defendants in an illegal enterprise cannot be found to promulgate and enforce good-faith product standards; or
products promoting racketeering enterprises are effectively defective.

In the same way one cannot use the exhaustion doctrine to avoid liability for selling genuine but defective goods under a mark, the exhaustion doctrine cannot be used to avoid seizure of goods that:

could not have been made and provided under appropriate standards; or
are 'damaged' by their association with the trademark owner and are thus defective (see Warner-Lambert Co v Northside Dev Corp (86 F3d 3 (1996)).

Such arguments, however, strain trademark law principles well beyond the usual bounds and seem unlikely to prevail.

No one supports allowing criminals to go unpunished, and it would seem that all would support using legitimate methods to indict and punish criminals. While the US government deserves credit for creativity, the method used in this case is difficult to justify under trademark principles.

Stephen M Schaetzel and Elizabeth M Fox, King & Spalding LLP, Atlanta

Can Uncle Sam take the trademarked shirt off your back?

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