Eva's Bridal Ltd. v. Halanick Enterprises, Inc.

                              In the

United States Court of Appeals
               For the Seventh Circuit

No. 10-2863

E VA’S B RIDAL L TD. and S AID G HUSEIN,

                                                Plaintiffs-Appellants,
                                  v.


H ALANICK E NTERPRISES, INC., and N AYEF G HUSEIN,

                                               Defendants-Appellees.


             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
               No. 07 C 1668—John W. Darrah, Judge.



      A RGUED F EBRUARY 9, 2011—D ECIDED M AY 10, 2011




   Before E ASTERBROOK, Chief Judge, and F LAUM and
R IPPLE, Circuit Judges.
   E ASTERBROOK, Chief Judge. In 1966 Eva Sweis estab-
lished in Chicago a shop that she called “Eva’s Bridal.”
It sold dresses for brides and bridal parties. The venture
was a success; Sweis allowed her children to open their
own shops under the same name. The business passed
to Said and Nancy Ghusein (née Sweis), who operate an
2                                             No. 10-2863

“Eva’s Bridal” shop in Oak Lawn, one of Chicago’s sub-
urbs. They have continued the pattern of licensing the
name to relatives. Three years after opening a shop in
Orland Park, another of Chicago’s suburbs, Said and
Nancy Ghusein sold that operation to Nayef Ghusein
for $10. The agreement required Nayef to pay $75,000
a year for the right to use the “Eva’s Bridal” name
and marks.
  The license agreement expired in 2002. Nayef and his
corporation Halanick Enterprises have continued to
operate the store under the Eva’s Bridal name
(see http://www.evasbridalsoforlandpark.com/) but no
longer remit a royalty. In 2007 Said and his firm Eva’s
Bridal Ltd. filed this suit under the Lanham Act, con-
tending that Nayef and Halanick have violated the Act
by using the “Eva’s Bridal” mark without payment (or,
for that matter, a current license agreement). See 15
U.S.C. §§ 1117, 1125(a).
  The district judge did not decide whether plaintiffs
waited too long before suing. Instead the court dis-
missed the suit, 2010 U.S. Dist. L EXIS 79186 (N.D. Ill.
Aug. 4, 2010), on the ground that plaintiffs abandoned
the “Eva’s Bridal” mark by engaging in naked licensing—
that is, by allowing others to use the mark without ex-
ercising “reasonable control over the nature and quality
of the goods, services, or business on which the [mark]
is used by the licensee”. Restatement (Third) of Unfair
Competition §33 (1995); see also id. §30 (discussing aban-
donment); TMT North America, Inc. v. Magic Touch GmbH,
124 F.3d 876, 885–87 (7th Cir. 1997). The written agree-
No. 10-2863                                            3

ment did not require Nayef and Halanick to operate the
Orland Park store in any particular way and did not give
the licensor any power of supervision over how the
business was conducted. Nancy conceded during her
deposition that she and her husband Said never tried
to control any aspect of how defendants’ shop operated
or how the mark was used. The district judge con-
cluded that the mark has been abandoned and that de-
fendants therefore may use it without payment.
   Plaintiffs do not dispute the proposition that a naked
license abandons a mark. Instead they observe that
many decisions say that a licensor must supervise to
ensure quality control, and they insist that they have
never doubted the high standards of Nayef and his firm,
so they had no reason to superintend any aspects of
defendants’ business. Plaintiffs maintain that Nayef and
Halanick sell dresses from the same designers that the
shop carried when it opened in 1988 and when owner-
ship changed in 1991. Because consumers care about
who designs and makes the clothing, which deter-
mines how the dresses look when worn, plaintiffs main-
tain that there was no need for any form of regulation.
Doubtless consumers also care about the quality of
service, whether the dressing rooms are clean and the
staff helpful, whether alterations are performed ac-
curately and on time, and so forth—matters about
which plaintiffs left defendants to their own devices—
but it is not necessary to decide which aspects of a
retail bridal business contribute most to customers’
satisfaction.
4                                              No. 10-2863

   This argument that licensors may relinquish all control
of licensees that operate “high quality” businesses mis-
understands what judicial decisions and the Restatement
mean when they speak about “quality.” There is no
rule that trademark proprietors must ensure “high qual-
ity” goods—or that “high quality” permits unsupervised
licensing. “Kentucky Fried Chicken” is a valid mark, see
Kentucky Fried Chicken Corp. v. Diversified Packaging
Corp., 549 F.2d 368 (5th Cir. 1977), though neither that
chain nor any other fast-food franchise receives a star
(or even a mention) in the Guide Michelin. The sort of
supervision required for a trademark license is the sort
that produces consistent quality. “Trademarks [are] in-
dications of consistent and predictable quality assured
through the trademark owner’s control over the use
of the designation”. Restatement §33 comment b. See
also William M. Landes & Richard A. Posner, The
Economic Structure of Intellectual Property Law 166–68,
184–86 (2003).
   A person who visits one Kentucky Fried Chicken
outlet finds that it has much the same ambiance and
menu as any other. A visitor to any Burger King
likewise enjoys a comforting familiarity and knows that
the place will not be remotely like a Kentucky Fried
Chicken outlet (and is sure to differ from Hardee’s,
Wendy’s, and Applebee’s too). The trademark’s function
is to tell shoppers what to expect—and whom to blame
if a given outlet falls short. The licensor’s reputation is
at stake in every outlet, so it invests to the extent
required to keep the consumer satisfied by ensuring a
repeatable experience. See generally Two Pesos, Inc. v.
Taco Cabana, Inc., 505 U.S. 763 (1992).
No. 10-2863                                              5

   How much control is enough? The licensor’s self-interest
largely determines the answer. Courts are apt to ask
whether “the control retained by the licensor [is]
sufficient under the circumstances to insure that the
licensee’s goods or services would meet the expecta-
tions created by the presence of the trademark.” Restate-
ment §33 comment a (summarizing doctrine); see also id.
at Reporter’s Note comment c (collecting authority,
which we need not set out). It isn’t necessary to be
more specific here, because plaintiffs did not retain any
control—not via the license agreement, not via course
of performance. A person who visited Eva’s Bridal of
Oak Lawn and then Eva’s Bridal of Orland Park might
not have found a common ambiance or means of doing
business. And though the shops may have had many
designers in common, this would not distinguish an
“Eva’s Bridal” shop from any other bridal shop; the
trademark would not be doing any work if identical
dresses could be purchased at Macy’s or Nordstrom,
and the “Eva’s Bridal” shops were dissimilar except
for some products that many retailers carried. Safeway
could not license its marks to a corner grocery store,
while retaining no control over inventory, appearance,
or business methods, just because every grocery store
is sure to have Coca-Cola and Wheaties on the shelf.
  Trademark law requires that “decisionmaking
authority over quality remains with the owner of the
mark.” Restatement §33 comment c. How much authority
is enough can’t be answered generally; the nature of the
business, and customers’ expectations, both matter. Ours
is the extreme case: plaintiffs had, and exercised, no
6                                          No. 10-2863

authority over the appearance and operations of defen-
dants’ business, or even over what inventory to carry
or avoid. That is the paradigm of a naked license.
                                            A FFIRMED




                        5-10-11