Intellectual Property: As a business owner prepares to sell its business, he seeks to highlight what the company has to offer a potential buyer. This may be the customer base, current accounts, inventory, equipment and other items. But, often what the buyer really wants is the intangible aspects of the business that have been built over the years. This is particularly evident in service-based businesses. Often times, the principal asset of such a business is its immense goodwill and name recognition. It is this, which the potential buyer often hopes to leverage off of in taking over the business.
This perspective highlights the importance of properly protecting and assessing the value of the intangible assets that one is transferring in the sale. If a business owner can present a solid book of intellectual property rights that are being transferred, and show that all have been properly protected and utilized, that increases the value of the intangible assets, and thus can help to increase the overall purchase price that may be asked.
To do this, it is important that a company properly identify and protect its intellectual property. Trademark protection is a huge aspect of this. Set forth below is a non-exclusive list of tips a business can undertake in order to protect its trademark rights. It is important to note that the following summarizes legal concepts that applied as of its posting in August of 2008; it does not account for future changes in the law.
Conduct an IP Audit. The first step to protecting intellectual property is to fully identify it. Though this discussion focuses on trademark rights, it is worth noting that many companies will also have an expansive combination of intellectual property including trademarks, copyrights, trade secret and perhaps patents. Prior to offering the company for sale, one should take a full evaluation of the value of its marketing materials, contracts and products. Underlying each of those will be critical intellectual property. For trademark purposes, the “easy” ones are the company’s name and logo. However, also potentially protected under trademark law are particular product names that the company has developed, unique service names and slogans. Further, the website, marketing materials, brochures and even price lists are ripe for copyright protection. In order to protect this intellectual property, one first needs to identify and treat it as such.
Use Your Mark. Trademark rights start from the use of the mark. That’s worth repeating: one gains rights from trademark law by using the mark. What does this mean? Its impact is two-fold. First, it means that use trumps registration. Accordingly, while registration is critical, if one register a mark that someone else used first, that other party has prior rights to it. Next, even if one has trademark registration for the mark, one must continue to utilize it in order to maintain those rights. If one fails to continuously utilize the mark, that could arguably be deemed an abandonment of the intellectual property rights to it. In order to argue that the company has rights to trademarks, it will need to be able to show that it actually used the mark. A mere idea for a mark that has not been used will arguably do little to add value as an intangible asset.
Evaluate the Mark. Because trademark rights lie in use of the mark, it is critical that prior to launch, one conducts an investigation to identify others’ use of that, or a similar, mark. A good starting point, of course, is checking the United States Patent and Trademark Office (USPTO)’s database, to see whether a similar mark has been registered. However, this is not enough. However, that database only demonstrates marks that are registered with the USPTO. It is not an exhaustive search, and it will not include an indication of parties that are using the mark but have not registered it. Again, because use trumps registration, it is critical to know more generally whether other parties are using the mark.
There are various resources available in order to conduct those searches, including utilizing private investigators to conduct them. For several reasons, it is critical to conduct such a search at the outset. First, it could save significant money. We generally recommend that our clients engage an investigator to conduct such a search prior to commencing a trademark registration. This enables the company to evaluate the likelihood of a successful registration.
For instance, if a search reveals that there are numerous other companies who have registered a similar mark in a similar industry, it is likely that the USPTO would identify those other marks as obstacles to registration, and could even deny registration on that basis. Identifying such obstacles at the outset can enable one to evaluate the risk and identify potential problems prior to incurring governmental filing fees and legal fees.
Moreover, if one identifies a potential conflict with others’ use of the mark one can address it before it becomes a problem. For instance, one may evaluate others’ usage of similar marks and determine that it would be best to simply redevelop the proposed mark. It is far better to do that at the outset, prior to incurring significant marketing money and building goodwill and branding associated with the mark, only to later abandon it. Last, but certainly not least, such an evaluation at the outset can help to avoid litigation. If a company proceeds to develop and use a mark without conducting such an evaluation, it may do so while completely unaware that the mark infringes upon another party’s use. Unfortunately, even innocent infringement could result in an infringement lawsuit and force one to cease use of the mark. Again, a proper evaluation in the beginning of the process can help to ward off such potential problems by allowing a company to evaluate the risks inherent in using a particular mark. Use of a trademark that arguably infringes on third party rights will certainly be less valuable as an asset to be sold. Moreover, such third party use may be discovered in a buyer’s due diligence and could in fact serve as a deterrent to the buyer.
Develop a Strong Mark. The selection of marks is critical to the ability to enforce rights to the mark. Trademark law has created a scale of marks, in which the strength of the mark is directly correlated to the creativity of the mark. For instance, the strongest marks are usually those that are made-up words (i.e., Kodak®) or are otherwise unrelated to the services or goods being provided under the mark. It is far more difficult to obtain trademark registration and protection to terms that are either generic or that merely describe goods and services. For instance, a name such as “Joe’s Landscaping” is arguably generic for a landscaping services company. Generic terms are not entitled to trademark protection at all. Moreover, if the company name is “Beautiful, Colorful Gardens,” that name arguably simply describes the services being provided. To obtain trademark protection in that situation, one would need to prove that the name has acquired what is termed as “secondary meaning.” This essentially means that consumers associate the mark “Beautiful, Colorful Gardens” with that particular company and understand and assume that that a particular entity is the source of the services being provided. In other words, they do not simply see it as a description for the goods and services that any landscaper might provide. Again, the more unique the name, and the greater “mental leap” that needs to be taken to connect your goods and services with the name, the stronger the mark.
Strength of the mark might be an issue when seeking registration: often times the USPTO’s examining attorneys will review this as a pre-condition to granting registration. However, it also will come into play in the event of litigation. For instance, if a business has operated for twenty years as “Beautiful, Colorful Gardens,” it might be upset if someone opened a business down the street and marketed their services as “Colorful, Beautiful Gardens.” The likely first step would be to try to force the latter party to cease utilizing the mark, and to try to recoup damages for their use of an arguably confusing mark (the same words simply re-arranged). However, at this point, that new company may be able to defend itself by arguing that the mark is merely descriptive and therefore not entitled to trademark protection. If they prevail on this argument and if one is unable to prove secondary meaning, one may be unable to stop their use, nor obtain damages.
Registration of the Mark. Once a business owner has made a final decision as to the mark, and has put it to use, the next step is to register it. Through the registration process, one submits the image of the mark to the USPTO, along with a description of the use and materials demonstrating that use. Notably, one can register variations of the mark. For instance, if the business is registering a company name, it may present that name in a stylized form, or in standard letters -- both forms can be registered -- although, they are considered to be two distinct marks, and thus, two separate applications. Next, one must indicate to the USPTO how the mark is being used. This involves developing various descriptions that depict the use of the mark. Importantly, a business’s use could be quite expansive, and it is important to register for all uses of the mark, not just the primary use. For example, the operation of an online business may touch on outside services, as well as services provided online, email services, and/or electronic forums, etc. Each of these should be reflected in the application.
Although we previously discussed the importance of use of the mark over registration, registration is nevertheless a critical aspect in protecting trademark rights. Having a registered trademark provides numerous benefits over rights as a mere common law trademark owner. For instance, once a mark has been registered, the owner is provided a legal presumption that he has valid ownership of the mark and an exclusive right to use it in connection with the registered goods and services. Further, once the mark has been registered for five or more years, the trademark owner is provided an additional legal presumption that your mark is valid -- this presents various arguments and defenses that may be raised by a third party in the event of a dispute. For example, in the previous example relating to “Beautiful, Colorful Gardens,” had there been a federal registration for the mark for more than five years, “Colorful, Beautiful Gardens” would generally be prevented from arguing that the mark was invalid as a descriptive mark, thus eliminating that potential defense. As a registered trademark owner, one is also entitled to bring suit in Federal court, and thus have the ability to leverage US registration into registration and applications in other countries. Thus, having a mark that is properly registered arguably increases the value of the mark.
Maintaining Registration. Once one has registered a trademark, there are certain procedures with to which one must adhere in order to maintain it. First and foremost, as previously stated, the business must continue to use its mark. However, in addition, even once one has received the registration, there will be periodic filings that need to be made with the USPTO in order to continue the registration. For instance, after the fifth year of registration, the trademark owner must submit to the USPTO a declaration of continued use. Through this filing, it is essentially certifying to the government that it is continuing to utilize the mark per the registration, and must provide additional specimen to the USPTO proving that use. There are incremental filings that will also need to be submitted thereafter. If one fails to timely submit these post-registration reports, he may be deemed to have abandoned the registration, and can therefore lose the benefits of being a registered trademark holder.
Notice. The appropriate notice designation should also be used in conjunction with the mark. If the business has not yet registered the mark (this includes the time period in which one has submitted an application but registration is still pending), it can utilize the designation “TM” or “SM,” for trademarks and service marks, respectively, in order to notify the public of a potential claim to rights in that mark. Once the business has obtained trademark registration, the notice should be modified to use the ® symbol. Importantly, one can only utilize the registered symbol if he has a registered mark, and only in connection with those goods and services for which he is registered. However, this notice is critical, because failure to consistently use the registered notice in conjunction with the mark can prevent one from obtaining damages in the event that one sues a third party for infringing use. This can be a crippling penalty for neglecting a notice that is easy to utilize.
Enforcing the Mark. Once the business has registered and clearly established the trademark rights, they need to be enforced. Unfortunately, this area of the law can fall under the umbrella of “you snooze, you lose.” Essentially, if one fails to enforce rights he may be deemed to have waived them. Therefore, if a business knows that someone is infringing on its rights and fails to act to enforce the rights and prevent the infringing use, it may be deemed to have consented to that use. Accordingly, if the business changes its veiwpoint a year or two later, it may be too late. This is often referred to as the doctrine of “laches.” Moreover, if one does this too many times one could additionally be deemed to have waived all rights. For instance, suppose that a business learns that Company F is patently infringing its rights and is stealing a large number of customers and profits as a result of their use. When it sues Company F, the Court may look to the fact that the business has allowed Companies A, B, C and D to utilize the mark freely and without limitation.
Even worse, following our example, suppose that Company E is utilizing the mark in a confusing way and in addition is providing horrible service. As a result, in addition to lost profits from their infringement, the business reputation could also be damaged, thus arguably diminishing the value of the trademark. In such a situation, when one sues Company F, Company F could arguably say that due to Company E’s damaging (and unstopped) use, the damages are negligible. For all these reasons and more, it is critical that one carefully monitor the market to quickly identify and diffuse any wrongful use of your trademarks. Again, when assessing the value of intangible assets such as intellectual property, a potential buyer may look to see the strength of a mark and how well the seller has prevented others’ infringing use.
Contract for Trademark Protection. In order to best protect intellectual property rights, it is critical to specifically address them when entering into business transactions. For instance, if a business is granting a third party a right to utilize its company name or marks, it should make sure that the appurtenant rights and obligations are very clearly and specifically detailed. In such an event, and without limitation, the licensor should make it clear what if any, consideration is being provided in exchange (i.e., a royalty), and whether or not the license is exclusive or non-exclusive. If it is exclusive one should carefully define that exclusivity. Moreover, the trademark owner should ensure that certain protocols are in place to enable it to maintain quality control over the products or services being associated with the mark. If the trademark owner fails to maintain quality control over either the depiction or usage of the mark or over the goods and services that are associated with the mark, it may be hampered later on in trying to obtain damages for someone else’s damaging use.
Register with US Customs. As a registered trademark holder, one has the ability to file for registration with US Customs and Border Protection. This can allow a business to obtain a head start in preventing counterfeit goods from entering the country. Moreover, as a registered rights holder with US Customs, a business may even provide the agency with certain information or criteria relating to suspected infringers (e.g., the specific importer, manufacturer, country of origin, etc.). Once a business has a registered trademark, one can leverage that application into registration with US Customs by filling out an online application.
Again, each of these are critical for increasing the strength of a business’s trademark rights, and thus increasing the value of the intangible assets that may be sold in a corporate sale.
Comments/Questions: ljm@gdnlaw.com
© 2008 Nissenbaum Law Group, LLC
Please visit our website at www.gdnlaw.com and our other blogs at www.nissenbaumlawblog.com; www.foreclosuredefenselawblog.com; www.saleofbusinesslawblog.com; www.internetdefamationlawblog.com; www.constructionlawinfoblog.com; www.filmproductionlawblog.com; www.internetlawinfoblog.com; and www.njbusinesslawblog.com
Non-Compete Agreements Can Add to Your Purchase Price
Commentary: In her previous posting on this Blog, Utilizing Non-Compete Agreements in the Sale of a Business, Lisa Miller, Esq. previously articulated a number of the legal issues to consider in connection with the execution of a non-compete agreement in selling a business. From the Seller’s point of view, it is also important to consider how agreeing to a non-compete can increase the value of his business.
Offering a non-compete in connection with the sale of a business can be very enticing to a potential buyer, adding value to the potential purchase price. A buyer is obviously interested in the business that has been established, and arguably the buyer’s interest reflects a respect for the clientele and services that are associated with that business. In a way, having a buyer interested in a business can be construed as a compliment. However, the seller’s ability to build a business and thrive can also be a threat to a potential buyer. A buyer may be less inclined to purchase a business if he knows that the seller can go down the street, recreate his original business model and compete with the new business owner. For this reason, buyers may be more willing to engage in the sale and pay more for a business where this threat has been eliminated.
However, there are a variety of factors for the seller to keep in mind when making this determination. If it were not for this agreement, would he have planned to engage in business that is now restricted? If so, is the purchase price, or the added consideration in addition to the base price, enough to warrant him giving up that opportunity?
As always, it is strongly recommended that a seller consult with an attorney prior to entering into a non-compete to be sure that the written agreement properly reflects the deal that he believes he made. A non-compete arrangement will often have very specific parameters -- if they are not outlined to match the deal made, the seller could be agreeing to more than he originally bargained for.
Comments/Questions: ljm@gdnlaw.com
© 2008 Nissenbaum Law Group, LLC
Please visit our website at www.gdnlaw.com and our other blogs at www.nissenbaumlawblog.com; www.foreclosuredefenselawblog.com; www.saleofbusinesslawblog.com; www.internetdefamationlawblog.com; www.constructionlawinfoblog.com; www.filmproductionlawblog.com; www.internetlawinfoblog.com; and www.njbusinesslawblog.com
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