Stanley Must Police Sears’s Continuing Use of Craftsman

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By Anandashankar Mazumdar

Stanley Black & Decker Inc. could lose trademark rights in the valuable Craftsman tool brand it’s acquiring from cash-strapped Sears Holdings Corp. if it doesn’t keep a close eye on how Sears—which can still make and sell Craftsman tools—uses the brand going forward.

Sears Holdings—which owns the Sears and Kmart retail chains—is shutting down 150 stores and has sought other sources of cash, such as a $500 million loan backed by its real estate holdings and a loan of $500 million from its own CEO and chairman. This sale of one of its venerable brands will add to the cash flow.

Under the terms of the deal, both Stanley and Sears, which retains a perpetual license to use the trademark, will get their Craftsman tools made independently of one another, according to an e-mail message from a Sears spokesman. Stanley Black & Decker did not respond to requests for comment from Bloomberg BNA.

Such an arrangement can be risky for a trademark owner if it doesn’t retain some control over the quality of a licensee’s use of a trademark— a concept known as “naked licensing,” according to trademark lawyers who spoke with Bloomberg BNA.

“I see several potential risks to SBD in this arrangement,” trademark lawyer Alan Cooper of Westerman Hattori Daniels & Adrian LLP, Washington, told Bloomberg BNA. Specifically, Cooper said, Stanley “must create and impose quality control standards to ensure that the quality of the licensed Craftsman products sold by Sears are consistent and meet a certain level.”

“That’s a fear any time you’ve got this kind” of a deal, Kenneth B. Germain, a trademark lawyer with Wood Herron & Evans LLP, Cincinnati, told Bloomberg BNA. “Stanley Black & Decker is probably sophisticated enough that they know they have got to exercise control.”

Sears currently holds 43 live Craftsman-related trademark registrations, according to a search of the Patent and Trademark Office’s database. The Sears entity that holds the Craftsman trademark registrations—KCD IP LLC—also holds Sears’s trademark rights in its DieHard battery and Kenmore appliance brand names. Sears has also been looking at those brands for potential sales. The Stanley deal for Craftsman could be a model for how Sears brings in cash while still retaining use of its trademarks.

Licensing Without Policing

When a trademark owner gives another company a right to use its trademark, it is obliged to maintain control over the trademark’s use and ensure that the licensee’s use doesn’t affect the public’s perception of the trademark. If a trademark owner licenses a trademark but doesn’t control its use, such “naked licensing” can lead to a loss of its trademark rights.

In Stanley’s case, it would have to set standards for tools being stamped with the Craftsman name in order to control the trademark’s use. And it would have to have a way of holding Sears to that standard, Germain said.

For example, Stanley could require Sears to submit samples, or it could send a secret shopper to Sears to buy and test their Craftsman-branded tools. It could also insist on a right to inspect the factories that supply Sears with Craftsman tools, Germain said.

If Stanley fails to monitor Sears’s use of the Craftsman name, it’s taking a chance that, at some future time, a third party could argue that Stanley’s claim of trademark rights in Craftsman is invalid because of the naked licensing to Sears, Cooper said.

Royalties After 15 Years

According to materials released Jan. 5 by Sears and Stanley Black & Decker, Sears will get $525 million in cash when the deal closes, $250 million after three years and annual payments of 2.5 percent to 3.5 percent on Stanley’s Craftsman sales for the first 15 years.

For those 15 years, Sears will not have to pay royalties to Stanley for its sales of Craftsman tools at Sears, Kmart and Sears Hometown Outlet stores. Sears will pay a 3 percent royalty on Craftsman tool sales after that.

Stanley Black & Decker has been steadily buying up brands over the past few years. Its website now lists nearly a dozen brands, including Stanley, Black & Decker, DeWalt, Proto, Bostitch, Facom, Porter Cable and Mac Tools.

To contact the reporter on this story: Anandashankar Mazumdar in Washington at AMazumdar@bna.com

To contact the editor responsible for this story: Mike Wilczek at mwilczek@bna.com

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