“Contracting parties, including parties who contract with the government, are generally held to the terms for which they bargained…. That principle is equally applicable in this case.”
In an appeal from the United States Court of Federal Claims (Claims Court), the United States Court of Appeals for the Federal Circuit (CAFC) last week affirmed a decision granting summary judgment in favor of the U.S. government with respect to a nonexclusive trademark license between the Department of the Army and an apparel company (Authentic Apparel Group, LLC v. United States). In the March 4 opinion, the CAFC agreed with the Claims Court that a license agreement’s provision giving the Army broad approval discretion over Authentic’s requests to use the Army’s trademarks on proposed products or marketing materials was not at odds with the principles of trademark law. The CAFC also held that Authentic did not present any legal or factual reasons to deviate from a plain reading of the license agreement’s exculpatory clauses.
The License Agreement
In 2010, the Army granted Authentic a nonexclusive license to manufacture and sell clothing displaying the Army’s trademarks in exchange for royalties paid by Authentic. The license agreement required Authentic to obtain the Army’s advance written approval prior to selling or distributing any items. In addition, the license agreement included exculpatory clauses that exempted the Army from liability for denying approval of Authentic’s products and marketing materials. For example, the licensing agreement stated: “[Authentic] shall not have any rights against [the Army] for damages or other remedies by reason of [the Army]’s failure or refusal to grant any approval referred to in this Section 5.” Authentic submitted approximately 500 requests for approval between 2011 and 2014, and the Army only refused 41 requests.
In 2014, Authentic refused to pay its outstanding royalties to the Army and instead filed a complaint in the Claims Court against the Army. Authentic was joined by co-plaintiff Ron Reuben. The complaint alleged that the Army breached its contract, in part, by denying Authentic the “right to exploit the goodwill associated with the Army’s trademarks,” denying Authentic’s request to advertise its contributions to certain Army recreational programs, and for denying approval of an advertisement featuring Dwayne “The Rock” Johnson. The government filed a motion for summary judgment and the Claims Court approved, noting that the exculpatory clauses prevented Authentic from recovering damages based on the government’s approval or disapproval of Authentic’s requests to use the Army’s trademarks on proposed products or marketing materials. The Claims Court also dismissed Reuben as a plaintiff for lack of standing. Authentic appealed to the CAFC.
Standing to Sue
Initially, the CAFC considered the dismissal of Reuben as a co-plaintiff for lack of standing. The CAFC noted that “[s]tanding to sue the United States on a contract claim is limited to those in privity of contract with the government,” but in rare situations, a third party can have standing to sue the United States upon a showing that he or she is an intended third-party beneficiary of a contract with the government.” Citing Flexfab, L.L.C. v. United States. The CAFC explained that it is undisputed that Reuben was not in privity of contract because it was not a party to the license agreement. The CAFC also determined that Reuben did not establish that the license agreement contained a “particular benefit that was clearly intended to flow directly to him,” especially since the license agreement did not ever mention Reuben. The CAFC further noted that the direct benefit of the “favorable contract terms flowed to Authentic, not to Reuben personally.” Thus, the CAFC held that the Claims Court correctly dismissed Reuben as a party.
Broad Approval Language was Valid
The CAFC next considered Authentic’s challenge to the Claims Court’s grant of summary judgment in favor of the government. The CAFC explained that the licensing agreement included express language that was dispositive. In particular, the CAFC stated that the “license agreement stated in no uncertain terms that the Army had ‘sole and absolute discretion’ regarding approval of Authentic’s proposed products and marketing materials.” Further, the CAFC pointed to the agreement’s exculpatory clauses that expressly stated that Authentic did not have the right to bring a cause of action against the Army based on the Army’s discretion regarding the approval of Authentic’s proposed products and marketing materials.
Noting that the Claims Court relied upon the Supreme Court cases Wood v. United States and Wells Bros. Co. v. United States in upholding the validity and enforceability of the exculpatory clauses, the CAFC further noted that the “Supreme Court has made it clear that courts should enforce “a plain and unrestricted covenant on the part of a contractor….that it will not make any claim against the government.”
Authentic argued that summary judgment was improper because even considering the Army’s broad discretion under the license agreement, the discretion cannot be “so broad as to allow the Army to refuse to permit the use of its trademarks ‘for trademark purposes.’” Authentic further argued that the Army separated its trademarks from their associated goodwill, which essentially turned the license agreement into a license “in gross,” thereby invalidating the trademarks. The CAFC noted that they were not “evaluating the validity of trademarks” in this case. However, the CAFC explained that it disagreed that the Army’s conduct was at odds with principles of trademark law because trademark licenses do not carry “special considerations that make them inherently distinguishable from other types of contracts”:
Authentic’s argument appears to rest on a premise that trademark licenses carry with them special considerations that make them inherently distinguishable from other types of contracts…. But we see no indication that the Supreme Court’s reasoning in Wells Bros. and Wood depended on the underlying subject matter of the contracts at issue, nor do we discern any reason why it would have…. Contracting parties, including parties who contract with the government, are generally held to the terms for which they bargained…. That principle is equally applicable in this case.
In addition, the CAFC rejected Authentic’s attempts to distinguish Wood and Wells because the Supreme Court’s reasoning depended on the underlying subject matter of the contracts at issue. Rather, the CAFC rationalized that the cases stood for the universal principal that contracting parties, including those contracting with the government, are held to the terms for which they bargained and contract terms “cannot be treated as meaningless and futile and read out of the contract.”
Right to Exploit the Goodwill Associated with the Army’s Trademarks
With respect to Authentic’s argument that it did not have an alleged “right to identify [the Army] as the source/sponsor of the licensed goods,” the CAFC explained that, since Authentic was the source of the goods, it did not have the right to mislead consumers to believe that the Army was the “source.” Further, the CAFC disagreed with Authentic that “a ‘decorative’ use of a trademark is necessarily divorced from the goodwill associated with the trademark such that it cannot be considered a licensed use ‘for trademark purposes.’” Authentic “repeatedly imply[ed]” that in order to capitalize on the goodwill associated with the Army’s trademarks would be by giving consumers the impression they were obtaining property manufactured by the Army. Citing In re Polar Music Int’l AB, the CAFC explained that a trademark “need not be the name of the manufacturer of the goods and the public need not know the name of the owner of the mark.” The CAFC reasoned that products the Army approved appeared to allow Authentic to benefit from the goodwill associated with the Army’s trademarks, while still requiring Authentic to sell its own products under its own name.
Thus, the CAFC concluded that the license agreement’s provision giving the Army broad approval discretion was not at odds with the principles of trademark law. The CAFC noted that Authentic did not present any legal or factual reasons to deviate from a plain reading of the exculpatory clauses; therefore, the exculpatory clauses were valid and the CAFC affirmed the Claims Court’s grant of summary judgment.