If you are a manufacturer and allow your distributors to use your unregistered trademarks without a contract, the Third Circuit just issued a decision that could help you retain ownership of those marks.

In Covertech Fabricating, Inc. v. TVM Building Products, Inc., the court resolved a split within the circuit, holding that manufacturers are entitled to a rebuttable presumption of trademark ownership in such situations. In doing so, the court joined the Seventh and Ninth Circuits, and several district courts, in rejecting the "first use" test that generally favored distributors. The new test starts with a presumption that the manufacturer owns the mark, then allows consideration of six factors that may rebut the presumption.

Covertech, a Canadian manufacturer of protective packaging and reflective insulation, entered into a verbal, exclusive marketing and distribution agreement with defendant TVM Building Products, Inc. After Covertech terminated the agreement, TVM continued marketing its products using Covertech's brand names. In an effort to enforce its claimed rights, Covertech filed for registration with the Canadian Intellectual Property Office and so informed TVM. TMV then registered the mark in the United States. Covertech sued. To determine trademark ownership, the trial court applied the first use test, which "determines initial ownership by asking which party was the first to use an unregistered trademark in commerce." Under this test, Covertech won.

On appeal, the Third Circuit rejected the first use test as an "imperfect fit" for the manufacturer-distributor relationship, recognizing that a distributor is generally the first to sell the goods in commerce. The court instead adopted the test proposed in the recognized treatise McCarthy on Trademarks: "Where initial ownership between a manufacturer and its exclusive distributor is at issue and no contract exists, the manufacturer is the presumptive trademark owner unless the distributor rebuts that presumption using [a six factor balancing test] designed to examine the distribution agreement in effect between the parties." The six factors are:

• which party invented or created the mark

• which party first affixed the mark to goods sold

• which party’s name appeared on packaging and promotional materials in conjunction with the mark

• which party exercised control over the nature and quality of goods on which the mark appeared

• to which party did customers look as standing behind the goods, e.g., which party received complaints for defects and made appropriate replacement or refund

• which party paid for advertising and promotion of the trademarked product

Applying these factors, the court held that although the district court erred in applying the first use test, the McCarthy test generated the same result. The court therefore affirmed the district court's judgment that Covertech owned the marks.

In future cases, application of the McCarthy test should result in manufacturers succeeding more often in claiming ownership of the unregistered trademarks used on their products.

These types of disputes can be avoided by registering as soon as possible, taking into consideration the intent to use the mark in commerce.