Avoiding Illegal Trademark Transfers: Introducing the Assignment-in-Gross
As business identity and brand awareness grow in import in our media saturated environment, trademarks continue to increase in value. Well-crafted and well-known marks command high premiums as a function of the value of their underlying goodwill. Businesses that acquire an effective trademark can enhance their financial status through boosted sales with less advertising support. As assets, trademarks have become ever more important to the financial success or failure of the businesses they represent.
Trademarks are also unique among business assets because they are as fragile as they are valuable. Unlike cash, which is only depleted when it is spent, or land, which can maintain its value despite years of neglect, trademarks can wither and die if they are not properly cared for.1 Simply put, a properly registered and maintained trademark can become invalid if it is mishandled in commerce.
Trademarks are particularly vulnerable to mishandling and cancellation when they are transferred. The assignment-in-gross doctrine, a long established but little known legal theory, accounts for much of the vulnerability of trademarks during transfer.
The trademark buyer, or assignee, bears the transaction risk in a trademark assignment. If the acquired mark is declared invalid, the assignee’s new trademark rights will be lost. identifying the characteristics of the assignment-in-gross, practitioners can prevent the potentially fatal mishandling of the acquired mark and save the assignee client much trouble and expense. This article provides an introduction to the assignment-in-gross doctrine and discusses when and how the doctrine is applied to assist the practitioner in avoiding the illegal trademark transfer.
Why Trademarks AreTransferred
Trademarks typically are transferred by assignment during the acquisition of a business or business division, and when a business attempts to gain greater, more senior rights in a certain mark to gain an advantage over a competitor. Both scenarios can foster an invalid transfer of a trademark regardless of the intentions of the parties involved.
In the business acquisition, the buyer of a business reasonably expects to receive the trademarks that represent the acquired business and serve as the repository of goodwill for the business. If the trademark is one that is recognized by the customers of the acquired business, or any portion of the public, then it is an asset with substantial value, albeit one that is difficult to quantify.
Similarly, the seller of a business should reasonably expect to part with the attendant trademarks that promote and identify the business, and may expect to receive a premium for them if the trademarks are particularly well known within a definable market. Properly executed, a trademark assignment allows the assignee to step into the shoes of the assignor, gaining whatever goodwill the assignor has built up, and whatever priority the assignor has in the mark against others.2
The second situation, the priority contest, usually results from a declared or impending trademark infringement dispute, where two or more businesses using the same trademark are competing for the sole ownership rights to the mark. Because trademark rights in the U.S. are determined by priority in time, an enterprising company will often attempt to acquire an assignment of an older, identical trademark in order to establish a pattern of use that predates that of its competitors. Sometimes the buyer in this situation will intend to use the purchased trademark as a part of its business. Typically, the purchaser in this scenario intends to buy a form of priority as an asset.3
Trademarks that go unused after registration, trademarks that have fallen out of favor with their owners or the public, or trademarks that are attached to unprofitable businesses are sometimes offered for sale to buyers who wish to strengthen their priority position within a field of competing identical marks. Some opportunistic sellers, alerted to an identical mark that is junior in priority but more profitable as part of a going business, may offer to transfer the senior mark to the junior owner in exchange for the forbearance of any legal remedies. These sellers may or may not be acting under the belief that they are effecting a valid trademark transfer.
Policy and Statutory Basis for Assignment-in-Gross
Trademarks cannot be sold apart from their businesses because they do not have discrete value as property, are meaningless apart from the business with which they are associated, and so are inseparable from that business.4 Trademark assignments, whether or not they are assigned attendant to a sale, are declared illegal if the trademark is sold alone, divorced from the business it formerly represented.5 When an attempted trademark assignment results in a bare transfer, not involving assets, trade secrets, management, or genuine goodwill, courts will invalidate the transfer as an assignment-in-gross.6
The statutory basis for the assignment-in-gross is §1060 of the Lanham Trademark Act, 15 U.S.C. §1060.7 In interpreting the statute, courts have consistently stated that the policy basis for invalidating illegal trademark assignments is the need to protect the public from being misled or confused about the source and nature of the goods and services in the public domain.8 When a buyer obtains a trademark that is separated from the goodwill of the assignor, the buyer has taken the symbol of a known quantity, but not the substance that the public expects to find when encountering the mark. The mark no longer symbolizes the identity and quality that it once did, and the established meaning of the mark is shattered.9 Trademarks assigned in gross are invalidated when challenged because the promotion of an alien product or service under cover of existing, familiar goodwill is regarded by courts as a fraud on the purchasing public.10
The assignment-in-gross is characterized by the absence of a demonstrable, genuine intent to continue the identity and meaning of the assigned trademark. Traditionally, the give away for an assignment-in-gross was the sale of a trademark apart from any tangible assets.11 While this broad measure has been expanded somewhat over the years, a trademark assignment that severs the tether between the mark and the product or service that gave it life is vulnerable to invalidation as an assignment-in-gross.12
Whether assigned attendant to a business sale or a priority contest, trademarks assigned within the context of the following scenarios are particularly vulnerable to becoming invalid in light of existing applications of the assignment-in-gross doctrine.
Divorcing a trademark from its business. In this scenario a seller assigns a trademark to a buyer but retains the business the trademark formerly represented. Courts confronted with this scenario examine the business reasons for the assignment and the assignee’s use of the mark.13
A court will investigate whether the assignee procured the mark to enter into or continue a business substantially similar to the business formerly associated with the trademark.14 If so, the question becomes whether the products or services the assignee attaches to the mark comport with the established goodwill of the mark, and whether the public would be confused as a result. Sometimes businesses legitimately desire to acquire a well-known trademark associated with competitive products or services. In one well-read case, a court upheld the assignment of a trademark representing live baby chicks.15 The purchaser of the mark in question was also a purveyor of live baby chicks and sought to use the goodwill of the acquired mark to sell a virtually identical product.16 Because the assignee had a sufficient inventory and plant to capitalize on the goodwill of the new trademark, the court was not bothered by the transfer of the trademark apart from the tangible assets of the assignor and found the assignment valid.17
The margin for error in matching two ostensibly similar products is thin, however. In another case, a court invalidated a mark that was assigned to a maker of pepper-flavor cola when the mark had previously represented a caramel-flavor cola.18 Not surprisingly, courts sometimes find that seemingly similar products are actually sufficiently dissimilar enough to confuse the public. For example, when a shoe manufacturer purchased a mark representing a well-known line of women’s shoes and subsequently sold men’s shoes under the mark, a court held the assignment invalid without regard to the assignee protestations that the two lines of shoes were of similar quality.19 Recently, a widely publicized trademark associated with a diet book and an identical mark representing a diet bookstore were found sufficiently dissimilar to invalidate the assignment of the former to the owner of the latter.20 If the assignment of a trademark results in the trademark assuming a new use or meaning that could confuse a consumer, courts will tend to recognize the assignment as an assignment-in-gross and invalidate it.
In determining whether a proposed trademark transfer will divorce a trademark from its business, the practitioner will anticipate the inquiry of a reviewing court and examine the transaction for evidence of a bona fide business transfer. Traditionally, assets have been the hallmark of a business acquisition, but other evidence may include the assignee actually taking over the assignor’s operations or sales territory, hiring the assignor’s management, or continuing the assignor’s advertisements. In continuing the existing business of the trademark, the assignee need not purchase the assets of the assignor if the assignee can maintain the identity of the mark with existing business assets.
Absent objective evidence of assets, management, or advertising, the practitioner will decide whether the transferred mark will represent products or services that are nearly identical in business meaning to the products or services the mark formerly represented. The match should be close enough to avoid any confusion in the minds of the consuming public. The process of matching old and new commercial applications of a trademark is necessarily exacting because courts tend to require a high degree of similarity between a mark’s old and new business identities in furthering the policy of consumer protection.
To avoid the risk of invalidating a transferred trademark, the assignee should have the intent to essentially continue the business of the assignor. The key to continuing the business formerly associated with an assigned trademark seems to be keeping true to the original identity and meaning of the mark.
Invalid extraterritorial trademark rights. This scenario usually arises when a business operating in a discrete market area, like a single state, assigns common law trademark rights outside of that market area. Common law trademark rights arise from use, and do not extend to geographic areas where the trademark has not been used in commerce; measured by sales, advertising, and enjoyment of consumer recognition.21
This scenario often occurs during priority contests. Typically, the seller in this scenario will assign trademark rights to market areas not penetrated by the seller’s business. The seller may view the sale of extra-market trademark rights as an easy way to raise cash without interrupting their ongoing business in their home market. When confronted with this scenario, a court will determine whether the seller held any trademark rights in the territory covered in the grant of the assignment.22 If the trademark was unused and unknown in the assigned territory, well established precedent dictates that the buyer has bought nothing, and the assignment will likely be declared null.23
Valid transfers of territorial trademark rights are better accomplished by the use of a license.24 A license offers commercial rights to the prospective mark user but allows the licensor to retain ultimate ownership and control of the delicate trademark rights. Conversely, assignments of trademark rights that partition one trademark between two territories and two ultimate owners may be viewed with suspicion by courts whose policy goal in interpreting trademark law is to protect the public and minimize consumer confusion.25
Avoiding an invalid extraterritorial transfer is probably best accomplished by investigating whether the seller owns what they purport to sell. Simply put, an assignor cannot validly transfer that which they do not own. If the trademark for sale is federally registered, consider using a license to accomplish the transfer of trademark rights as the seller’s intent to partition their federal registration may be misguided. If the mark consists of only common law (use) rights, check to see if those rights have ever attached to the territory described in the grant of assignment. Sales records and advertising specimens can help to determine whether the mark in question exists in the market area you desire.
A trademark assignment is illusory and illegal when unaccompanied by the goodwill of the business it formerly represented. Courts will invalidate a so-called naked transfer under the assignment-in-gross doctrine to protect the public and prevent consumer deception. Illegal assignments frequently occur under color of business acquisitions and during trademark priority contests. The practitioner can identify a trademark transfer that is vulnerable to invalidation by finding factors evincing an intent to divorce the trademark from its business or to transfer extra-territorial trademark rights. This article provides an introduction to the assignment-in-gross doctrine and alerts practitioners to the risk factors that operate under the doctrine to create an illegal trademark assignment. q
1 See Tally-Ho, Inc. v. Coast Community College Dist., 889 F.2d 1018, 1022-23 n.6 (11th Cir. 1990).
2 See Clark & Freeman Corp. v. Heartland Co. Ltd., 811 F. Supp. 137, 139 (S.D.N.Y. 1993), citing Money Store v. Harriscorp Fin., Inc., 689 F.2d 666 (7th Cir. 1982).
3 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition ‘18-2, p. 5 (4th ed. 1997).
4 Marshak v. Green, 746 F.2d 927, 929 (2d Cir. 1984).
5 McCarthy, supra note 3, at §18-17, p. 27.
7 “A registered mark or a mark for which application to register has been filed shall be assignable with the goodwill of the business in which the mark is used, or with that part of the goodwill of the business connected with the use of and symbolized by the mark, and in any such assignment it shall not be necessary to include the goodwill of the business connected with the use of and symbolized by any other mark used in the business or by name or style under which the business is conducted.”
8 See Sugar Busters LLC v. Brennan, 50 U.S.P.Q. 1821, 1825 (5th Cir. 1999); Visa, U.S.A., Inc. v. Birmingham Trust Nat’l Bank, 696 F.2d 1371, 1375 (Fed. Cir. 1982); Greenlon, Inc. of Cincinatti v. Greenlawn, Inc., 542 F. Supp. 890, 893 (S.D. Ohio 1982).
9 Money Store v. Harriscorp Fin., Inc., 689 F.2d 666, 676 (7th Cir. 1982).
10 See Marshak, 746 F.2d at 929.
11 See, e.g., Pepsico, Inc. v. Grapette Company, Inc., 416 F.2d 285, 290 (8th Cir. 1969).
12 See Clark, 811 F. Supp. at 140 (noting that assignments without an accompanying transfer of assets or tangible items have been accepted by other courts in limited circumstances); see also Defiance Button Mach. Co. v. C & C Metal Prod., 759 F.2d 1053, 1059–60 (2d Cir. 1985).
13 See Greenlon, 542 F. Supp. at 893–95.
14 See id.
15 Hy-Cross Hatchery, Inc. v. Osborne, 303 F.2d 947 (C.C.P.A. 1962).
16 Id. at 950.
18 Pepsico, 416 F. 2d at 290.
19 Clark, 811 F.Supp. at 138–39.
20 Sugar Busters, 50 U.S.P.Q. at 1826.
21 Proriver, Inc. v. Red River Grill, LLC, 27 F.Supp.2d 1, 4 (D.D.C. 1998) (finding that under common law the adoption and use of a trademark in a limited market does not create ownership rights in other geographic markets).
22 Hanover Star Milling Co. v. Metcalf, 240 U.S. 403, 415–16 (1916).
23 See id. at 416.
24 See, e.g., Finance Investment Co. v. Geberit AG, 165 F.3d 526, 532 (7th Cir. 1998) (finding that geographic limitations on territorial use of trademarks is inconsistent with the concept of an assignment).
25 See supra note 8 and accompanying text.
Michael Cavendish practices corporate and intellectual property law with McGuire, Woods, Battle & Boothe LLP in Jacksonville. He received his J.D. from the University of Florida and is licensed to practice law in all federal and state courts in Florida.
This column is submitted on behalf of the Business Law Section, Howard J. Berlin, chair, and T.A. Borowski, editor.