Mischaracterization of relationship violates trademark rights

In Schlotzsky's Ltd v Sterling Purchasing and National Distribution Co Inc (Case 06-50720, March 5 2008), the US Court of Appeals for the Fifth Circuit has affirmed the district court's grant of an injunction in favour of a restaurant franchisor under the Lanham Act.

Schlotzsky's Ltd entered into an agreement with Sterling Purchasing and National Distribution Co Inc whereby Sterling was to act as a "non-exclusive supply chain manager" for Schlotzsky's national chain of delis. Sterling subsequently began to hold itself out as the exclusive representative for purchasing and distribution of all goods and services within the Schlotzsky's system. The relationship between Schlotzsky's and Sterling was eventually terminated. Schlotzsky's sought injunctive relief under the Lanham Act. It claimed that even though Sterling had not misused Schlotzsky's trademarks, it had mischaracterized itself as the exclusive representative of Schlotzsky's in various dealings with third parties. The District Court for the Western District of Texas ruled in favour of Schlotzsky's. Sterling appealed.

The Fifth Circuit found that Sterling's representation that it was the exclusive distributor violated Section 43(a) of the act because it was deceptive as to the "affiliation, connection, or association" between Schlotzsky's and Sterling. The court also found that the congressional purpose for the Lanham Act was to provide remedies for unfair and misleading use of trademarks, which extends beyond mere trademark protection. Therefore, even though Sterling did not use Schlotzsky's trademark, Sterling violated Schlotzsky's trademark rights by mischaracterizing its relationship with Schlotzsky's.

The Fifth Circuit cited Dastar Corp v Twentieth Century Fox Film Corp (539 US 23 (2003)) as support. In Dastar, the Supreme Court stated that Section 43(a) of the act is broader than just "trademark protection", as it prohibits actions that deceive consumers and impair a producer's goodwill. The Fifth Circuit also cited various other cases in which Section 43(a) was applied to situations where a registered trademark was not involved.

Holding that the remedial provision of the Lanham Act is broad, the Fifth Circuit also held that the injury requirement under Section 43(a) can be satisfied even where a party fails to establish a specific amount of actual loss. Since the mischaracterizations were done to maximize Sterling's income at the expense of Schlotzsky's, it was likely that the violations damaged Schlotzsky's. The court thus held that the district court had properly granted Schlotzsky's injunctive relief.

The decision highlights the fact that trademark rights can extend past the actual use of a trademark. Companies should be aware that trademark rights under Section 43(a) are intended to prevent any deception or mischaracterization of their businesses, not just their trademarks.

Jeremy T Elman, McDermott Will & Emery, Miami