Avoiding illegal trademark transfers: introducing the assignment-in-gross.

• Author: Cavendish, Michael

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. By 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 Are Transferred

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...