## Facts

- Kentucky Fried Chicken Corporation (KFC) owned multiple federally registered trademarks and trade dress associated with its restaurant system and branded packaging.
- KFC operated through franchise agreements requiring franchisees to buy certain supplies (including carry-out boxes and napkins) either from KFC or from suppliers approved in writing by KFC to meet specifications.
- KFC’s evidence showed it had not refused approval to any supplier that requested approval and met KFC’s specifications.
- Diversified Packaging Corporation printed KFC’s trademarks on packaging products and sold them to KFC franchisees without KFC’s authorization.
- Diversified’s packaging, though bearing KFC’s marks, did not conform in significant respects to KFC’s design and quality specifications.
- KFC sued for trademark infringement and unfair competition and sought injunctive relief.
- Diversified asserted defenses and counterclaims including trademark forfeiture through “unrestrained” (uncontrolled) licensing, antitrust violations based on an alleged tying arrangement, trademark misuse, and unclean hands.
- The district court entered judgment for KFC and issued an injunction; Diversified appealed.

## Issues

1. Whether KFC’s trademark rights were unenforceable due to alleged forfeiture or “naked licensing” from insufficient quality control over use of the marks.
2. Whether Diversified’s unauthorized use of KFC’s identical marks on packaging sold to KFC franchisees created a likelihood of confusion and constituted infringement and unfair competition.
3. Whether franchise provisions requiring purchases from KFC or KFC-approved suppliers constituted an unlawful tying arrangement (and thus trademark misuse) barring KFC’s enforcement action.
4. Whether equitable relief was barred by unclean hands based on alleged antitrust misconduct or other asserted wrongdoing by KFC.

## Decision

- The Fifth Circuit affirmed the district court’s judgment and injunction in full.
- KFC’s trademarks were valid and enforceable; KFC’s licensing and franchise controls were sufficient to prevent forfeiture through uncontrolled licensing.
- Diversified infringed KFC’s marks by placing them on packaging without consent and marketing nonconforming goods in a manner likely to confuse as to source and quality.
- Diversified failed to prove an illegal tying arrangement or other antitrust violation on the record; the approved-supplier system was supported by legitimate quality-control objectives and open to qualifying suppliers.
- Diversified did not establish unclean hands sufficient to deny injunctive relief.

## Legal Principles

- Trademark licensing does not forfeit a mark so long as the licensor takes reasonable steps to control the quality of goods and services sold under the mark; absolute control is not required.
- Use of an identical mark on the same type of goods in the relevant market, without authorization, supports a finding of likely confusion, particularly where the goods are nonconforming and risk harm to goodwill.
- Approved-supplier clauses in franchise agreements are not automatically unlawful ties; a claimant must prove the elements of a tying violation, and legitimate brand and quality-control justifications may defeat liability on the facts shown.
- Allegations of antitrust misconduct do not bar trademark enforcement through unclean hands absent proof of inequitable conduct closely related to the subject matter of the infringement claim.

## Conclusion

The court upheld an injunction against a packaging supplier that sold nonapproved, nonconforming goods bearing a franchisor’s marks, holding that the franchisor maintained adequate quality control to preserve trademark rights and that the record did not prove an illegal tying arrangement or unclean hands barring enforcement.


Kentucky Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368 (5th Cir. 1977)