Non-Challenge Clause in Certification Mark License Agreement Was Against Public Policy and Unenforceable

Case: State of Idaho Potato Commission v. G & T Terminal Packaging (9th Cir. No. 04-35229 10/07/05)

The One Sentence Summary: The Ninth Circuit affirmed district court rulings that a non-challenge clause in a certification mark license agreement was unenforceable and that selling of packages bearing the mark after expiration of the license agreement allowed an award of statutory damages for counterfeit use of the mark.


Ninth Circuit Holdings:

• The prior decision of the Second Circuit in Idaho Potato Commission v. M&M Produce Farms & Sales, 335 F.3d 130 (2d Cir. 2003) (M&M III), cert. denied, 541 U.S. 1027 (2004), that the non-challenge clause was non-enforceable did not establish a basis for issue preclusion because the doctrine does not apply to government litigants such as the Idaho Potato Commission.
• The Ninth Circuit agreed with the Second Circuit's decision in M&M III that a non-challenge provision in a certification mark license was unenforceable as against public policy.
• The panel affirmed a nominal $1 damages award for breach of contract for violation of labeling provisions after finding that the district court did not have authority to award it as a civil penalty under the applicable statute.
• The district court's award of $50,000 to IPC could not be upheld as a discovery sanction for missing documents absent a showing that defendant intentionally destroyed the documents, nor as a civil penalty.
• The district court properly awarded $100,000 in statutory damages for use of a counterfeit mark for the sale of potatoes in bags bearing the certification mark after the license to use the mark had expired. The court rejected defendant's argument that there was no confusion because the potatoes were genuine. The certification mark holder must have an opportunity to inspect the goods, and was deprived of this ability by misuse of the mark.