A Tale of Mangled Marks -- Top Three Ways in which Corporate and Tax Lawyers Inadvertently Damage a Trademark Portfolio
Potomac Law Group’s Corporate and IP lawyers take an interdisciplinary look at common problems and how to avoid them.
Trademarks represent the brand of a company and are also often the most valuable assets of a business. As the general counsel of a major multimillion dollar soft drink brand once told us, “without our trademarks, we are just sugar water.”
Despite this recognized value, companies and their corporate and tax counsel frequently execute strategies that inadvertently put trademarks at great risk or require significant cleanup after the fact. Here, we highlight the three most common issues we have observed which illustrate the need to collaborate early and often with trademark counsel whenever trademarks are part of a tax strategy, financing, or mergers and acquisitions.
1. Assigning Trademarks to Another Corporate Affiliate
This is perhaps the top pet peeve of trademark lawyers: assigning trademarks from one corporate entity to another, often for tax reasons, without considering the underlying status of the marks, using the correct assignment language or properly recording the assignments.
First, if you have U.S. trademark applications that are based on an intent to use, which is how most U.S. applications are filed, and use has not yet been proven to the Trademark Office, you cannot assign the applications unless the assignee is a successor to the business of the applicant, or portion thereof, to which the mark pertains, if that business is ongoing and existing. A holding company for tax purposes is not the successor to the business if it is not going to make and sell the goods or services. This error may not be discovered right away, but the registration is forever subject to being void and your valuable brand may now have a sleeping Achilles heel which will come out at due diligence or when you try to enforce against infringers.
Second, boilerplate language is often used to move marks between entities under the presumption that such boilerplate language has been vetted and is sufficient. We have seen numerous instances where the language was not comprehensive. For example, assigning a trademark registration without the goodwill of the business associated with the mark is a naked assignment which can void the trademark rights.
Third, if you have an international portfolio, it can be expensive to record the assignments to the new entity in foreign countries, and it can be cumbersome -- with lots of red tape. The cost to record assignments may even outweigh any anticipated tax savings or transfer-pricing efficiencies. Even changing an entity type from an LLC to an LP, for example, can trigger expense in recording the change of ownership around the world.
2. Pledging Trademarks as Collateral for Financing
Lenders commonly require borrowers to pledge intellectual property as collateral for financing.
What will a bank DO with the trademarks?
Like the dog who finally catches the mail truck, what will a bank do with these trademarks if they have to foreclose? If the bank forecloses on a trademark for dog biscuits, and is now the owner of the trademark for dog biscuits, is the bank going to make dog biscuits? Is the bank going to license someone else to make dog biscuits or allow the borrower to keep using the mark, which is also a license? A licensor has to exercise real quality control over the licensee’s use of its mark or the license is “naked,” and the mark will be deemed abandoned and worth nothing. As a result, the bank as licensor must now be in the dog biscuit business.
Or perhaps the bank will stash the trademark registration away and hope to sell it later. In the meantime, however, no one is using the mark and it could be deemed abandoned through nonuse.
Furthermore, if the security interest was only in the registrations, but not the goodwill, the foreclosure may split the two and void the trademarks. While this last issue pertains more to the bank than the brand owner, the damage is done should the brand owner climb out of its difficulties and wish to recover the trademarks.
Noncompliance
Noncompliance with the financing documents is another issue we often see with trademarks pledged as collateral. For example, it is common for the lender to require that all pledged registrations remain in force, which is not always possible, or that new applications and registrations be added to the schedule of pledged marks. Frequently, the trademark requirements of the financing documents are simply forgotten until new financing is needed.
Failure to record release
Finally, lenders properly perfect their security interest in the collateral with appropriate UCC and trademark office filings, but we often find that such security interests are not properly released when the loan is repaid. Otherwise, when you sell the company or seek new financing, due diligence will reveal the historic recorded liens. At that point, cleanup can be burdensome if the right parties can’t be located to release the collateral, and in any event, the flurry of filings to correct can significantly slow down the deal. So, it is important to chase down releases when the loan is repaid and have those releases properly recorded.
3. Trademark Issues in M&A and Corporate Reorganization
In the heat of any deal, risks are assumed by the buyer and often shortcuts occur to close a deal quickly. When it comes to trademarks, however, we often see risks that could have easily been avoided and shortcuts that inadvertently impact the value of a portfolio.
We have seen that some corporate lawyers routinely make these errors:
Drafting Issues
- Assigning all intellectual property without the goodwill associated with the trademarks, or general references to assignments of all trademarks or IP, as opposed to a detailed schedule.
- Not providing a separate trademark assignment document, as an exhibit, for the trademark lawyers to record with trademark offices around the world. That omission likely means a post-closing assignment, which can be difficult to obtain if time has passed, or the entire confidential M&A agreement might have to be filed, with redactions, which may not work overseas.
Due Diligence Issues
- Not calling in the trademark lawyers until the 11th hour for last minute due diligence and then having to scramble over problems with the chain of title, for example.
- Not calling in the trademark lawyers for due diligence before pricing the deal. We recently saw a deal where the buyer in a general asset purchase agreed to pay a significant additional amount for a set of trademarks, but neither party noticed that all but one registration had been cancelled and the marks were not in use and long ago abandoned.
Budget Issues
Failing to secure budget for the post-closing filings, which inevitably causes significant delay. In the meantime, enforcement against infringers is difficult because the owner of record is not up to date. If several years pass (which is quite common), when the chain of title has to be updated for renewal of the registrations, the entities that would need to sign the intervening assignment documents may no longer exist. Even if you have a copy of an old assignment, some countries require you to create a new nunc pro tunc original.
International Issues
- Not checking with trademark counsel on what other requirements and red tape there might be for recording the assignment overseas. Some countries require another original; some require certain additional language; some require legalization. Knowing this in advance can make sure you get the right documents executed at closing without having to chase them down later.
- Including blanket representations and warranties worldwide without a “to the best of our knowledge” qualification that the marks do not infringe the rights of third parties, instead of limiting those reps and warranties to countries where the company actually owns registrations. This exposes the seller to indemnification liabilities.
Takeaway
Calling in trademark counsel early in the deal process and keeping in touch along the way will help avoid headaches, expense, and damage to valuable brands, and set you apart from deal counsel who fail to do this.
About the Authors:
Janet Satterthwaite leads Potomac Law’s Trademark Group
Mendi Sossamon leads Potomac Law’s General Counsel Services Group
Gregory Giammitorio leads Potomac Law’s Mergers and Acquisitions Practice
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