Why Trademarks Matter and How it Can Become an Expensive Problem

Why Trademarks Matter and How it Can Become an Expensive Problem

by Gloria Steinberg

Selecting the right name for a service or a product is one of the most difficult tasks when launching a business. While there are many considerations into building a brand, strong brand names are often associated with an authenticity and a mission that is driven by a backstory that is relatable to customers. These are the factors that add value to trademarks because brand recognition cannot be simply imitated by competitors. Despite the value that trademarks can bring to a company, trademarks often take the backseat in discussions relating to intellectual property (IP). But like other IP assets, trademarks serve an important function that can become an extremely valuable asset that is important to protect.

First and foremost, trademarks serve as source identifiers. Investing early in brand development through various marketing efforts can help a company identify and engage its target customers to educate them about the company and what the company stands for. In fact, social media platforms have revolutionized branding tools used to showcase services and products and attract customers. For Business to Consumer (B2C) companies, these tools highlight the importance of a direct relationship with customers that help build customer loyalty.

Customer loyalty is important because it is the basis for a customer retention. High customer retention means customers of the product or business tend to return to or in some other way not turn to another product or business. Trust and credibility are important factors for both B2C and Business to Business (B2B) brands alike. For B2B brands, a strong brand means a better reputation and the perception of reduced risk, which makes the purchase decision safer and easier for a customer.

Therefore, it is no surprise that all of the goodwill that is associated with a strong brand forms a substantial portion of the brand’s value. The key to taking advantage of the opportunity to profit from the brand’s value is to be diligent about controlling and policing the usage of a trademark at all stages of brand building. The following issues may arise at various stages of brand building.

Insufficient Clearance

A company should ensure that a trademark is free and clear to use from the beginning, before investing in brand development. It can be problematic for many reasons to select a name only to realize that the name has been in use by an earlier user. One way to check whether a name is free and clear to use is by conducting a trademark clearance search. If a name is already taken by a senior user, the senior user can bring a trademark infringement action against the company.

Even after a settlement, the company may bear the risk of losing the money spent marketing materials, product packaging, domain names, social media profiles, and other business-related expenses that bear the name that would no longer be suitable for use (in addition to any litigation costs and associated fees). Before stocking up on a full inventory of marketing materials and packaging that cannot be used, conducting a trademark clearance search is crucial.

Obtaining, Maintaining, and Enforcing a Federal Registration

If a chosen brand name is available for use, a company may try to obtain a federal trademark registration by filing an application before the United States Patent and Trademark Office (USPTO). If the application is allowed, the resulting trademark would entitle the company to enhanced federal trademark protection in the United States under the Lanham Act.

It is possible to use a trademark without a registration, but unregistered trademarks do not afford a company the right to sue for damages and do not provide presumptions showing that the company’s mark was first in seniority. It is also possible to file for state trademark protection. It is beyond the scope of this blog post to discuss state trademark matters.

Because trademark rights are based on jurisdiction, a company must be strategic about where to seek federal trademark registration. Most companies file trademark applications in the United States, but many parts of Asia and Europe may also be appropriate depending on how a company operates. Bear in mind that trademark law varies from jurisdiction to jurisdiction and seeking advice from a local counsel in the respective jurisdiction is always recommended.

In addition, the mark itself must possess a distinctive quality and function as a trademark in order to warrant trademark protection. See Zatarain’s, Inc. v. Oak Grove Smoke House, Inc., 698 F.2d 786 (5th Cir. 1983). In the United States, the trademark must also be used in commerce to receive trademark protection. See 15 U.S.C. § 1127. That is – a company cannot simply sit on a trademark the same way it would sit on a domain name, hoping to sell it for profit. Once a trademark office grants a registration, a company must renew the trademark registration throughout the entire lifetime of the trademark usage. Depending on which jurisdiction(s) the trademark is registered, maintaining and renewing the registration(s) can become quite expensive.

A company must also monitor new trademark applications filed by later, junior users of the identical or similar mark in various trademark offices to ensure that junior users are not granted federal trademark protection for the identical or similar mark for identical or similar goods/services. In some circumstances, it may also be in the best interest of a company to prevent junior users from obtaining a registration for a trademark even if it is used for unrelated goods/services if the associated goods/services would be detrimental to the image of the company. For example, a company focused on health and fitness would not want to be associated with goods/services that go against a healthy lifestyle.

Trademark Infringement

As alluded to above, a federal trademark registration gives a company the presumption of validity in the mark and the right to sue in a federal court, among other benefits pursuant to 15 U.S.C. § 1114. If a company never enforces any of its rights, the company can run the risk of allowing a third party to raise the defense of laches as well as other affirmative defenses. This, in turn, could make it more difficult for a company to later enforce its trademark rights. Without overseeing the usage of a trademark by junior users, a company can also overlook the opportunity to assert its rights in other tribunals such as the Trademark Trial and Appeal Board (TTAB) at the USPTO.

Trademark Dilution and Genericizing

In addition to preventing infringement, a company must enforce its trademark rights to ensure that the trademark does not become diluted (e.g., via tarnishment or blurring) or genericized through another party’s use under 15 U.S.C. § 1125(c). A trademark that becomes diluted or genericized loses its distinctive quality, which can erode the goodwill a company has invested in the mark. Not surprisingly, whittling away the identity of a trademark in the public mind diminishes its value. Therefore, failing to prevent dilution or genericizing can be just as damaging as allowing infringement to occur.

Trademark Licensing

Finally, in some circumstances, a company may grant a license to a party to use the trademark. Under Mission Product Holdings, Inc. v. Tempnology, LLC, 587 U.S. __ (2019), an agreement rejected by a debtor licensor in bankruptcy will not be deemed terminated or rescinded. This means that a licensee continues to have the right to use a licensor’s mark even when the licensor becomes insolvent. This can be a problem for a company licensor because the licensor would have to continue bearing the burden of policing or monitoring of the usage of its trademark by a licensee long after it is bankrupt. To prevent a situation like this, the company should explicitly state the rights and responsibilities of each party in the event of insolvency.

Companies must make a number of complex branding decisions that can affect their trademark rights down the road. This can mean, at times, making the decision to rebrand. It is crucial to be diligent from the beginning and seek the advice of counsel to ensure that trademark rights are not prematurely lost while balancing the interests of the business, which can vary on a case-by-case basis.

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