Copyright © 2014 International Trademark Association 655 Third Avenue, 10th Floor, New York, NY 10017-5646 USA

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Trademarks in Business TransactionsBy Lanning G. Bryer∗

I. Introduction

A company’s intellectual property rights are valuable assets that can help the company enhance its business. In the course of operating or expanding a business, trademark rights routinely present themselves in various types of business transactions. More specifically, acquisitions, divestitures, mergers, licensing and co-branding, due diligence reviews, and valuation are some of the major transactions in which trademark issues can arise. Given this expansive reach, a trademark administrator or paralegal (“Administrator”) will undoubtedly encounter many opportunities to contribute to and participate in business transactions involving trademarks.

II. Evaluating a Trademark Portfolio

A. Management and Ownership Structure

Evaluating a company’s trademark portfolio is an important task that can represent an important part of an Administrator’s responsibilities. A trademark portfolio requires diligent record keeping and overall management. Through portfolio evaluation, the Administrator is better able to determine the degree and

∗ Lanning G. Bryer is a Partner in the New York office of Ladas & Parry LLP and is Director of

the firm’s Mergers, Acquisitions, and Licensing Group. The author gratefully acknowledges the outstanding drafting, researching, and editing of this chapter by Angela Lam, a recent graduate of Brooklyn Law School and an associate in the New York office of Ladas & Parry LLP, and Stacy Wu, a recent graduate of Benjamin N. Cardozo School of Law and a prior associate in the New York office of Ladas & Parry LLP.

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scope of record keeping, the capacity of record-keeping systems, and the extent of his or her responsibility for intellectual property management. Evaluating the portfolio can also help the Administrator determine who should be delegated certain tasks or on whom to rely in making decisions that could affect part or all of the portfolio.1

While an Administrator’s full understanding of an owner’s intellectual property portfolio is important, management of the business’s intellectual property rights generally will be successful and effective only if there is an operational management structure in place. Trademark rights are fragile intellectual property assets that require care and attention. Therefore, proper management of these rights can be critical. For intellectual property management to be effective, strategies must be accompanied by effective management structures and implementation tools.

There are two types of management structures: centralized and decentralized. Choosing the right structure will depend on such things as the company’s personal agenda for its intellectual property rights; the resources available to implement one structure as opposed to the other; and the composition of the company’s departments and related entities. While Administrators may not have control over the decision-making process in selecting and implementing the management structure, they do effectively have a role as decision makers within either structure.

Under a centralized management structure, top-level executives make decisions regarding trademark rights, which are then executed by designated personnel. Depending on his or her level of expertise and authority, it is not unexpected for an Administrator to be among the principal decision makers regarding trademark-related matters. An important advantage of a centralized structure is that it eliminates waste and duplication of efforts in maintaining the company’s trademarks. On the other hand, it has been argued that a centralized system is

1 For a brief synopsis of what portfolio management entails, see INTA Fact Sheet, Trademark Portfolio Management Strategies.

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inherently inefficient because “no central planner can possibly have all of the necessary local and national information to make the right decisions.”2

Under a decentralized management structure, each department has its own decision maker. Consequently, many different people can make decisions regarding trademark issues. A decentralized structure allows different people with varying degrees of experience to efficiently address trademark issues as they arise within their department. Thus, each department may have a person in an Administrator-type role. This may result in greater employee understanding of and contribution to the value of the company’s intellectual property rights. On the other hand, a decentralized management structure may not be useful for the company unless “there is no strong need to leverage know-how across the business units and the IP issues encountered by the business units are not complex.”3

Increasingly, businesses have created intellectual property holding companies (IPHCs), which are wholly owned subsidiaries created solely for the purpose of maintaining and managing the intellectual property. Title to the intellectual property is transferred from the parent company to the IPHC, which then licenses the IP rights back to the parent company. This vehicle may provide advantages, such as tax benefits and independent control of the company’s IP assets. However, an IPHC must not be incorporated solely to allow the company to avail itself of tax benefits; the company must be able to justify substantial business activities separate from the tax benefits.4

2 Lanning G. Bryer & Deepica Capoor Warikoo, “Corporate Strategies, Structures, and Ownership of Intellectual Property Rights,” in Lanning G. Bryer, Scott J. Lebson & Matthew D. Asbell, Intellectual Property Strategies for the 21st Century Corporation 1–36 (Wiley 2011).

3 Id. 4 See Sherwin-Williams Co. v. Commissioner of Revenue, 438 Mass. 71 (2002).

For a further explanation of IPHCs, see Lanning Bryer & Matthew Asbell, “Combining Trademarks in a Jointly Owned IP Holding Company,” The Trademark Reporter, Vol. 98 No. 3, 834–72 (May-June 2008).

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B. Assessing the Portfolio

When the overall value of a company is assessed, it is not surprising to find that the company’s trademark rights may be among its most valuable assets. As a consequence, it is important that the company extract the most value from its trademark portfolio. It is also important for the company to maintain and continue to develop that portfolio by (1) understanding the existing portfolio, (2) developing new trademarks, (3) acquiring new trademarks, and (4) periodically assessing the overall portfolio.

Assessing Marks. The greater an Administrator’s understanding of how and why a company’s trademarks were acquired or adopted, the more he or she can contribute to the future development of the trademark portfolio. Each trademark that a company owns either domestically or internationally, through registration or common-law right, must be prioritized by its value to the company. Here are suggested questions one should ask when assessing the company’s existing portfolio:

Assessing Existing Portfolio Checklist

What trademark rights does this company own?

What is the nature of the ownership of each mark? What rights are included with each mark?

Does the trademark portfolio support the business strategy of the company?

What do competitors’ trademark portfolios look like?

Are there gaps in the company’s portfolio where trademarks may provide value? (An Administrator may wish to have a discussion with business personnel to determine whether any gaps in trademark protection should be filled.)

How can the gaps in the company’s portfolio be filled?

What are the rights claimed in each country?

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Once a clear framework of the portfolio is understood, an Administrator can identify key areas that can profit from greater attention and effort.5

C. Reevaluating Current Marks

Large corporations with substantial trademark portfolios may have rights in marks that they are unaware of or have forgotten about. Such marks could result in value upon reevaluation of the marketing plans, or even in third-party disputes. Accordingly, it is important to manage one’s trademark portfolio in order to fully utilize these property rights. Sometimes a trademark may no longer be necessary to a company, and therefore maintaining the mark would be a waste of resources. This may come about because the mark has never been used by the company and it has no connection with current business strategies. Also, a mark also may be registered in a particular jurisdiction in which the company has no intention of conducting business or ceased conducting business years ago. Finally, some trademark owners have acquired marks through the settlement of third-party disputes or have obtained them for defensive purposes to protect themselves against competitors. At this point, an owner may decide that the best approach would be to abandon the mark or not renew it.

Reevaluation of a trademark portfolio is a key task for an Administrator that can lead to overall cost savings and efficient management. Administrators can reduce their record keeping by eliminating unnecessary marks. Moreover, reevaluation can help the Administrator keep an up-to-date portfolio, which is necessary for any efficient business transactions involving the company’s trademarks. An outdated portfolio can diminish the value of a company’s overall IP rights, especially if other tangible rights are tied to the trademark.

5 To further understand the IP value chain, see Ron Carson, “Get Your Assets in Gear: Aligning IP Strategy and Business Strategy,” in Building and Enforcing Intellectual Property Value 2008 31–36 (World Intellectual Property Organization 2008).

Practice Tip

If the Administrator’s budget is limited to begin with, see Allan S. Pilson et al., “Tips on Acquisition and Enforcement of Trademark Rights on a Tight Budget,” Ladas & Parry Bulletin, March 17, 2010.

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D. Creating New Marks

Typically, a company creates a new trademark when its business launches a new or updated product, a new marketing campaign, or an updated version of a previously existing mark. Whether or not the company finds value in the initial creation, registering the mark is an important step in protecting the company’s potential future profits from the sale of the goods or services associated with the mark. When a mark is registered, the registration puts the world on notice of the existence of the owner’s trademark rights.

In the United States, although common-law rights are created through use of a trademark in commerce, registration of the mark provides prima facie evidence of exclusivity in the mark and offers greater protection and enforcement options to the owner. Furthermore, in certain countries, registration may even be a formal requirement for enforcement of trademark rights.

Updated Marks. Frequently, a company decides to update or modify its brand to meet new marketing plans or business expectations, not realizing that the legally protected component of its brand, the trademark, may be adversely affected. An Administrator may be called upon to monitor and determine whether an updated trademark requires a new registration. Administrators should be aware that the inconsistent presentation of a mark can devalue its worth. In addition, what a layperson considers to be an insignificant change to the mark may be legally significant and may result in the loss of trademark protection for the updated mark (and abandonment of the original mark). Take, for example, a mark that consists of a silver circle with a black design in the middle and that is used for beauty products. Five years after registration of the mark, the company decides to release a line of beauty products solely for nighttime use, and it chooses to reverse the colors of the trademark—that is, a black circle with a silver design in the middle—to suggest nighttime. If the original trademark registration specifies the colors in its description of the mark,

Practice Tip

Before a new mark can be used in commerce, it is highly advisable that the mark undergo a comparative risk assessment (i.e., a search) so as to avoid infringing a third party’s intellectual property rights. A mark may turn out to be undesirable after review. For more information, see Section IX.D, Due Diligence—Searches, below.

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protection of the mark as registered is limited to those colors; therefore, the company will have to obtain a new registration for the updated mark.

E. Acquiring Existing Marks

In addition to creating its own marks, a company may seek to acquire trademarks owned by another individual or entity. This allows the company to seek out marks that would quickly diversify or expand the company’s portfolio. Oftentimes, business transactions involving trademarks arise because of perfect timing. Company A is willing to buy a mark that company B is willing to sell. Administrators will want to reevaluate their company’s trademark portfolio on a regular basis to ensure that any acquisitions or divestitures the company decides to make will not be delayed or hindered by an outdated portfolio. Moreover, the Administrator would also benefit by evaluating the mark being acquired and/or the target company’s overall portfolio in order to understand how the target company has profited from the mark that is being acquired. In doing so, the Administrator can determine whether the mark would also produce value for the Administrator’s own company. (See also Section III.A, Business Expansion, and Section IX, Due Diligence, below.)

A company may seek to obtain or use another individual or company’s mark through an acquisition or a merger or by license. The business’s strategic plan may dictate which type of ownership would be most beneficial. By acquisition, a company would typically receive complete right, title, and interest in the mark by assignment from the mark’s owner. Under a merger, a company would receive complete ownership of the mark by operation of the law. All rights and liabilities of the mark attach to the new owner. Under a license agreement, a company may receive a right to use (rather than own) the mark under certain terms and conditions set out by the mark owner (also known as the licensor).

In assessing a company’s trademark portfolio, the Administrator may wish to take into consideration the following questions for each trademark:

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Trademark Portfolio Assessment Checklist

What is the registration or application number of the trademark?

What goods or services are protected by the trademark?

What is the date of the trademark registration or application?

What is the chain of title (recordal of the prior owners) for the trademark?

Are there any encumbrances on the trademark?

In which countries is the trademark registered? In which countries is the trademark used? To which countries do the trademark rights extend?

III. Acquiring or Divesting Marks

A. Business Expansion

1. Identifying Trademark Targets

When dealing with a potential target (i.e., a company to be acquired or merged with), a company should thoroughly research the target’s assets to understand the extent of the trademark rights involved. This process would involve a review of the target’s past and current activities. Some suggested areas to investigate for information are the target’s marketing, operations and management, and legal departments. Even if an Administrator is not called upon to undertake this review, it is in his or her best interest to familiarize himself or herself with the target’s assets. By doing so, the Administrator may be able to help determine whether the

Practice Tip

Although this publication is focused on trademark rights, an assessment of the target’s trademark rights cannot be conducted within a vacuum. A thorough review process would involve two additional aspects. The first is the manner in which the trademarks interact with the target’s complementary assets, such as trade dress, slogans, and marketing campaigns. The second is the manner in which the trademarks and the complementary assets may associate with other IP assets in the target company.

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assets are compatible with the company’s existing marks and overall business goals.6

2. Mergers; Stocks and Asset Purchases

A transfer of trademark rights is sometimes part of a much larger business transaction, such as a merger, acquisition, asset purchase, or stock purchase. How IP assets are acquired or transferred can affect the nature of the documents that Administrators may need to maintain or produce. In addition, Administrators may be called upon to consider the alternative methods of transferring trademark rights.

With any merger or acquisition, the acquiring company’s first responsibility is to determine whether trademark rights are also being acquired. Sometimes the transfer of trademark rights is incidental to the merger or acquisition, while at other times the transfer of trademark rights is the driving force behind it. An Administrator can be a great resource for the company in helping to make the determinations discussed below. The acquiring company must determine the impact that the trademark rights will have on business models or goals of the new entity. The company should also determine how the trademark rights might affect or interact with the company’s current goods or services. This may be determined by looking at the trademarks’ cash flow or their reputation in the marketplace. When the merger or acquisition is between international companies, the businesses need to consider which country’s trademark laws will control the transfer of the trademark rights.

Post-merger. When a merger has taken placed, an Administrator should be mindful of the following question: Which entity will ultimately own and use the newly obtained trademark rights? The decision is best made before the closing of the business transaction. The acquiring company may find no value in the trademarks for its specific business. Put another way, the marks may lose their value because they were associated only with the acquired company. If the marks

6 For an in-depth discussion of this subject, see David Drews, “Properly Evaluating a Target with Intellectual Property Rights,” in Lanning G. Bryer, Scott J. Lebson & Matthew D. Asbell, Intellectual Property Strategies for the 21st Century Corporation 37–46 (Wiley 2011).

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have not retained value for the acquiring business, the company may find it beneficial to either license, sell, or abandon them. Conversely, the surviving company may see a significant commercial benefit in retaining and using the trademarks of the acquired company. In that case, it is the surviving company’s responsibility to record the merger and all existing trademark registrations and applications to make certain that title in the marks is owned by an active business entity. In some jurisdictions, failure to record the merger may prevent or complicate the transfer of the trademarks at a later time.

Definitions

An asset purchase is a transaction in which a business’s assets and certain liabilities are acquired and folded into an existing company or transferred to a new company.

A stock purchase is a transaction based on an agreement between a closely held or private firm and its shareholders regulating the sale and transfer of the firm’s shares.

Another common method utilized in expanding a business is the acquisition of another company’s stock or assets. In an asset purchase, all or a portion of the target’s assets, which usually include trademark rights, is acquired by the purchasing company. In a stock purchase, all or a portion of the target shares of stock is acquired by the purchasing company. However, trademark rights often remain with the acquired company absent a separate provision or agreement to the stock purchase.7 This is because assets are not exchanged in the stock purchase; only the shares of the stocks are acquired. The buyer should ensure that the seller discloses which trademark rights the selling company owns and which trademark rights are merely licensed for its use.8

7 See Lanning G. Bryer & Scott J. Lebson, “Transfer of Intellectual Property Upon Merger or Acquisition,” in Lanning Bryer & Melvin Simensky, eds., Intellectual Property Assets in Mergers and Acquisitions 16.1–16.26 (Wiley 2001).

8 See Glenn A. Gundersen, “Intellectual Property Aspects of Acquisitions,” in id. at 6.1–6.17.

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Ultimately, either an asset purchase or a stock purchase transaction between companies requires a significant level of due diligence to account for whether the purchases include specific trademark rights.9

B. Assignments

An assignment of trademark rights occurs when a company transfers its complete ownership of a mark or several marks to another individual or company. There are certain procedural rules that the parties must meticulously follow; otherwise, the assignee could be vulnerable to losing its rights. Since trademark laws are territorial and practice can vary widely, it is important to seek a reputable local counsel who understands the requirements for filing in each country in which the mark is registered or pending.

An Administrator may be called upon to act as liaison with local counsel for the recordal or to instruct the recordal of the assignments. Administrators may also need to oversee and correct inaccurate assignments made by others. After all, data verification and integrity are critical to any trademark portfolio. Assignments can affect the Administrator’s decisions on IP management and timely performance of the necessary tasks.

1. U.S. Trademark Assignment Requirements

The checklist below sets out the key requirements for a trademark assignment in the United States. The USPTO’s requirements for recordal of an assignment are available at http://www.uspto.gov/trademarks/process/assign.jsp.

9 See generally Sheldon Burshtein, “Intellectual Property and Technology Due Diligence in Business Transactions,” in id. at 8.1–8.66. See also Section IX, Due Diligence, below.

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U.S. Trademark Assignment Requirements Checklist

Writing: The assignment of a federal registration or application to another must be in writing. A written assignment is also recommended for the assignment of a common-law trademark.

Signature: The assignor, the person who is assigning the rights to another, must sign the written assignment.

Notarization: There is no witness or notarization requirement for the assignment of a federal application or registration. However, a notarized written assignment creates a legal presumption that the assignor executed the assignment.

Recordal: It is highly recommended that an assignment be recorded with the U.S. Patent and Trademark Office (USPTO). Recording an assignment safeguards an assignee from a subsequent assignee for value who did not have notice of the original assignee’s rights. The recordal of the assignment can be submitted to the USPTO either online or by mail.

Timing: An assignment should be recorded within three months of its execution. Such recordal will ensure the assignee has priority over any subsequent bona fide purchaser for value who did not record its assignment. Moreover, a subsequent bona fide purchaser for value without notice will have priority over a prior assignee who fails to record. (More information on timing is provided in Section 10 of the Lanham Act (U.S. Trademark Act), 15 U.S.C. § 1060.)

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2. Assignment of U.S. Pending Applications

The assignment of a pending application may be more complex. A pending U.S. trademark application based on commercial use must be transferred together with its goodwill. Under the Lanham Act, a trademark is accompanied by the goodwill it symbolizes.10 Attempts to transfer trademarks without the associated goodwill of the business have been characterized as “assignments in gross” and have been declared invalid.11 Also, an intent-to-use application can be validly assigned only in two situations: (a) if the entire business associated with the mark is sold or (b) if there is commercial use of the mark documented with the USPTO.12 Note also that this means an intent-to-use application cannot be assigned as collateral for a security interest.13

The following checklists set out a few key assignment tasks for which an Administrator may be responsible, with regard to both the assignor and the assignee.

10 “A…mark…shall be assignable with the good will of the business in which the mark is used, or with that part of the good will of the business connected with the use of and symbolized by the mark.” 15 U.S.C. § 1060(a)(1).

11 Berni v. International Gourmet Restaurants, Inc., 838 F.2d 642 (2d Cir. 1988). 12 15 U.S.C. § 1060. 13 Clorox Co. v. Chemical Bank, 40 U.S.P.Q.2d 1098 (T.T.A.B. 1996).

Practice Tip

When filing a recordal of an assignment with the USPTO by mail, use the Recordation Form Cover Sheet (Form PTO-TM-1594). The recordal may also be filed online through the Electronic Trademark Assignment System (ETAS).

Queries regarding trademarks should be submitted to the USPTO’s Assignments on the Web page.

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Assignor Checklist

Fully understand what specific rights will accompany the assignment.

Check to make sure that the assignor does not need to retain rights in the mark.

Does the assignor need a temporary or permanent license from the assignee back to the assignor?

Ensure that the assignor has ownership or a security interest until the assignor is paid in full.

Has payment in exchange for the assignment been fully transferred and received?

Assignee Checklist

Is the mark valid? Is the application pending or is the registration still in force?

Check the chain of title to ensure that the title is free and clear of any prior encumbrances (more specifically, check for any prior assignments, licenses, or security interests).

Has the assignor adequately represented its ownership of the validity and enforceability of the mark and its ability to transfer the mark?

Check to ensure that there are no infringements or other third-party claims known to the assignor.

Fully understand and confirm that the rights included with the assignment are reduced to writing. Rights can include goodwill, the right to sue for past infringements, etc.

Is the assignment notarized?

Ensure that the assignment is recorded within three months of execution.

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3. International Trademark Assignment Requirements

It is important to note that trademark laws and practice vary widely throughout the world. For example, in contrast with the United States, certain jurisdictions permit assignments without the goodwill of the business associated with the mark or only with the partial goodwill of the business. Furthermore, the procedures for Madrid Protocol applications and registrations with the World Intellectual Property Organization (WIPO) (see http://www.wipo.int/madrid/en/) may also differ. Assignments of International Registrations may be recorded with WIPO or with a national trademark office, which will then notify WIPO and other designated countries/ jurisdictions. If the International Registration is properly recorded with WIPO and protection extends to the United States, the USPTO will be notified to update its database accordingly pursuant to Section 501.07 of the Trademark Manual of Examining Procedure (TMEP).

Please see the assignment forms on the following pages for examples of assignments with goodwill, with partial goodwill, without goodwill, and not mentioning goodwill.

Checklist

Writing: The assignment of an international trademark registration or application requires a written instrument (sometimes an original or certified copy, but simple photocopies are acceptable as well).

Signatures: Signatures of both parties are required in many international jurisdictions.

Notarization/authentication: Certain jurisdictions require the assignment to be notarized or authenticated with apostille/consular legalization.

Recordal: A number of jurisdictions have deadlines for the filing of assignments from the date of execution, after which penalties for late filing either are assessed or may be rejected.

Practice Tip

INTA’s Country Guides: Full Report Search provides an overview of trademark practice in more than 100 jurisdictions. This resource is helpful in determining procedures for recordal of assignments in other countries.

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Assignment with Goodwill

Source: Susan Barbieri Montgomery & Richard J. Taylor, eds., Worldwide Trademark Transfers: Law and Practice (INTA, rev. 1998).

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Assignment with Partial Goodwill

Source: Susan Barbieri Montgomery & Richard J. Taylor, eds., Worldwide Trademark Transfers: Law and Practice (INTA, rev. 1998).

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Assignment Without Goodwill

Source: Susan Barbieri Montgomery & Richard J. Taylor, eds., Worldwide Trademark Transfers: Law and Practice (INTA, rev. 1998).

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Assignment Not Mentioning Goodwill

Source: Susan Barbieri Montgomery & Richard J. Taylor, eds., Worldwide Trademark Transfers: Law and Practice (INTA, rev. 1998).

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4. Due Diligence

When seeking to acquire a trademark, a company would be well advised to undertake appropriate due diligence.

A company should also be wary of the fact that in certain jurisdictions, a bona fide purchaser of an asset for value who has not recorded his or her assignment may still have a claim to ownership. A chain of title search will also help the assignee determine whether the trademark rights that the assignor has promised to convey are exactly what the assignee is acquiring. Through the due diligence process, an assignee will understand the full extent and limitations of the trademark rights it is about to receive. For example, an assignee may discover that the assignor had limited the ability to use the mark with regard to certain potential goods or services or in certain territories. These findings are important to the assignee company because it receives not only the benefits of the trademark rights but also any liabilities and limitations relating to the trademark rights.

The following checklist sets out a few key assignment-related due diligence tasks for which an Administrator may be responsible.14

Assignment Due Diligence Checklist

Search the chain of title and determine current owner of record.

Review any affiliated agreements. (May also require attorney review.)

Consider the marketplace and consumers.

Determine the available resources to support the transfer or acquisition of the trademark.

14 For more information on determining what tasks due diligence incorporates, see Robert W. Smith, “Diligence in Acquiring Trademarks: What’s Due?” INTA Bulletin, Vol. 60 No. 11 (June 15, 2005).

Practice Tip

Due diligence includes reviewing the chain of title to ensure that the assignor has true ownership rights to the trademark and to reveal any third party’s rightful claim to title of the trademark.

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Assignment Due Diligence Checklist

Consider the impact on and from third-party interests (including obligations, exclusivity, territory, liabilities, representations and warranties, etc.). (May also require attorney review.)

Determine the responsibility for pre- and post-closing activities.

Determine whether assignor companies are in existence and officers are able to execute documents.

Determine whether unregistered rights exist requiring common-law assignment. (May also require attorney review.)

Determine whether domain name rights exist based on acquired trademark rights. (May also require attorney review.)

Where appropriate, determine the manner and geographic use of acquired trademarks.

The following is an in-depth comprehensive checklist that Administrators may wish to consult as a guide when handling an assignment of trademark rights.

Divestiture Project Checklist

Pre-Closing Actions

Task Status Notes Complete

Determine Basics of Transaction

Who are the parties?

Obtain contact info for assignee

What is the purpose of the underlying transaction?

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Task Status Notes Complete

What are the trademarks involved? Are any unregistered marks a part of the deal?

When is closing?

Level of confidentiality

Will a phase-out license be needed for existing inventory?

Who will be responsible for recordal of the assignment?

Review Portfolio to Identify:

Registrations/applications to be assigned

Domain names to be assigned

Owner issues:

o Affiliate owners o Chain of title issues o Unrecorded changes of address

Associated marks:

o Dissociation possible? o License to assignee? o Voluntarily cancel?

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Task Status Notes Complete

Registrations/applications in sensitive countries:

o Does assignee want them? If so, license and docket for periodic review, or cancel so assignee can refile?

o If no interest to assignee, consider canceling

Agreements affecting the marks:

o Third-party licenses—transferable? Identify termination requirements

o Affiliate licenses—automatic termination provision? Identify termination requirements

o Settlement agreements o Consents o Prior rights agreements o Prior assignments

Conflicts:

o Active conflicts o Prior decisions affecting the

marks

Deadlines, including renewals:

o Actions to complete prior to closing

o Actions due up to one year after closing, to provide to assignee

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Task Status Notes Complete

Consult with Tax Department to Identify Tax Consequences of Transfer

Write Local Counsel in Each Country to Ask:

Are registration details accurate?

Are there any affiliate-owned registrations for this mark of which you are unaware?

Any associations that would prevent assignment? (In case your records on this are incomplete)

Any license or registered user recordals that must be terminated? What is required? Request forms.

Provide Assignee Lists of:

Registrations and applications to be assigned

Any trademarks that cannot be assigned (associated marks, sensitive countries)

Domain names to be assigned

Agreements affecting the marks

Active conflicts

Prior decisions affecting the marks

Issues that may be impediments or complications to assignment

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Task Status Notes Complete

Renewals and other deadlines due within first year after projected closing date

Pre-Closing Housekeeping

Resolve any incomplete owner name or address changes

Retrieve original registration certificates and agreements, or copies if originals are unavailable

Retrieve copies of decisions affecting the marks

Review prosecution files; remove confidential and proprietary information for production of redacted files to assignee, according to practice and records retention policy

Review conflict files; remove confidential and proprietary information for production of redacted files to assignee, according to practice and records retention policy

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Task Status Notes Complete

Prepare Draft Documents

Assignment for each owner, including any unregistered marks

Phase-out license for existing inventory, if needed

Licenses for marks not assignable

License terminations

Post-Closing Actions

Task Status Notes Complete

Send Following Items/Information to Assignee:

Original registration certificates, or copies if originals are unavailable

Original third-party agreements, or copies if originals are unavailable

Renewal documentation for pending renewals

Updated report of deadlines due within next year

Redacted files, according to practice and retention policy

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Task Status Notes Complete

Digital file of portfolio data, for entry into assignee’s trademark database

As license and registered user recordals are terminated, advise assignee so its assignment recordal process is not impeded

Terminate Affiliate Licenses

Immediately after closing, have license terminations signed by assignor and send them to affiliates for countersignature

Send completed terminations to local counsel for recordal where necessary

Write Local Counsel in Each Country

Notify of assignment

Provide assignee contact information and instruct that all future correspondence be directed to assignee; cc assignee

Cancel registered user and license recordals; record license terminations where necessary

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Task Status Notes Complete

Post-Closing Housekeeping

Assist assignee with obtaining signatures on confirmatory assignments and power of attorney forms (assignee should prepare all documentation if it is responsible for recordal of assignment)

Update computer records, remove deadlines from docket

Remove mark(s) from Watch Service

IV. Licensing

A. Generally

Licensing can provide both the licensor and the licensee major benefits to their trademark portfolio. It can save the licensee the time and expense of achieving the name recognition necessary for a profitable brand. These expenses can involve marketing and advertising costs, building brand familiarity among consumers, and costs involved with creating a new mark. In the United States, a valid license will absolve the licensee from a potential claim of infringement if the licensee uses the mark as authorized.15 This does not leave the licensor without protection. The trademark licensee has an implied good-faith obligation not to engage in actions that would impair or destroy the value of the trademark rights

15 See Segal v. Geisha NYC LLC, 517 F.3d 501 (7th Cir. 2008).

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granted to the licensee.16 Licensors benefit from the expansion of the market through the licensee’s use of the mark on products that may be outside of the licensor’s resources or capability.

License agreements can be simple or complex depending on jurisdictional requirements and the type of conditions that both parties require. While there are a number of standard license agreements available, an Administrator should not undertake the drafting or execution of a license agreement without consulting a trademark attorney. In practice, a trademark Administrator will likely be involved in monitoring the activities of its company to ensure that business activities are in line with conditions in a license agreement. This process can entail anything from updating a company database to implementing quality controls over the company’s use of the mark. (See INTA Fact Sheet, Trademark Licensing. See also INTA Fact Sheet, Assignments, Licenses and Valuation of Trademarks.)

1. Types of Licenses

A standard “express” trademark license is not the only option available to a company. Depending on the business goals of both companies, another type of license may better fit the business transaction. Moreover, a trademark Administrator should be familiar with the different types of licenses in order to properly examine the trademark rights acquired or transferred.

• Exclusive license: Confers the exclusive right to use a mark. This includes all rights and liabilities connected to the mark. An exclusive license precludes the licensor from both granting additional licenses to third parties and using the mark itself.

• Non-exclusive license: Grants the licensee a limited use of the trademark right. A non-exclusive licensee cannot preclude the licensor from granting additional licenses or using the mark itself.

16 See Weight Watchers of Quebec Ltd. v. Weight Watchers International, Inc., 398 F. Supp. 1047 (E.D.N.Y. 1975).

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• Sole license: Not the same as an exclusive license. The sole licensee is granted the right to use the trademark, but the licensor is not precluded from using the mark. However, the grant of additional third-party licenses is not permitted.

• Cross-license: The companies grant each other a license in their respective trademark rights.

• Sublicense: The grant of trademark rights to a third party (the sublicensee) by the licensee of the original agreement. Generally, the licensee is not authorized to sublicense the trademark rights absent an express agreement from the trademark owner/licensor.

• Extension license: Allows the licensee to extend the trademark to new goods or services other than those provided for by the licensor. The closer the goods or services between the licensor and licensee are commercially related, the more benefit the extension license will provide through consumer recognition and association of the original mark. This right is useful when the licensor is limited in resources or know-how to be able to successfully extend its goods or services into other markets. (See also Section IV.A.2, Co-Branding, below.)

• Franchise: Involves an agreement where the franchisee makes a payment to receive the right to operate a business associated with the franchisor’s trademark and that business is under the franchisor’s quality control. The primary advantage of a franchise agreement is it allows the franchisor to reap the benefit of many channels of commerce without having to invest any of its own money.17 Most states provide

17 See 3 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition §§ 18:64–18:65 (Thomson 4th ed. 2014). Most states provide laws that govern the disclosure and registration of franchises. See INTA, U.S. State Trademark and Unfair Competition Law (January 2014).

Practice Tip

A good standard agreement would include provisions that address whether the licensee may sublicense the trademark rights. Moreover, when reviewing a license agreement, consider whether a termination of the primary license agreement will result in termination of the sublicense.

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laws that govern the disclosure and registration of franchises. Furthermore, the Uniform Franchise Offering Circular and certain Federal Trade Commission rules and regulations also impose additional obligations to prevent deception and encourage disclosure with franchises involving trademark rights.

o “Franchise means any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that: (1) [t]he franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark; (2) [t]he franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and (3) [a]s a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate.” 16 C.F.R. § 436.1.

• Distribution license: Typically gives the distributee the right to take possession of branded goods for resale in a certain territory. Unlike a licensee, a mere distributor of trademarked goods usually does not need a trademark license.18

• Hybrid license: A license that involves at least two different types of intellectual property.

The following checklist sets out a few key licensing-related due diligence tasks for which an Administrator may be responsible.

18 For more information on distribution licenses, see McCarthy, supra note 17, § 18:42.

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Licensing Due Diligence Checklist

Manage or oversee active licenses with regard to trademark rights and use, royalties, renewals, and quality control.

Determine the scope, duration, and geographical location in which the mark can be exploited.

Input recent details/features of all licenses in database (including any expiration or renewal dates of the marks and/or agreement).

Establish and maintain quality control protocol.

Monitor royalty payments and fees owed the company.

RESOURCE: For more information on quality control, see Kevin Collette & Michael Lisi, INTA Practitioners’ Checklists, Licensor’s Quality Control Checklist.

2. Co-Branding

Taking licensing a step further, some companies may find that their trademarks would work well with another company’s trademark as a co-brand. Increasingly, businesses have entered into joint ventures. In these joint ventures a party is granted the authority either to partition its mark for the other party’s use or to combine marks from each company for one or both parties to use. Co-branding has the potential of changing the ways in which trademarks are owned, used, and maintained. (See Deena Crawley & Steve McKee, “Twenty Co-Branding Examples,” Bloomberg Businessweek (July 10, 2009).)

As with any partnership arrangement, co-branding can come with risks. As a protective move, the interested companies enter into a licensing agreement. As part of that licensing agreement, the companies may elect to place the combined trademark rights into a mutual trademark holding company (MTHC). An MTHC is similar to an IPHC, except that the subsidiary is jointly owned and formed by unrelated parent companies. The MTHC usually requires the assignment of rights

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from both parties, whereas the IPHC involves no transfer of ownership and no registration of the mark because no entity owns the combined mark. Each company’s IPHC owns its portion of the mark independent from the other, but an agreement is reached to co-brand the marks.19 (See also Section II.A, Management and Ownership Structure, above.)

Association Issues. An Administrator should emphasize the importance of due diligence, particularly by considering the marketplace and consumers, when it comes to agreements because co-branding may easily lead to consumer confusion or even the dilution of the mark. For example, Company A manufactures tables made of the finest oak and Company B manufactures cabinets made of the finest oak. Both parties enter into a joint agreement to use Company A’s mark STRONGWOOD. Two years later, Company B realizes that it can make similar cabinets more cheaply by using imported oak. Unfortunately, the imported wood warps during humid weather. Accordingly, customers begin to associate the poor quality of the cabinets with the mark STRONGWOOD. When the quality is not maintained for all of the goods that the mark is being used on by both parties, the mark is vulnerable to becoming diluted or losing its distinctiveness. Trademark markings may help trademark owners who co-brand to reduce the risk of a new unitary, legal association’s being formed in the minds of consumers.20

19 For a detailed discussion of MTHCs and IPHCs, see Saul Lefkowitz, “Double Trademarking—We’ve Come a Long Way,” The Trademark Reporter, Vol. 73 No. 1, 11–27 (January-February 1983).

20 For more information on association issues, see Lanning Bryer & Matthew Asbell, “Combining Trademarks in a Jointly Owned IP Holding Company,” The Trademark Reporter, Vol. 98 No. 3, 834–72 (May-June 2008). See also Section IX, Due Diligence, below.

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Definition

Dilution is the lessening of the capacity of a famous mark to identify and distinguish goods or services, regardless of the presence or absence of competition between the owner of the famous mark and other parties, or of likelihood of confusion. Typically it occurs as the result of blurring or tarnishment of the famous mark.

Tarnishment. Dilution by tarnishment is the weakening of the distinctiveness of a famous mark, usually through inappropriate or unflattering associations. Most countries recognize some form of trademark dilution and a need for businesses to have some recourse to thwart that activity but that recourse, the definition or elements of dilution, the tribunals determining dilution and the resulting penalties or forms of compensation imposed upon a trademark diluter vary across jurisdictions. (See INTA Fact Sheet, Trademark Dilution.)

3. U.S. License Requirements

In the United States, license agreements are governed by the general rules of contract law. In some instances, a license agreement does not need to be in writing to be enforceable; oral agreements may be acceptable.21 A licensee can be held liable for trademark infringement and breach of contract if the licensee violates the agreement’s provisions. The Lanham Act does not provide general guidelines for trademark license agreements, although it does require the trademark owner to control the quality of the licensee’s goods and services.22

21 Basic, Inc. v. Rex, 167 U.S.P.Q. 696 (T.T.A.B. 1970). 22 15 U.S.C. §§ 1055, 1127.

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4. International License Requirements

Similar to trademark assignments, it is mandatory in some international jurisdictions for license agreements to be recorded at the national trademark office. Some countries may even require a license to be re-recorded each time the trademark registration is renewed.

5. Quality Control

Once a license agreement has been signed, the licensor risks losing control of the trademark. A licensor is obligated to maintain the quality of the products associated with the trademark by ensuring that the mark is being used on goods or services that meet its expectations and standards. Quality control serves the purpose of protecting consumers from receiving goods or services from the licensee that are not of the same quality as those provided by the licensor.

Definition

Quality control, also known as quality assurance, is the obligation to ensure that the goods and services sold under one’s mark conform to consistent standards of quality. It is vital in a trademark license because unfettered use of a mark by a licensee can cause loss of trademark rights.

Practice Tip

INTA’s Country Guides: Single Topic Report allows you to view the licensing requirements of any jurisdiction.

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In a trademark license, the licensor must demonstrate actual quality control, not just the mere right of control. “The owner of a trademark has a duty to ensure the consistency of the trademarked good or service. If he does not fulfill this duty, he forfeits the trademark.”23 By implementing adequate inspection procedures and supervising the quality of goods, the licensor will show actual control over the mark and avoid the allegation of abandonment. A licensed trademark for which use is uncontrolled is known as a naked license.

Naked licensing can be described as a situation where “the presence of the mark on the licensee’s goods or services misrepresents their connection with the trademark owner [and] no longer identifies goods and services that are under the control of the owner of the mark.”24 Depending on the degree of the severity of the lack of quality control, the trademark could be considered abandoned.

The licensor should also be cautioned against overreaching quality control measures, especially with regard to franchises. In order to minimize the risk of violating U.S. federal antitrust laws,25 franchise agreements should incorporate a list of approved vendors rather than requiring one specific vendor, or impose a uniform quality standard requirement for all potential vendors.26 The key is to avoid becoming an imposing force on the licensee’s business.

23 Gorenstein Enterprises, Inc. v. Quality Care-USA, Inc., 874 F.2d 431 (7th Cir. 1989). 24 Restatement (Third) of Unfair Competition § 33 cmt. b (1995). 25 See Sherman Act, 15 U.S.C. § 1. 26 McCarthy, supra note 17, § 18:62.

Practice Tip

It is important for the trademark owner to keep up-to-date quality control records. A licensor should implement adequate inspection procedures and supervise the quality of goods.

Practice Tip

Although it may appear that only the licensor can exercise quality control, this is not the case. The licensor is allowed to delegate the responsibility to a third party to inspect and evaluate the licensee’s goods and services for compliance with the licensor’s standards.

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Policing Issues. The licensor should include in the license agreement provisions ensuring that a licensee will maintain the level of quality of the goods and services that would meet the licensor’s standards. It is recommended, moreover, that the Administrator for the licensor company engage in routine documented inspections. Often it may be unclear who determines whether a certain level of quality has been reached. Administrators take note: “[T]he consuming public must be the judge of whether the quality control efforts have been ineffective.”27 Ultimately, the consumer’s perception will determine whether quality control has been successful. The standard to be maintained is not one of the highest quality of goods or services; rather, it is the consistent quality of goods or services.28

A best efforts clause in a contract “imposes an obligation to act in good faith in light of one’s own capabilities.”29

6. Royalties

A trademark license can be royalty-bearing or royalty-free. Royalty-bearing licenses can be based on the gross income (the amount earned before deductions for overhead expenses and taxes) or the net income (the amount earned after deductions) of the licensee.

27 Kentucky Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368, 387 (5th Cir. 1977).

28 Eva’s Bridal, Ltd. v. Halanick Enterprises, Inc., 98 U.S.P.Q.2d 1662 (7th Cir. 2011). 29 Ashokan Water Services, Inc. v. New Start, LLC, 11 Misc. 3d 686, 692 (N.Y. Civ. Ct. 2006).

See generally Theodore C. Max, “Available Remedies for Dispute Resolution in International and Domestic Trademark Licenses,” in 2 Melvin Simensky, Lanning Bryer & Neil J. Wilkof, eds., Intellectual Property in the Global Marketplace 27.1–27.35 (Wiley, 2d ed. 1999).

Practice Tip

There are distinctive quality control risks that arise in certain jurisdictions outside the United States where licensors are precluded from using the trademark right in the jurisdiction of the licensee (e.g., exclusive license agreement). In such a situation, the licensor is vulnerable to any lack of policing or quality control by the licensee. One way to overcome the risk is to include express provisions (e.g., a best efforts clause) in the license agreement that hold the licensee responsible for engaging in quality control.

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Definition

A royalty is a payment made by a licensee in return for permission to use another’s mark.

Because unspecified royalties can lead to misunderstandings, the licensee and licensor should, at the onset of negotiations, clearly specify and define in the agreement what deductions are to be included. Other issues to be aware of include: (1) whether the royalty is based on direct or indirect income;30 (2) the currency in which the royalty payments are to be paid; and (3) whether the royalty includes the overall amount of invoiced goods or if it is limited to money actually received by the licensee for its goods.31

To determine whether a royalty is “fair,” a company can look toward any similar prior transactions it has consummated or to industry standards. It is difficult to project the revenue that a licensee company may earn from another company’s trademark rights, but a royalty clause can allow for adjustments under certain conditions. Either licensor or licensee may desire this type of provision, to accommodate expectations of fairness.32 In attempting to establish an appropriate royalty provision, the parties may seek to engage in a thorough valuation of the trademark rights. (See Section VIII, Valuation, below.)

30 Direct income includes monies directly earned from business dealings (e.g., salaries), while indirect income means monies received from non-business activities (e.g., investments).

31 See Erik Verbraeken, “Drafting Royalty Clauses: 30 Ways to Head for Windfall or Pitfall,” Les Nouvelles: Journal of the Licensing Executives Society International, Vol. 46 No. 3, 166–92 (September 2011).

32 See also Damien Salauze, “A Simple Method for Calculating a ‘Fair’ Royalty Rate,” Les Nouvelles: Journal of the Licensing Executives Society International, Vol. 46 No. 3, 210–15 (September 2011).

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V. Using a Portfolio as Collateral—Secured Transactions

In the course of obtaining a loan or entering into certain business transactions, trademark owners frequently offer trademark rights as collateral. There are a number of issues that must be considered to correctly pledge these trademark rights. In order to avoid unnecessary complications, trademark owners and lenders should resist treating a grant for collateral purposes as an all-purpose assignment. Unlike an assignment, a security interest does not involve the transfer of title to the trademark. Instead, the “secured” party has only a possible future interest in the trademark rights.33 (See INTA Presentation, Security Interests in Trademarks: United States Perspective.)

In the United States, security interests in property generally are governed by Article 9 of each state’s Uniform Commercial Code (UCC).

Definition

A security interest is an interest in property obtained pursuant to an agreement whereby the property serves as collateral for a loan. Trademarks and trademark registrations can be used in this manner.34

Put another way, a security interest in trademark rights is a type of ownership that arises when a debtor, to guarantee the repayment of a debt, uses the intangible asset as collateral. To achieve this result, typically the lender (sometimes known as the secured party or the creditor) and the debtor (i.e., the trademark owner) negotiate and execute a security agreement.

33 See generally Scott J. Lebson, ”Creating, Perfecting, and Enforcing Security Interests in Intellectual Property,” in Lanning G. Bryer, Scott J. Lebson & Matthew D. Asbell, Intellectual Property Operations and Implementation in the 21st Century Corporation 103–20 (Wiley 2011).

34 See U.C.C. § 9-102 and official cmt.

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The secured party receives title only upon the debtor’s defaulting on the obligations of the security agreement. Under the UCC, the creditor has the right to seize (i.e., to take title to) and sell (in an auction) the trademark rights to satisfy the debt obligation.35

Recording. To be “perfected,” a security interest must be recorded in the relevant state office, such as the Department of State. Perfecting a security interest is the way in which a party provides notice to the world of its interest in the trademark right. The secured party has priority to claim the trademark right as collateral over other types of creditors. Typically, the instrument filed is a financing statement, with the debtor’s and creditor’s contact information, that adequately identifies the collateral used for the security interest. Although perfection of a trademark interest is governed by Article 9 of the UCC and not by the Lanham Act, it is suggested that a federal filing with the USPTO be made for the security interest to serve as constructive notice to third parties. This financing statement plus cover sheet may be filed online with the USPTO.36 Filing of the security agreement itself is optional.

Enforcement/Release. If the debtor defaults on the loan, the creditor is entitled to take possession of the trademark right used as collateral. The creditor can engage in any judicial proceeding available to enforce the security interest, including, but not limited to, obtaining from the court a writ of replevin (an order for the attachment of property to be held in the custody of a designated official) or a writ of execution (a process issued by the court directing the U.S. Marshal to enforce and satisfy a judgment for payment of money).37 However, the parties may prefer to resolve the issue without resorting to any judicial intervention: the debtor may agree to assign the trademark rights to the creditor. As a preventive measure, a secured creditor may have a power of attorney

35 See U.C.C. § 9-602.

36 See TMEP § 503.02. See also Melvin Simensky & Howard A. Gootkin, “Liberating Untapped Millions for Investment Collateral: The Arrival of Security Interests in Intangible Assets,” in 2 Melvin Simensky, Lanning Bryer & Neil J. Wilkof, eds., Intellectual Property in the Global Marketplace 29.1–29.29 (Wiley, 2d ed. 1999).

37 See U.C.C. § 9-602.

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accompany the security interest in the event of a defaulting debtor. The power of attorney enables the creditor to receive an assignment of the mark more smoothly. The creditor may wish to sell the trademark rights in an auction and apply the sale proceeds to the debt. In such case, the sale must be “commercially reasonable” and the debtor must receive reasonable notice regarding the auction.38 Conversely, when the loan is satisfied, the parties should execute a release of security agreement.

While each security interest transaction is unique and will range in complexity, the following checklist may provide general guidance when filing trademark rights as collateral.39

38 See U.C.C. § 9-610. 39 See generally Melvin Simensky, Lanning Bryer & Neil J. Wilkof, eds., Intellectual Property in

the Global Marketplace (Wiley, 2d ed. 1999); Susan Montgomery, “Security Interests in Intellectual Property,” ALI-ABA Business Law Course Materials Journal, Vol. 25 No. 1, 23–27 (February 2001).

Practice Tip

Security interests or pledges are also recognized in many jurisdictions worldwide under their applicable commercial laws. The use and filing of trademark rights as collateral for security interests may vary from one jurisdiction to another. Frequently, the location of the parties (particularly the debtor) and the location of the secured trademark rights will dictate the laws that apply. Therefore, it is imperative that an Administrator be familiar with the trademark laws of the appropriate jurisdiction when dealing with a security interest transaction.

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Security Interest Checklist

Prepare schedules and check trademark cases for current data in order to collateralize trademark rights.

Perform searches to verify ownership, status, and validity.

Record security interest agreements at U.S. and/or international trademark offices.

Engage and interact with outside counsel regarding relevant commercial and IP issues, to properly create a security interest in U.S. and international trademark rights.

VI. Coexistence Agreements

Coexistence agreements are commonly used when two or more persons use “the same or a similar trademark with respect to the same or similar goods in different parts of the world.”40 They are in some characteristics comparable to licenses and assignments, since they involve the claims by multiple parties of rights over the same or a similar trademark. However, unlike the situation with a license, the parties to a coexistence agreement typically do not have an obligation of quality control, nor are they entitled to royalties. Unlike the situation with an assignment, the two parties do not transfer title to the trademark rights.

40 See “IP and Business: Trademark Coexistence,” WIPO Magazine, No. 6/2006 (November 2006).

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Definition

A coexistence agreement is an agreement by two or more persons that similar marks can coexist without any likelihood of confusion; it allows the parties to set rules by which the marks can peacefully coexist. Both parties are permitted to use the same mark in connection with the same or similar goods or services. Usually the agreement is limited by geographic boundaries.

Under such an agreement, the respective trademark owners agree to abide by certain limitations of use of their respective trademark rights as defined in the agreement. Sometimes this situation arises when two companies are operating in different territories or channels of trade with the same mark.

Generally, a coexistence agreement is used in one of three types of situations: (a) both marks are unregistered; (b) one mark is registered and the other mark is unregistered; or (c) both marks are unregistered but one has an intent-to-use application. An example of a situation where a coexistence agreement would be useful is when two parties are in dispute over their use of a similar trademark. The disputing parties may realize that they do not want to incur the additional expense of a trademark opposition, cancellation of a registration, or litigation in court. Therefore, a coexistence agreement will allow them to coexist peacefully in the marketplace. Be aware, however, that it is possible that a party may demand a fee in exchange for its consent or outright refuse to agree to a coexistence arrangement.

Practice Tip

The Administrator may be called upon to assist the attorney who is drafting the coexistence agreement, consent letter, or concurrent use agreement. The Administrator should not be expected to use a general “one size fits all” template, because each case involves a different set of circumstances.

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Consent Letter. Consumer confusion41 can be the basis for a claim by one party against an applicant’s attempt to register a trademark. Where the applicant and the owner of the cited mark agree that no confusion is likely to occur, provision should be made for evidence, in the form of a written consent by the owner, that illustrates that, in spite of a fair evaluation of the confusion factors on the basis of evidence available to the trademark office examiner, the applicant's mark should be registered.

Definition

A letter of consent is a letter issued by the owner of a mark, consenting to the use and/or registration of a similar or identical mark by a third party. It may include conditions imposed by the owner under which the consent is given.

The Trademark Office may decide, if local legislation permits, to accept a straightforward letter of consent for registration of a claimed mark from the owner of a cited mark. Such consent may include the following factors, where applicable:

• that a significant period of concurrent use has passed with no evidence of actual confusion among the relevant purchasing public;

• that the applicant’s goods/services are distinct from the goods/services of the cited marks;

• that the trade channels and/or the purchaser groups are different;

• that the applicant and the owner of the cited mark agree not to use the mark of the other on their own goods/services, and agree not to use their own mark on the goods/services of the other;

41 See U.K. Intellectual Property Office, Coexistence Agreement: Fact Sheet (Dec. 2, 2008); Tamara Nanayakkara, Independent Existence or Coexistence of Identical or Similar Trademarks.

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• that if confusion should occur, the owners of the respective marks will work together and take reasonable action(s) to promptly obviate such confusion;

• any other relevant factors illustrating that, in this specific case, confusion is not likely to occur.

(See INTA, Guidelines for Trademark Examination sec. 10.1.3 (rev. 2007).)

Concurrent Use Agreements. When dealing with the same (and not just a similar) mark, concurrent use agreements may be useful to allow simultaneous use and registration. Indeed, certain jurisdictions may require a concurrent use agreement to be filed for the same mark to be registered by two or more different parties.

Definition

A concurrent use agreement is an agreement by two or more persons to use the same mark in connection with the same or similar goods or services. Usually it is limited by geographic boundaries.

In jurisdictions having provision for opposition proceedings, the owners/users having earlier rights than the applicant’s will have an opportunity to object to additional registrations.

In jurisdictions where no search of the trademarks register is conducted during examination and no opposition is allowed, it is recommended that notice of the mark to be approved for registration be forwarded by the applicant or local authority to the earlier owner(s), or made available publicly by the applicant or local authority, prior to approval for registration. Earlier owners would thereby have notice of a potentially confusing mark, which could be objected to according to the provisions within the jurisdiction, or could later be the subject of a suit for injunctive relief in a court proceeding. (See INTA, Guidelines for Trademark Examination sec. 8.2.5 (rev. 2007).)

In the United States, concurrent use registration is allowed under Section 2(d) of the Lanham Act, 15 U.S.C. § 1052(d).

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For a general discussion of these topics, see Lawrence W. Greene, “The Ties That Bind? Considerations in Drafting and Maintaining U.S. Trademark Consent and Coexistence Agreements,” INTA Bulletin, Vol. 67 No. 6 (March 15, 2012); U.K. Intellectual Property Office, What Is a Coexistence Agreement?; TMEP § 1207.04.

VII. Tax Considerations

A. Accounting for Intangible Assets

Tax issues can play a part in owning, selling, or buying trademarks. While Administrators are unlikely to make legal or policy decisions regarding relevant tax consequences, they should have a basic familiarity with the instances in which tax issues may be relevant and consultation with a tax professional might be warranted. Accounting for intangible assets depends on how the asset was acquired. Trademark rights acquired through an external business transaction will differ from trademark rights acquired through internal development.42 Trademark rights are assets that are subject to amortization because such intangible assets have a finite useful life. The goodwill of a company, however, is an example of an asset that would not be subject to amortization because such intangible assets tend to have an indefinite useful life if maintained. In the United States, the main authority on accounting for trademark rights can be found under the Accounting Standards Codification established by the Financial Accounting Standards Board (FASB). Under the guidelines, trademark rights should be recognized and recorded based on their fair market value. Moreover, the costs of “developing, maintaining, or restoring [trademark rights] should be expensed when incurred.”43

42 See Howard Fine & Andrew P. Ross, “Accounting and Tax Policies as They Relate to Intellectual Property,” in Lanning G. Bryer, Scott J. Lebson & Matthew D. Asbell, Intellectual Property IP Strategies for the 21st Century Corporation 275–85 (Wiley 2011).

43 Id. at 277.

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With regard to trademark rights (and other intangible assets), the Internal Revenue Service (IRS) has established mandatory capitalization for money put into (a) acquiring or creating trademark rights; or (b) facilitating the acquisition or creation of trademark rights, including the acquisition of assets through a business transaction or ownership interest in the taxpayer.44 This rule governs regardless of whether the trademark rights were internally created or acquired externally.45 A business that disposes of intangible assets may face tax consequences as well; however, the amount may depend on the length of the holding period.46

On the global scale, the International Accounting Standards Board (IASB) is the standard-setting body of the independent nonprofit organization that develops and publishes international financial reporting standards (IFRSs).

B. Minimizing Taxation

Saving or reducing taxes is an obvious motivation for most trademark owners. The tax differences in jurisdictions outside the United States can be a favorable option that companies may wish to explore. There are two types of tax jurisdictions. The first, which is known as a pure tax haven, does not require that income taxes be paid.47 The second type is a tax-free status jurisdiction, which varies from one jurisdiction to another and offers tax-free status to qualifying international persons or corporations.48 Placing trademark rights in an offshore entity can allow the corporation to effectively manage and exploit the trademark rights; however, it may end up costly or time-consuming. A company should take into consideration the overhead and management costs involved in setting up an offshore entity, as well as any approval that is required.

44 Id. at 279. See also Internal Revenue Code § 197. 45 Fine & Ross, supra note 42, at 279. 46 Internal Revenue Code §§ 197, 1231. 47 See Tira Green & Michael J. Ward, “Offshore Corporations,” in Lanning Bryer & Melvin

Simensky, eds., Intellectual Property Assets in Mergers and Acquisitions 14.1–14.9 (Wiley 2002).

48 Id.

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In the alternative, a company may wish to assign the trademark rights to a national entity merely to hold the trademark rights until they are ready to be exploited. Incorporating an IPHC in tax-friendly states (e.g., Delaware does not recognize taxation on royalties) can be cost-effective. Note, however, that a holding company that does not function as a business is less likely to survive tax examination than a holding company that does have a proper business purpose,49 such as actively managing a trademark portfolio or simply maintaining corporate records.50

C. Transfer Pricing

In trademark licensing arrangements, companies must establish an actual or imputed (in agreements that are royalty-free) royalty for tax purposes. When a company transfers its trademark rights, it has an option to impose a royalty on the recipient of the trademark rights. The IRS looks toward the benefit incurred by the recipient and determines whether the royalties paid pass scrutiny. In other words, has a fair royalty (which is subject to taxation) been established? If not, the IRS may adjust the pricing for transfers to reflect arm’s-length income levels. Internal Revenue Code Section 482 provides in part that “the income with respect to such transfer or license [of trademark rights] shall be commensurate with the income attributable to the intangible.” This provision has become known as the super royalty provision. Companies should not wait until the IRS conducts an audit to establish documentation supporting the royalty amount.

49 See Susan Barbieri Montgomery & Leonard Schneidman, “Intellectual Property Transfers—Holding Companies,” in Lanning Bryer & Melvin Simensky, eds., Intellectual Property Assets in Mergers and Acquisitions 13.1–13.11 (Wiley 2002).

50 See Del. Code § 1902(b)(8); Lanning Bryer & Matthew Asbell, “Combining Trademarks in a Jointly Owned IP Holding Company,” The Trademark Reporter, Vol. 98 No. 3, 834–72 (May-June 2008).

Practice Tip

The owner of a trademark right that is owned abroad, but that is licensed to a U.S. licensee and exploited in the United States, may receive a tax deduction for royalty payments that may be considered a business expense.

Practice Tip

Due diligence and valuation can provide evidence to overcome some adjustments by the IRS.

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The Administrator may be called upon to assist in accounting, minimizing taxation, and transfer pricing issues in order to maintain a viable and fully developed trademark portfolio. The following checklist may provide further guidance on these important taxation issues.

Tax Considerations Checklist

Report trademark transaction to relevant tax counsel or authorities.

Seek tax counsel regarding the licensing in or out of trademark rights and possible tax liability created.

Pay value added, ad valorem, stamp, or other taxes assessed by relevant country’s trademark office or tax authorities in connection with trademark transaction.

Take into account the amount of consideration or value that needs to be cited in relevant trademark documents.

VIII. Valuation

The need for a valuation may arise in many business transactions involving trademark rights. (See INTA Fact Sheet, Brand Valuation.)

Definition

Brand valuation is an economic analysis that determines the value of a trademark. The term refers to the process of ascertaining the amount of money another party is prepared to pay for the brand. Sometimes this is readily ascertainable after a company purchases a brand and the associated goodwill without any other assets; however, in many situations, determining a value for a brand can be significantly more complicated. Another readily identified value of a brand, or brands, is the difference between the amount paid to buy a company and the value of the fixed assets of that company.

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For example, whether a business is considering expansion or is restructuring (e.g., due to bankruptcy), valuation may be an important step. A valuation can provide a better understanding of the trademark’s worth from local to global markets, or from competitors to investors. Forbes magazine’s 2011 list of the top ten most valuable trademarks should not come as a shock: GOOGLE, MICROSOFT, WALMART, IBM, VODAFONE, BANK OF AMERICA, GE, APPLE, WELLS FARGO, and AT&T.51 Without valuation of a company’s trademark rights, important aspects of a transaction can be frustrated.52 A framework of the valuation’s business purpose can help the analyst choose the most effective valuation method.

The most important reason for valuation is for strategic use in a business transaction. The valuation can be used to identify adjunct opportunities that may not have been revealed initially, such as licensing or joint ventures of the trademark rights. Moreover, because the valuation process can unearth important information and provide a more thorough assessment of the actual value of the trademark rights, it can offer leverage in negotiations for licensing or joint ventures. In making such determinations, the Administrator has a key role in shaping certain business dealings.

Additional reasons for valuation include calculating royalty amounts; monitoring licenses and whether the mark has been diminished by the licensee’s use; determining the marks’ value as collateral for loans; planning the formation of an IPHC; pricing the expansion of trademark rights on a global scale; and assessing the exchange value in a co-branding or cross-licensing transaction.

51 Sean Stonefield, “The 10 Most Valuable Trademarks,” Forbes, June 15, 2011, 2–7. 52 See generally Robert F. Reilly, “Intellectual Property Valuation Approaches and Methods,”

Les Nouvelles: Journal of the Licensing Executives Society International, Vol. 46 No. 3, 198–209 (September 2011).

Practice Tip

Sometimes a company may prefer to hire an outside valuation analyst instead of relying on its general financial advisor. In that case, the Administrator may be responsible for overseeing or checking the valuation report. Consistent valuation reports may become a priceless asset when the threat of litigation is looming on the horizon, whether they are used in dispute resolution to avoid litigation or as evidentiary support in court to prove the economic damages incurred.

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The following checklist sets out key steps that may be taken by Administrators who are assisting others in conducting a valuation.

Valuation Checklist

Assemble information necessary for auditors to conduct valuation, including sales revenue; details regarding commercial use of the trademark; and details regarding registration, protection, or enforcement of the trademark or brand.

Maintain a log of information for an extended period of time.

Identify trademarks similar to the one being valued.

A. Methodologies

Typically, a valuation of trademark rights is conducted through one or a combination of the following methods:

• Market Approach: Under a market approach, a “fair market value” is assigned to the trademark. The fair market value of a trademark is based on comparisons with other, similar transactions of comparable assets.53 In general, a fair-market-value analysis would require looking into market conditions, the nature of the assets, and the goods and services covered by the marks. Similar to the real estate market, where one would compare the sale prices of comparable homes in comparable neighborhoods, the market approach compares comparable marks in comparable companies and for comparable goods and services.54 However, sometimes a market approach is difficult to apply, because there may not be similar transactions to serve as a basis for comparison.

53 Michael J. Lasinski, “Valuation Approaches: Market, Cost, and Income,” in Lanning Bryer & Melvin Simensky, eds., Intellectual Property Assets in Mergers and Acquisitions 4.1–4.19 (Wiley 2001).

54 See Michael Freno, “Trademark Valuation: Preserving Brand Equity,” The Trademark Reporter, Vol. 97 No. 5, 1055–72 (September-October 2007).

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• Income Approach: The income approach takes into consideration the projected future profit stream of the trademark asset. This analysis requires three elements: (1) the future income from the trademark, (2) the income stream risks, and (3) the duration of the income stream.55 The potential downside of this method is that there are a number of risks. Inflation rates, corporate restructuring, and other unforeseeable events could alter the equation in varying degrees.

• Cost Approach: The cost approach is premised on the idea that a company would not be willing to pay for a trademark license if it would cost more than the amount it would take for the company to develop its own alternative trademark. There are four components to a cost approach to valuation: (1) direct costs (materials, labor, overhead costs, etc.); (2) indirect costs; (3) the trademark developer’s profit; and (4) the opportunity cost. The total cost of developing an alternative asset with the same functionality and utility is called the replacement cost new.56 The cost approach method can be an awkward fit for valuing trademark rights because the analysis requires an “assumption that an alternative [mark] could be developed.”57 Furthermore, the cost approach assessment can be rather limiting, in the sense that no consideration is given to possible future economic risks, market climate, or future profits.

A general financial advisor will not necessarily be able to provide a company with a proper assessment of its trademark value. To increase its chances for an accurate valuation assessment, the company should turn to a competent appraiser that specializes in intangible assets. For a detailed discussion of assessments, see Daryl Martin & David Drews, Intellectual Property Valuation Techniques (IPmetrics LLC 2010).

55 Lasinski, supra note 53, at 4.11. 56 See Robert F. Reilly, “Intellectual Property Valuation Approaches and Methods,” Les

Nouvelles: Journal of the Licensing Executives Society International, Vol. 46 No. 3, 198–209 (September 2011).

57 Lasinski, supra note 53, at 4.10.

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The Administrator should make sure to perform at least the tasks listed in the following checklist when a valuation is being conducted.

Methodologies Checklist

Assist in valuation of trademark rights and furnish information regarding use, sales, active license agreements, etc.

Review valuation opinion for trademark references and verify validity or accuracy.

Interact with valuator who is assessing damages in a trademark infringement case.

IX. Due Diligence

A. Global Scale

With businesses growing in the global marketplace, it is important to conduct due diligence on a global scale, especially with highly valued trademarks. In this context, due diligence refers to the investigation and analysis of a target company’s business dealings and legal affairs with regard to its trademark rights. The neglect of a company in maintaining its trademarks in jurisdictions where the mark is used or has rights can diminish the trademark’s value. A company must strategically monitor its own trademark rights and, depending on the corporate structure, the marks owned by its subsidiaries. A trademark owner must engage in the due diligence process seriously, otherwise, after the acquisition, the marks will be vulnerable to many risks, including infringement or dilution. Furthermore, a company’s history of mismanaging its trademark rights may have a significant adverse effect on its own ability to do business on an international level, not to mention the ability of the acquiring company. However, the responsibility of conducting due diligence does not necessarily rest upon only one party. All parties in a business transaction involving trademark rights should engage in the due diligence process. Therefore, the performance of due diligence should involve at least the tasks listed in the following checklist.

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Due Diligence Checklist

Verify trademark data for accuracy.

Conduct searches.

Aid in the process of deciding whether to engage in the business transaction at all.

Provide evidentiary material to be used in negotiations.

Assess the legal or business risks that may exist in engaging in a particular business transaction.

Plan the integration of the trademark rights after the assets have been acquired or transferred.

Provide evidence that justifies the proposed purchase price of the trademark right.

Determine how to structure and document the transactions.58

B. Audits

“The audit identifies all intellectual property rights being used by the business, ensuring that they are properly owned, registered, and licensed by the business, and that they are being used and protected properly.” 59 Because it can help determine what rights can be used or licensed, sold, or abandoned, an audit may

58 For further information on due diligence in general, see Alan Blum & Patricia McGovern, INTA Practitioners’ Checklists, Trademark Due Diligence; Frank Fletcher & Keith E. Gottfried, “Due Diligence and Your M&A Success Story,” ACC Docket, Vol. 29 No. 7, 34–46 (September 1, 2011).

59 R. Scott Jolliffe & Andrew Kelly Gill, “The Acquisition and Disposition of Intellectual Property in Commercial Transactions: The Canadian Perspective,” in 2 Melvin Simensky, Lanning Bryer & Neil J. Wilkof, eds., Intellectual Property in the Global Marketplace 23.6 (Wiley, 2d ed. 1999).

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be an important part of the due diligence process.60 It can help properly evaluate how best to use a company’s brands to match the company’s business goals. The audit can assist a company in maintaining a lean portfolio that aligns with its business strategies.

The audit can be conducted either internally or externally, but it definitely should be done by someone familiar with trademark law and practice. There is no statutorily required time to conduct an audit; however, certain events may render an audit essential. For example, a business transferring its assets or shares will have to identify the trademark rights being sold and make the information available to the acquiring company for due diligence purposes. (See Section III.A.2, Mergers; Stock & Asset Purchases, above.) Another example is when companies engage in a licensing deal. Audit clauses often are standard language in a license agreement. Audits conducted specifically to assess royalty rates by evaluating oversight procedures and analyzing revenue data are also common practice.

The person who conducts the trademark audit does not need to be certified or qualified in any particular area. However, be wary of the fact that a trademark audit may not always identify all rights and uses of the mark in different jurisdictions outside the United States. Certain issues that the audit should uncover include the following:

• Registered rights

• Ownership recordals

• Unregistered rights

• Licenses

60 See generally Susan M. Natland, “The Importance of Trademark Audits,” INTA Bulletin, Vol. 63 No. 5 (March 1, 2008); Jolliffe & Gill, supra note 59.

Practice Tip

Because royalty calculations are prone to human error, routine audits will help alleviate such risks. However, these must also be balanced with unnecessary audits that licensees may find to be harassing. Each party may wish to appoint an auditor with which it is comfortable. Another option is for the licensor to bear the audit costs. As with any contractual provision, one should always give the audit clause careful consideration and not dismiss it as a standard provision. An audit may disclose sensitive information that a party would not particularly want to have disclosed.

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• Potential infringement by the mark’s owner or third parties

The information an audit can provide will allow companies to engage in business transactions more confidently in the markets that are important to their strategic plan. In summary, audits are relevant to Administrators who may be asked to manage portfolios and control costs; determine whether trademark coverage is sufficient or insufficient for business activities; and find out whether certain marks are available for registration or use (i.e., clearance).

C. Searches

Searches can reveal important information about a particular trademark right or use thereof. Section 8.1 of INTA’s Guidelines for Trademark Examination contains details on how to assess the information disclosed by searches. The Administrator may be asked to manage and conduct trademark searches, secure opinions of trademark availability, act as liaison with outside search firms, cross-check the results obtained from outside search firms, and provide investigative support to legal and business personnel on search results. (For general information on searching, see INTA Fact Sheet, Trademark Searching.)

A few common searches that an Administrator should be familiar with are an index search, a registrability search, and an opposition search. The index search reveals any trademark applications and registrations that have been filed or registered by the USPTO under a particular company’s name. A registrability search includes trade names and common-law uses and is useful to determine whether there are any risks in eventually applying for a new mark. The search will expose pending applications and registrations that may be similar or substantially similar to the mark in question. An opposition search is used to reveal oppositions that a company may have pending against third-party applications.

In addition to conducting searches, a company that does not have in-house intellectual property counsel sometimes may wish to obtain an opinion letter

Practice Tip

Although searches can provide useful information, they should not be the sole source relied on in determining trademark rights and use, since they may not always be totally accurate.

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from outside counsel. The main reason for requesting an opinion letter is to assess the availability of trademarks for registration, use, or acquisition.

An opinion letter can also provide an extra layer of protection in establishing a company’s due diligence. Take note, however, that opinion letters may not provide definitive conclusions regarding the validity of or the infringing nature of a trademark.

For more information on selecting a trademark, see generally INTA Fact Sheet, Considerations in Selecting a Trademark.

Glossary of Terms

Assignment: A transfer of ownership of a trademark application or trademark registration from one entity to another. An assignment involves the transfer by a party of its entire or partial right, title, and interest in a registered mark or a mark for which an application to register has been filed.

Asset purchase: A transaction where a business’s assets and certain liabilities are acquired and folded into an existing company or transferred to a new company.

Chain of title: Recordal of the prior owners of the trademark and how the rights were conveyed.

Co-branding: A joint venture that allows both parties to partition a brand for the other party’s use or to allow the combination of trademark rights.

Coexistence agreement: An agreement by two or more persons that similar marks can coexist without any likelihood of confusion. It allows the parties to set rules by which the marks can peacefully coexist. To use the same mark in connection with the same or similar goods or services, the agreement usually is limited by geographic boundaries.

Collateral: Property that is pledged as security for the satisfaction of a debt. It includes accounts, contract rights, and chattel paper that have been sold.

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Concurrent use agreement: An agreement by two or more persons to use the same mark in connection with the same or similar goods or services; usually limited by geographic boundaries.

Creditor: A type of lender.

Debtor: Typically, the trademark owner, in a secured transaction.

Dilution: The lessening of the capacity of a famous mark to identify and distinguish goods or services, regardless of the presence or absence of competition between the owner of the famous mark and other parties, or of likelihood of confusion. Typically occurs as the result of blurring or tarnishment of the famous mark.

Due diligence: The level of prudence, activity, or care properly to be expected from a reasonable and prudent person under particular circumstances, not measured by an absolute standard but determined under the facts of the situation. When a new mark is being adopted, the purpose of carrying out a due diligence exercise is to avoid infringing the rights of others.

Goodwill: An intangible asset of a company that provides added value to a company’s worth (such as a recognizable brand). Protection of goodwill is one of the main purposes of trademark law.

Intangible asset: Such values as accrue to a going business as goodwill, trademarks, copyrights, franchises, or the like. It is a nonphysical, noncurrent asset that exists only in connection with something else, as the goodwill of a business. Intangible assets include reputation, name recognition, and intellectual property such as knowledge and know-how.

Intellectual property holding company (IPHC): A wholly owned subsidiary created solely to maintain and manage the intellectual property.

Lender: A party sometimes known as the “secured party” or the “creditor.”

License: A grant to a third party, by the trademark owner, of permission to use a trademark or service mark for a fee, usually called a royalty. The license is the means by which the proprietor of a mark (the “licensor”) gives permission to

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another party (the “licensee”) to carry out an action, such as to use its trademark under specified conditions, that would otherwise constitute infringement.

Madrid Protocol: International treaty, administered by the World Intellectual Property Organization, that allows the international registration of marks.

Perfection: Legally required steps that give a secured party an interest in subject property against the debtor’s creditors. In most cases the secured party may obtain perfection either by filing (i.e., with the Secretary of State) or by taking possession of the collateral.

Quality control (quality assurance): Obligation to ensure that goods and services sold under one’s mark conform to consistent standards of quality. Vital in a trademark license because unfettered use of a mark by a licensee can cause loss of trademark rights.

Royalty: Payment made by a licensee in return for permission to use another’s mark.

Search: Review of existing trademarks owned by others (registered or not) to determine whether adoption and use of a mark might pose a risk of infringement liability and whether the mark may be registrable. Can be either preliminary (“screening” or “knockout” search) or comprehensive (“full” search).

Secured party: Lender, obligee, or seller who holds a security interest or lien against a pledged asset.

Secured transaction: Transaction used to guarantee repayment of a debt.

Security interest: Interest in property obtained pursuant to an agreement whereby the property serves as collateral for a loan. Registered and unregistered trademarks can be used in this manner.

Stock purchase agreement: Agreement between a closely held or private firm and its shareholders for regulating the sale and transfer of the firm’s shares.

Target: A company that has been chosen as attractive for takeover by a potential acquirer.

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Tarnishment: Weakening the distinctiveness of a famous mark, usually through inappropriate or unflattering associations; one form of dilution.

Trade name: The name used by a company in its business activities. Also known as “commercial name.” A company’s trade name may also be its corporate name.

Uniform Commercial Code (UCC): A standardized set of model business laws adopted, with some variations, by every state in the United States.

Valuation: An economic analysis that determines the value of trademarks. Brand valuation refers to the process of ascertaining the amount of money that another party is prepared to pay for the brand. Sometimes this is readily ascertainable after a company purchases a brand and the associated goodwill without any other assets; however, in many situations, determining a value for a brand can be significantly more complicated. Another readily identified value of a brand, or brands, is the difference between the amount paid to buy a company and the value of the fixed assets of that company.