Purchasing a Business with a Trademark
Thinking about purchasing a business with a trademark? A little due diligence now can teach you whether your purchase will meet your expectations. Then, spend just a little more time and effort and learn to protect and exploit a business's potentially most significant assets.
A trademark can be of major importance in a newly acquired business. However, unless you are aware of what trademark rights are being acquired, you may not be getting what you think you are bargaining for. It does take some effort to get the most out of trademark but that is not necessarily costly.
Know what you are purchasing. A trademark can be exceptionally broad (KODAK is a broad mark because it is highly distinctive) or narrow (AMERICAN, as it is shared with a number of companies used for many different products). A stronger mark may have greater value as it may be more readily protected against infringing potentially reducing future litigation costs.
A trademark can be accompanied by registration either federally, sometimes registered with a state or it may not have any registration at all, existing as a "common law" mark. Sometimes, the rights are acquired to foreign or international trademarks. Maintaining a single registration may not be costly. But maintaining a large portfolio may be substantial, particularly if they include numerous foreign registrations for widely ranging goods and services.
Ask yourself how significant the mark is to the business and its relationship to the purchase price. If the trademark is important in maintaining significant sales of the business, the maintenance of trademark rights is going to be important. If there are a number of marks associated with the business, and each mark only results in a small portion of sales both domestically and abroad, then the cost of maintaining trademark registrations may be very substantial in relationship to their value.
To determine what you are going to be paying for, collect and review all the trademark documents that are available, preferably with the help of your trademark lawyer. First, obtain all trademark registrations. Then, try to obtain documents which are filed along with trademark applications that you might be able to receive from the prior counsel or trademark counsel. Look at the samples of the labels and other uses of the mark. Collect all documents of the company showing how the mark is actually used. Try to find out through communications with third parties information concerning the marks. Have any cease and desist letters been sent by your predecessor to any companies who have used confusingly similar marks? Have there been any uses of the mark by third parties for which cease and desist letters have not been sent? And from a defensive posture, have any third parties sent cease and desist letters to the seller? What was the resolution of those conflicts? These documents should be viewed with your trademark counsel.
Determine whether trademarks have been used correctly in the past on hangtags, literature and advertisements. One of the most important methods of establishing rights in the mark and strengthening those rights is to make sure that marks are used properly. The International Trademark Association (INTA) located in New York, is a worldwide association of owners of trademarks which has developed brochures that help the business person properly use trademarks. A review of their publications may help determine whether the marks have been used properly. The consequences of improper use are that the trademark may no longer function as a mark and may become generic for the particular product. One general rule for proper trademark use, for example, is that a mark should be used as an adjective and not a noun and should not be used in a possessive form.
Marks which are registered with the U.S. Patent and Trademark Office should have the symbol, ®, associated with the mark or some reference to the mark being registered. Failure to properly use the registration notice may make it more difficult to obtain actual damages in the event of infringement.
Has the mark been licensed to others? If so, the mark should be licensed with quality control. Review trademark licenses. Quality control provisions will often state specific requirements to be exercised by the trademark owner. For example, samples may need to be sent at regular intervals to the licensor, particularly at such time as the product changes. Have the quality control provisions been followed through? If quality control provisions and procedure have not been followed, it is possible trademark rights may not be enforced by a court.
Do you plan to use the mark with the same types of goods and services as the seller? Is the mark being used with the same quality of goods? Or will the mark eventually be spun off and used for something entirely different. These questions are important is that trademark rights cannot simply be bought and sold as ordinary property. A trademark is associated with goodwill. Goodwill is a perceived quality in the mind of the consuming public. If the purchaser’s goods are completely unrelated to the seller’s goods or the quality completely unrelated, rights to the mark could be diminished when goodwill does not follow the mark.
Were there any prior owners of the trademark acquired? If so, how were those prior marks transferred? Is there a recordation of the transfer of ownership? And if so, have those transfers been recorded in the Patent and Trademark Office?
Trademark registrations need care themselves. Federal registrations must be renewed at intervals of ten (10) years and during the sixth year following the registration date, (and as part of the renewal process at ten (10) year intervals), a declaration of use must be filed alleging that the mark is still in use in commerce. If the mark has been in continuous use for a period of five years, there is an opportunity to file another type of declaration which significantly strengthens the rights in the mark. But the failure to use a mark for a period of three (3) years results in a presumption of abandonment.
Registration maintenance gets complicated quickly if registrations outside the United States are involved. For most countries other than Europe, registration is typically on a country by country basis, though there are some additional exceptions. In Europe, there is a Community Trademark to which the fifteen countries of the European Union subscribe. For all of these registrations, there are required renewals at various intervals and generally the mark must actually be used or the registrations may be subject to cancellation.
While maintaining registrations of numerous marks or international registrations can be costly, the review of a company's trademark portfolio before purchase can help identify limitations of trademark rights and develop a cost effective trademark maintenance program.
In conclusion, if trademarks which are acquired during the purchase of a company are examined, they can in some situations have a tendency to significantly increase the value of the property being purchased. But some care and effort need to go into determining whether or not the rights acquired are exactly what are perceived by the purchaser. If so, and if some care and effort is taken in connection with the maintenance of the rights, the trademarks will be significant business asset.
Paul Supnik is a member of the Public Relations committee of the International Trademark Association ("INTA") and an intellectual property lawyer with a California practice. INTA is a not-for-profit association of trademark owners and advisors dedicated to promoting trademarks as essential to world commerce.
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