Lessor Beware

Courts are increasingly willing to hold commercial landlords liable for their tenants’ trademark infringement

By Bryan Huntington

0519-Counterfit-Bags-150 Recent federal court decisions reflect a trend in favor of expanded liability for commercial landlords premised upon the unlawful conduct of their tenants. The theory of liability applied against landlords, known as “contributory” liability, derives from the federal trademark laws, 15 U.S.C. §1051, et seq. (the Lanham Act). Plaintiffs in these cases are the manufacturers and holders of trademarks. Federal judges are upholding jury verdicts awarding millions in damages against landlords predicated on their tenants’ trademark infringement. Where Lanham Act liability is established, damage awards can be devastating. Lanham Act plaintiffs have the option to elect treble damages or minimum statutory damages (ranging from $1,000 up to $2,000,000 per counterfeit sale) and attorneys’ fees. Furthermore, officers of the landlord can be held individually liable for violations. This article analyzes the theory of contributory liability in the landlord-tenant context and concludes by offering five lessons for commercial landlords.

Origins and elements of contributory trademark infringement

Contributory trademark infringement is a judicially created cause of action that originates from the common law of torts. The theory was established by the United States Supreme Court in Inwood Lab., Inc. v. Ives Labs, Inc., wherein the Court concluded that:

Even if a manufacturer does not directly control others in the chain of distribution, it can be held responsible for their infringing activities under certain circumstances. Thus, if a manufacturer or distributor intentionally induces another to infringe a trademark, or if it continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement, the manufacturer or distributor is contributorially responsible for any harm done as a result of the deceit.¹

Federal circuit courts have ruled that contributory trademark infringement extends to service contracts.² Neither the Supreme Court nor the 8th Circuit has had occasion to consider landlord contributory liability, so the Minnesota practitioner must look to foreign authority to understand the mechanics of such a claim where a landlord is the defendant. Case law generally considers four factors, including whether the landlord:

had sufficient control over the instrumentality used to infringe;
possessed the requisite knowledge of trademark infringement activity;
continued to supply its service despite said knowledge; and
took sufficient remedial steps to stop the infringing activity.³

The first factor (sufficient control over the instrumentality) and third factor (continued supply of services) are easily established in landlord-tenant cases because of the landlord’s ongoing provision of physical space, utilities, parking, advertising, or customers to its tenant(s). Ac cordingly, court decisions in this context focus upon the second (knowledge of infringement) and fourth (remedial steps) factors. These are analyzed in further detail below.

Knowledge of trademark infringement

Courts have found a duty for landlords to “avoid providing spaces to counterfeiters who the owner knows or has reason to know are selling counterfeit goods.”⁴ A landlord’s knowledge that a particular counterfeit good is being sold at a particular location may satisfy the knowledge requirement.⁵ Establishing that a landlord is merely negligent with respect to ongoing trademark infringement is insufficient as a matter of law.⁶ Absent a landlord’s actual or constructive knowledge of infringement, a landlord has no affirmative duty to take precautions against the sale of counterfeit goods.

Demonstrating a landlord’s willful blindness to a tenant’s trademark’s infringement satisfies the knowledge requirement. To be “willfully blind, a person must suspect wrongdoing and deliberately fail to investigate.”⁷ Landlords cannot close their eyes to trademark infringement. The willful blindness standard is subjective: Of consequence is what the landlord knew and what the landlord did with the information.

The extent and nature of the infringement bears upon the landlord’s knowledge: “‘If the infringement is serious and widespread, it is more likely that’ the defendant ‘knows about and condones’ the infringing activity.”⁸ A landlord’s receipt of complaints regarding alleged infringement may be used as evidence to establish the knowledge requirement. Furthermore, law enforcement activity on the leased premises (e.g., stings, arrests, execution of search warrants) is relevant to the landlord’s knowledge.⁹

Remedial steps to stop infringement

Where the knowledge factor is satisfied, a landlord must prove it took genuine and concrete actions to eradicate infringement. Landlords may be required to exercise contractual remedies such as default and eviction of tenants violating the law. Two recent federal cases—Omega SA v. 375 Canal, LLC and Luxottica Grp., S.P.A. v. Airport Mini Mall—show that courts are strongly inclined to let juries decide the reasonableness of the landlord’s efforts.

In Omega SA v. 375 Canal, LLC, the landlord moved for summary judgment arguing that it took reasonable remedial steps as a matter of law, including: (1) language in its leases prohibiting tenants from selling counterfeit merchandise and prohibiting subleasing; and (2) after landlord learned of an instance of counterfeit sales, landlord served a notice of default, followed by a notice of termination, and then initiated legal action against its tenant. Despite all this, the court denied summary judgment and the jury held the landlord liable for $1.1 million.

Similarly, in Luxottica Grp., S.P.A. v. Airport Mini Mall, the landlord argued in a post-trial motion that the following circumstances absolutely barred contributory liability:

Landlord’s inclusion of provisions in its leases prohibiting the sale of counterfeit goods;
landlord’s receipt of assurances from tenants that merchandise was legitimate;
landlord’s agents’ warnings to tenants that landlord would evict if there was evidence of counterfeit sales;
landlord’s distribution of fliers informing tenants that the distribution of counterfeit goods was prohibited;
landlord’s direction to tenants that certain products should not be sold unless tenants could prove that they were authorized dealers of those products;
landlord’s request for assistance from the plaintiff trademark holder’s investigator to identify tenants engaged in the sale of counterfeit goods; and
landlord’s attempt to secure information from law enforcement regarding the sale of counterfeit goods.

Despite these precautions and remedial measures, the jury returned a verdict of $1.9 million against the landlord and individuals associated with the landlord. The landlord’s motion for judgment notwithstanding, the verdict was rejected because the court ruled the jury could reasonably conclude the landlord had “deliberately failed to take serious, corrective action in light of what was known from the various notice letters and law enforcement raids.”¹⁰ The court also affirmed the jury’s conclusion that individuals associated with the landlord were individually liable for contributory trademark infringement. The court observed that the standard for individual liability in this context is whether the person “actively participated as a moving force in the decision to engage in the infringing acts, or otherwise caused the infringement as a whole to occur.”¹¹

Lessons for commercial landlords

Court decisions sustaining substantial jury verdicts against commercial landlords for contributory infringement hold five significant lessons for landlords:

Unlike in other contexts, the lease agreement will not absolutely shield the landlord from liability. Even if the lease expressly prohibits the sale of counterfeit goods, such a clause has been held not sufficient for the landlord to secure an early exit from this type of suit.
If a landlord has contractual power to default or terminate a tenant based upon the tenant’s sale of counterfeit goods, failure to exercise that power will be used against the landlord. A landlord’s renewal of a tenant with a history of trademark infringement will be used as evidence of the landlord’s willful blindness to trademark infringement.
Courts expect landlords to take remedial steps to counter infringement that are proportional to the infringement. If infringement is widespread and continuing over a lengthy period of time, the landlord may have exposure no matter the remedial steps taken. Landlords must not permit these situations to fester.
A landowner granting leases to multiple tenants operating in a common space need not know which particular tenant is engaged in infringement for the landlord to be liable for contributory infringement. Instead, it may be sufficient if the landlord knew that a particular counterfeit product was being sold at a particular location.
The potential for individual liability for persons associated with the landlord is greatly increased compared to other contexts. The Lanham Act plaintiff need not prove the elements associated with piercing the corporate veil in order to recover against related individuals and officers.

Commercial landlords can expect to see the number of contributory infringement claims grow as news of the victories achieved against landlords is disseminated around the bar. Landlords with reason to believe infringing activity is occurring should take swift and deliberate action to stomp it out.

BRYAN HUNTINGTON represents landlords and tenants in both commercial and residential disputes throughout Minnesota.

Notes

¹ 456 U.S. 844, 854 (1982).

² See Tiffany (NJ) Inc. v. eBay Inc., 600 F.3d 93, 103-104 (2d Cir. 2010); Hard Rock Café Licensing Corp. v. Concession Svcs., Inc., 955 F.2d 1143, 1149 (7^th Cir. 1992) (holding that Lanham Act applied to owner of flea market).

³ Omega SA v. 375 Canal, LLC, No. 12-civ-6979, 2016 WL 7439359, at *2 (S.D.N.Y. 12/22/2016).

⁴ Louis Vuitton Malletier v. Eisenhauer Road Flea Market, Inc., No. SA-11-CA-124-H, 2011 WL 13237799, at *4 (W.D. Tex. 12/19/2011) (emphasis in original).

⁵ Omega SA, 2016 WL 7439359, at *2.

⁶ Hard Rock Café Licensing Corp., 955 F.2d at 1149.

⁷ Id. (citation omitted).

⁸ Luxottica Grp., S.P.A. v. Airport Mini Mall, LLC, 287 F.Supp.3d 1338, 1342 (N.D. Ga. 2017) (appeal pending) (citation omitted).

⁹ See id. at 1342 (observing that “[a] landlord’s knowledge of infringing conduct by its tenants may come from raids by law enforcement agencies[.]”); Coach, Inc. v. Gata Corp., No. 10-cv-141, 2011 WL 2358671, at *8 (D.N.H. 6/9/2011) (determining that raids on the premises, arrests of licensees and confiscation of counterfeit goods was sufficient to establish willful blindness).

¹⁰ Luxottica Grp., S.P.A., 287 F.Supp.3d at 1345.

¹¹ Luxottica Grp., S.P.A., 287 F.Supp.3d at 1348.