IP Law Daily, TRADEMARK—1st Cir.: Financial difficulties and litigation do not excuse nonuse of a mark, (Sep 20, 2024)

By Robert B. Barnett Jr., J.D.

A Puerto Rican chicken company abandoned its mark because it stopped using it for five years and never could offer any evidence of an intent to resume use.

The U.S. Court of Appeals for the First Circuit has affirmed a Puerto Rican district court’s grant of summary judgment to To-Ricos for use of the mark POLLO PICÙ after To-Ricos sufficiently established that the prior owner, Productos Aviclolas del Sur, had abandoned the mark for five years after encountering legal difficulties. In doing so, the appellate court upheld the Puerto Rican court’s finding that Avicolas failed to offer proof of any intent to resume use of the mark when its legal difficulties ended. Furthermore, the appellate court reiterated that financial difficulties and litigation do not excuse nonuse or toll the running of the nonuse period (To-Ricos, Ltd. v. Productos Avícolas Del Sur, Inc., No. 22-1853 (1st Cir. Sept. 19, 2024)).

Background. Productos Avicolas Del Sur, Inc., sold chickens under the POLLO PICÙ mark, becoming quite popular in Puerto Rico. In 2011, however, Avicolas stopped selling the chickens after encountering financial difficulties. In 2016, To-Ricos, Ltd., applied to register the POLLO PICÙ mark on the theory that Avicolas had abandoned it. After Avicolas opposed To-Ricos’ application, To-Ricos sued Avicolas in federal district court in Puerto Rico, asking for a declaratory judgment that it was the rightful owner of the mark.

The district court granted summary judgment to To-Ricos, ruling both that Avicolas had abandoned the mark and that Avicolas had evinced no intent to resume use of the mark during the period of abandonment. Avicolas appealed the decision to the First Circuit Court of Appeals in Boston.

Abandonment. To establish abandonment, To-Ricos had to prove two elements: (1) non-use by the owner and (2) lack of intent by the owner to resume use of the mark in “the reasonably foreseeable future.” Under the Lanham Act, a prima facie case of abandonment can be established by proof that the mark has not been in use for three consecutive years (15 U.S.C. §1127). Such proof constitutes a rebuttable presumption of abandonment. The burden of production (not the burden of proof) then shifts to the prior owner to demonstrate an intent to resume use.

The First Circuit agreed with the lower court that Avicolas’s nonuse for five years had created a presumption of abandonment. Furthermore, although the period of abandonment was 2011-2016, the three-year period for purposes of the rebuttable presumption was deemed to be 2013-2016 because that was the three-year period immediately preceding To-Ricos’ 2016 application for the new registration of the mark.

Avicolas tried to argue that the lower court erred in ruling that it had abandoned the mark because its financial and legal difficulties, in effect, tolled or excused the nonuse. The district court categorically rejected that argument, noting that the Lanham Act simply states that three consecutive years of nonuse establishes prima facie evidence of abandonment. It does not provide any exceptions, nor does it distinguish between excusable and inexcusable nonuse. “Indeed,” the appellate court noted, “the statute is agnostic about the reason for a mark’s hibernation.” Thus, once the rebuttable presumption is established, no further analysis need occur except whether the mark owner evinced an intent to reuse the mark in the reasonably foreseeable future.

Reuse. The analysis then turned to whether Avicolas had produced evidence of an intent to reuse the mark. Avicolas offered three pieces of evidence to support its claim that the lower court erred when it ruled that Avicolas had failed to offer sufficient evidence: (1) the attempted sale of its assets, including the mark, to To-Ricos in 2012, which never came to fruition, (2) its efforts during the period of financial difficulty to retain the mark in its negotiations with its lender to avoid foreclosure, and (3) the licensing agreement that Avicolas entered into with IMEX in 2017.

Asset sale. In 2012, after encountering financial difficulties, one of Avicolas’ first actions was to seek out To-Ricos’ interest in buying Avicolas’ assets, including its trademark rights in the POLLO PICÙ mark. To-Ricos initially expressed interest, but the negotiations did not lead to an asset sale, and the discussions were ultimately abandoned. While the circuit courts are divided on whether an attempt to sell a mark expresses an intent to use the mark in commerce, the First Circuit concluded that it need not resolve the question because the negotiations were conducted in 2012, before the three-year abandonment period began. The analysis is whether Avicolas expressed an intent during the period of abandonment. Thus, what happened prior to that period is irrelevant.

Furthermore, the First Circuit concluded, comments made by Avicolas’ president during the negotiations, to the effect that Avicolas hoped to restart chicken production in the future, were similarly unavailing. Bare assertions of possible future use, at some unspecified date, are not enough to evince an intent to restart production “in the reasonably foreseeable future.”

Bank negotiations. After Avicolas experienced its financial difficulties, it negotiated with its bank about loan repayments that the bank was seeking. In fact, the bank sued to collect the outstanding payments and to foreclose on Avicolas’ assets. Under a 2014 settlement agreement, the bank agreed to exempt the POLLO PICÙ mark from the assets that could be foreclosed upon. Avicolas argued to the First Circuit that this exclusion on the mark was evidence of an intent to resume use of the mark.

The First Circuit disagreed, ruling that an intent to own an unencumbered right to the mark does not imply an intent to resume use of the mark. They are not the same thing. The bank’s lien that would be removed never prevented Avicolas from using the mark; it merely gave the bank the right to apply profits from the mark to satisfy the unpaid debts. Between 2013-2106, Avicolas could have taken, but did not take, any further actions to resume use, such as by licensing the mark to someone else.

The First Circuit went on to say that, even if the settlement agreement evinced an intent to use the mark in the future, “that would still not be enough.” To satisfy its burden, Avicolas was required to produce evidence of an intent to resume use in the reasonably foreseeable future. The settlement agreement simply did not satisfy that requirement. No reasonable jury could view the settlement agreement as probative of the issue, the appellate court said.

Licensing agreement. In 2017, Avicolas entered into a licensing agreement with IMEX to resume use of the mark (which it did but which was stopped by To-Ricos’ lawsuit). While such efforts can be evidence of an intent to resume use, Avicolas’ argument had two flaws, the First Circuit noted. First, the licensing agreement occurred in 2017, which was after the three-year period of abandonment (2013-2016). The mark was already abandoned when the licensing agreement was signed.

Second, which the court characterized as more important than the first, “licensing agreements without adequate quality control cannot show an intent to resume use of the mark.” Such agreements are known as “naked licensing” agreements because the mark owner does not follow through on its duty to ensure that the good or service is of consistent quality. As a result, the court concluded, a naked licensing agreement “cannot show an owner’s intent to resume use of a mark,” presumably because it has ceded quality control to the licensee. Avicolas, for example, never inspected the chicken that IMEX sold under the POLLO PICÙ mark. Furthermore, the duty cannot be satisfied merely by a showing that the chicken underwent the same federal health standards that chicken products undergo, nor can it be shown, as Avicolas attempted to do, by the fact that IMEX’s owner was the nephew of Avicolas’s president. No evidence of any close working relationship existed.

The First Circuit, therefore, affirmed summary judgment in favor of To-Ricos because Avicolas abandoned its mark in 2016. Thus, To-Ricos had every right in 2016 to apply for a new registration of the abandoned mark.

The Case is No. 22-1853.

Judge: Lipez, K.

Attorneys: David Rafael Rodriguez-Burns (Gonzalez Law Group, PLLC) for To-Ricos, Ltd. Monique Guillemard (Nachman & Guillemard PSC) for Productos Avicolas Del Sur, Inc.

Companies: To-Ricos, Ltd.; Productos Avicolas Del Sur, Inc.

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