Addressing a range of trademark licensing issues, including discretionary approval, exculpatory contract clauses and third party beneficiary standing, the US Court of Appeals for the Federal Circuit affirmed a lower court’s grant of summary judgment to the US Army, finding that the Army abided by the terms of a trademark licensing agreement with a brand management company that sold clothing bearing the Army logo. Authentic Apparel Grp., LLC v. United States, Case No. 20-1412 (Fed. Cir. Mar. 4, 2021) (Lourie, J.)

In a 2010 licensing agreement, the Army granted Authentic Apparel, a brand management company that licenses merchandise, a non-exclusive license to manufacture and sell clothing bearing the Army’s trademarks in exchange for royalties. The licensing agreement gave the Army sole and absolute discretion on whether to approve any products and marketing materials bearing the Army’s trademarks. The licensing agreement also included exculpatory clauses exempting the Army from liability for exercising this discretion. From 2011 to 2014, Authentic submitted 500 requests for product approval, and the Army disapproved of only 41. After a series of late or unpaid royalty payments, Authentic sent notice that it would not pay 2014 royalties. The Army then terminated the license to Authentic. In 2015, Authentic and its chairman, Ron Reuben, sued the US government for breach of contract of the licensing agreement. The alleged breaches included denial of the right to exploit the goodwill associated with the Army’s trademarks, refusal to permit Authentic to advertise its contribution to certain Army recreation programs, delay of approval for a financing agreement for a footwear line, and denial of approval for advertising featuring the actor Dwayne “The Rock” Johnson. The Court of Federal Claims granted summary judgment to the US government and dismissed Reuben as a co-plaintiff for lack of standing. Authentic appealed.

The two main issues on appeal were whether Authentic provided sufficient evidence to show there was a genuine dispute of material fact that the Army breached the terms of its contract or any implied duty of good faith, and whether Reuben was a third party beneficiary to have standing as a plaintiff to the suit.

As to the first issue, the Federal Circuit affirmed the lower court’s grant of summary judgment for the government because Authentic was unable to provide sufficient evidence that the Army breached the trademark licensing agreement. The Court found that:

The contracting parties contemplated the terms of the contract and voluntarily decided to include express language of broad discretionary approval and exculpatory clauses exempting liability for disapproval, and therefore they should be held to the express terms for which they bargained.

The Army did not act unreasonably or violate its duty of good faith and fair dealing in exercising its discretion because it did approve more than 90% of Authentic’s products.

Authentic’s argument that the Army’s discretion was too broad and restricted Authentic’s use of the trademarks to solely “decorative purposes” was without merit because (1) the Court was not evaluating the validity of the trademarks here, (2) Authentic still benefited from the goodwill associated with the Army’s products even sold under Authentic’s name without reference to the Army as the trademark source, and (3) the Army fulfilled its duty to Authentic to not give a “naked license” of the trademarks because the Army maintained quality control over its products by following the agreement’s discretionary approval provisions.

The Court explained that this was a contract interpretation case and it would not give special considerations for the trademark law subject matter when there were controlling express and agreed upon contract terms. The Court also explained that Authentic could not have contract remorse now and recover damages just because the contract went to its detriment, especially when the Army was in line with its obligations under the plain terms of the agreement.

As to the second issue, the Federal Circuit affirmed the lower court’s dismissal of Reuben as a co-plaintiff for lack of standing. Reuben was not in privity of contract as a party of the licensing agreement, nor was he a third party beneficiary of the contract. To prove third party beneficiary status requires a high standard, and the contract must specifically identify an intention to benefit Reuben personally. Despite being Authentic’s chairman, Reuben was not mentioned in the contract, and his personal connections with the company were insufficient. Thus, the Court found that Reuben did not have standing as a third party beneficiary and that dismissal was proper.

This article was written by Darra Loganzo, a law clerk at McDermott Will and Emery.