Toward a Trademark-Based Liability System

Abstract

No general rule of law renders trademark owners liable for products sold or business conducted under the trademark. This essay proposes the adoption of such a rule. The rationale for the change is that businesses are known by their trademarks, not their entity names, in the marketplace. The vast majority of customers - both businesses and consumers - select the persons with whom they will deal, and contract with those persons, on the basis of trademarks. The entity structures of businesses (corporate groups, franchises, joint ventures, etc.) are generally invisible to customers. Yet under current law the businesses' liabilities to customers are calculated from those entity structures. The result is a failure in the market for liability: Customers lack the information they need to contract for the level of supplier financial responsibility they prefer.

The proposed rule would create no new liability, it would merely extend existing liability to trademark owners. The rule would extend liability to trademark owners for (1) defective products sold under the mark and (2) the wrongful acts of licensees that conduct businesses identified to customers by the mark. The initial assignment of liability to the trademark owner will prevent businesses from externalizing their liabilities. Trademark owners will remain free, however, to pass the liability on to their licensees by contracts requiring indemnification or insurance.

JEL Classification: K00, K12, K13, K20, K22