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Trademarks—U.S.

Christopher P. Bussert

I. Introduction

Trademarks are at the heart of modern-day marketing of goods and services.Indeed, virtually all industrialized countries including the United States areincreasingly becoming brand-savvy. Although federal unfair competition laworiginally protected trademarks only against direct “passing off,” trademarksno longer merely indicate the origin of their associated goods and services,but instead have themselves become critical commodities, often identifying asource of licensing, sponsorship, or endorsement. For example, the drivingforce in many stock and asset transactions today is the seller’s trademarkportfolio. Trademarks are also often offered as collateral to secure loans,qualify for capital gains treatment, and are property of the estate under theU.S. bankruptcy code. Today the importance of distinctive trademarks issuch that they may be among a company’s most valuable assets.

The owners of well-known trademarks such as McDonald’s, Microsoft,and Coca-Cola did not, however, come to enjoy their assets by chance. Rather,the strength of such trademarks reflects the culmination of a process beginningwith careful selection and ending with proactive maintenance by their owners.Undertaken and executed properly, such strategies can often yield returns farexceeding those attributable to other forms of capital investment.

II. Basic Trademark Principles

A. TRADEMARK FORMS AND TYPES

Trademarks can take many forms, including words, numbers, letters, symbols,slogans, colors, characters, graphic designs, smells, building shapes, containers,

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and other three-dimensional configurations, sounds, and any combinations ofthese items. The variety of possible trademark formats include:

1. WordsEnglish language words such as Arrow for shirts and Burger King forrestaurant services constitute the most common type of trademarks. “Coined”words (e.g., Exxon for gasoline products and Quizno’s for restaurantservices), which are words created by trademark owners, are a species oftrademarks that are capable of great strength and distinctiveness. Acronyms,abbreviations, or nicknames (e.g., MAACO for automotive services, DQfor restaurant services, and Beetle for automobiles) are recognized speciesof trademarks as well.

2. NumbersNumbers alone or combined with letters can be trademarks, provided,however, that the numbers or number-letter combinations are in fact usedin a trademark sense and not primarily to describe the model, grade, size,or feature of a product. For example, A-1 for steak sauce, K-10 for flyingdiscs, V-8 for juices, and 4711 for cologne have each been successfullyregistered as trademarks. These, however, are often not considered optimaltrademark choices at their inception, requiring a certain amount of salesand advertising leading to consumer recognition before achieving trademarkprotection.

3. Number and Word CombinationsTelephone number and letter combinations have also been found to beprotectable as trademarks (e.g., 1-800-MATTRESS for bedroom furnitureand 369-CASH for mortgage broker services).

4. SlogansIn recent years slogans have been increasingly adopted and used as trademarks(e.g., You Got the Right One Baby Uh Huh for carbonated soft drinks, andWe Love to Fly and It Shows for airplane travel services).

5. DesignsA wide variety of designs used alone and in combination with words havebeen accorded trademark protection (e.g., the Adidas three stripes design andthe golden arches design for McDonald’s restaurant services).

6. ImagesImages of real or fictitious individuals have long been used as trademarks(e.g., the “Uncle Ben” image for rice, the “Betty Crocker” image for bakery

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products, the “Paul Newman” image for food products, the design of a girlwith pigtails for Wendy’s restaurant services).

7. ColorsSingle colors, combinations of colors, or colors as a part of a design can beprotected as trademarks under certain limited circumstances. A single coloror combinations of colors can be recognized as valid trademarks if they servean ornamental, as opposed to a utilitarian, function and have obtained a highlevel of “secondary meaning,” that is, the public has come to identify thecolor or combination of colors used in connection with a product or servicesolely as signifying a brand. In one of the leading cases involving colortrademarks, Owens Corning was successful in protecting the color “pink” asa trademark for its brand of fiberglass insulation.

8. SoundsMarks consisting of distinctive sounds have become an important and highlyrecognizable species of trademarks (e.g., the NBC “three chimes” forbroadcasting services and the Intel “five chimes” for computer products).

9. SmellsSmell marks, although somewhat rare, have also been recognized as capableof being viable trademarks (e.g., “a high-impact, fresh, floral fragrancereminiscent of Plumeria blossoms” for sewing thread).

10. Three-Dimensional ConfigurationsPackaging, and the appearance of a product or of structures where servicesare performed, can be protected as trademarks if they are inherently distinctiveor have achieved secondary meaning (e.g., the distinctive shape of the flutedCoca-Cola bottle, the Hershey’s teardrop shaped candy, and the exterior designof White Castle restaurants).

B. TRADEMARK FUNCTIONS

Trademarks convey valuable information to consumers by identifying goodsand services that have been satisfactory in the past while rejecting those thathave not. They reduce the costs (i.e., time, trial and error, and inconvenience)of acquiring information about particular goods or services, because consumerscan come to rely on a trademark and the brand image it conveys in makingfuture purchases. Moreover, because trademarks identify goods or servicesfrom a single source, they often induce the trademark owner to provide higherquality goods and services. Trademarks further provide a framework foreffective advertising of goods and services. Trademarks perform several keyfunctions that are recognized and protected by the courts:

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• They identify the goods or services of the trademark owner and/orof its licensees and help distinguish them from those of competitors.

• They signify that all goods or services bearing the trademark emanatefrom a single, albeit sometimes anonymous, source or connotecommon sponsorship.

• They signify that all goods or services bearing the trademark are ofa uniform quality.

• They enable effective advertising of the goods and/or services withwhich the trademark is used.

• They provide a common identity for goods and services from a licenseor franchise system.

State and federal law protect not only trademarks, but also service marks,collective marks, and certification marks. A service mark is the counterpartof a trademark, but is used to identify services rather than goods. (Throughoutthis chapter, the term “trademark” is used to refer to both trademarks andservice marks.) Some designations can serve as both a trademark and a servicemark (e.g., Kroger grocery stores and product brands, and Weight Watchersdietary counseling services and product brands). A collective mark is ownedby a cooperative, association, or other collective group and distinguishes thegoods or services of the members from those of others, as well as indicatingmembership in the collective group or organization.

A certification mark represents a certification by the owner of the markthat the goods or services of others meet the owner’s standards. The applicablestandards can relate to quality, method of manufacture, regional origin, orsome other characteristic. The owner of a certification mark (e.g., an entityformed to certify goods as made of Harris Tweed or Icelandic Wool) cannotitself be the source of goods or services under the mark or rights to the markwill be lost.

C. SPECTRUM OF DISTINCTIVENESS

To be eligible for protection under trademark law, a trademark must bedistinctive, that is, capable of identifying and distinguishing the goods or servicesof the trademark owner or its licensees from those of competitors. Trademarksvary in distinctiveness, and a trademark may be either inherently distinctive or,alternatively, may acquire distinctiveness as a result of recognition by the relevantpublic after a period of use. The degree of inherent or acquired distinctivenessof a trademark is relevant to the scope of protection to which it is entitled. Ahighly distinctive and famous trademark is considered “strong” and often willbe protected against use by others even on unrelated goods or services (e.g.,Rolls-Royce hotels). On the other hand, a non-distinctive or “weak” trademark

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may be entitled to only limited protection against use of identical or closelysimilar trademarks on identical or closely related goods or services.

In assessing their protectability, trademarks are often grouped on acontinuum called the “spectrum of distinctiveness.” The spectrum ranges from“fanciful” trademarks, which are arguably the most protectable, to genericterms, which are not protectable at all.

1. Fanciful MarksThe most distinctive and protectable trademarks are unique, coined termshaving no inherent linguistic meaning. Examples of coined trademarks includethe invented words Clorox, Exxon, and Pepsi. Such trademarks generallyreceive a wide scope of protection because prohibiting their use by othersdoes not deprive business competitors or the public of any terms they need tocompete or fairly use.

2. Arbitrary MarksArbitrary trademarks, which are next in order of distinctiveness, are wordshaving a common meaning but no connotation in association with the user’sgoods or services. Consequently, even if the term is in common use, atrademark composed solely of that term may nevertheless be consideredarbitrary if it is “applied to a product or service unrelated to its meaning, sothat the word neither describes nor suggests the product or service.” Examplesof arbitrary trademarks include Domino’s pizza, Sonic Restaurants, andJellibeans roller skating rinks. Like coined terms, these trademarks typicallyare entitled to a broad scope of protection because they do not deprivecompetitors of the ability to describe their own goods or services.

3. Suggestive MarksThe third category of distinctiveness includes suggestive trademarks, which,as the name indicates, suggest some of the qualities of the user’s goods orservices but do not directly describe them. The courts and registrationauthorities have generally found that a term is suggestive if it requiresimagination, thought, and perception by a consumer to understand the essentialcharacteristics of the goods or services. Examples of suggestive trademarksare Holiday Inn for hotel services and Homefoamers for an insulationinstallation service. Suggestive trademarks are considered inherently distinctiveand capable of protection against use of similar trademarks upon their adoption.They typically do not, however, receive as broad a scope of legal protectionas coined or arbitrary marks. In general, suggestive marks that have notacquired a high degree of fame are likely to be protected only against use ofsimilar trademarks for related goods and services.

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4. Descriptive TerminologyThe fourth category of trademarks consists of descriptive terms. Descriptive“trademarks” include:

• Trademarks that merely describe the intended purpose, function,quality, size, ingredients, characteristics, class of users, or intendedeffect on the user of the goods or services they identify.

• Trademarks that primarily describe the geographical origin of thegoods or services.

• Trademarks that primarily constitute a person’s surname.• Trademarks that primarily describe laudatory aspects of the goods or

services.

Trademarks that are deemed to be merely descriptive of the goods and/orservices with which they are used will be denied protection and, as discussedin further detail below, will also be found unregistrable, unless “secondarymeaning” can be shown (e.g., that the trademark has become recognized as abrand for specific goods and services from a single source). In keeping withthe concept of a continuous spectrum of distinctiveness, however, sometrademarks are only slightly descriptive, and need only a minimum level ofusage to acquire secondary meaning, while others may be highly descriptiveand need substantial evidence of public recognition to establish secondarymeaning. Significantly, the U.S. Supreme Court has held that product shapesare considered to be descriptive marks at best, and therefore always require ashowing of secondary meaning for protection.

Despite the initial burden trademark owners face in establishing protectablerights in marks that consist of descriptive terminology, it is possible for suchtrademarks to acquire a high degree of secondary meaning and in some caseseven become extremely famous. When that happens, the trademark is entitledto a broader scope of protection. For example, Kentucky Fried Chicken andBaskin-Robbins are trademarks that were originally considered descriptive,but have become well known as designations of origin and are thereforeentitled to substantial trademark protection. In the absence of such a highdegree of fame, descriptive trademarks, even if they have acquired sufficientsecondary meaning to be protectable, generally are entitled to protection onlyagainst use of closely similar marks for closely related goods or services andtherefore may not be the best of trademark choices.

5. Practice Pointer—Proving Secondary MeaningBoth direct and circumstantial evidence tending to prove that the relevantconsuming public associates a trademark with the trademark owner can be

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used to prove secondary meaning. Evidence that will support a finding ofsecondary meaning includes:

• Direct consumer testimony. Testimony establishing that customersperceive a term as a trademark rather than as a descriptive term maybe the most relevant persuasive evidence in proving secondarymeaning. Unfortunately, it is often very difficult to obtain.

• Consumer surveys. A properly conducted survey of the relevantconsuming public may also provide persuasive evidence of thesecondary meaning. However, such surveys can be expensive.

• Length, manner, and exclusivity of use. Under the federal trademarkact, proof of substantially exclusive and continuous use of a trademarkin commerce for five years is “prima facie” evidence of secondarymeaning.

• Advertising expenditures. Because direct evidence of secondarymeaning can be very difficult to obtain, advertising, promotional,and publicity expenditures can help establish secondary meaning.The greater the exposure of the mark, the greater the number ofbuyers who will associate the mark with the trademark owner. Thus,substantial advertising, promotion, and publicity raise an inferencethat the purchasing public has come to associate a trademark with asingle source.

• Amount of sales and number of customers. Like advertisingexpenditures, the volume of sales is relevant to secondary meaning.Substantial sales volume supports an inference of secondary meaningon the theory that such sales are more consistent than not with theexistence of secondary meaning.

• Other evidence. In addition to the traditional categories of secondarymeaning evidence discussed above, other evidence may be probativeas well, including evidence of counterfeiting by third parties, registrationby unrelated third parties of closely similar terms without a disclaimer,unsolicited media coverage, or other evidence of industry recognition.

6. Generic TerminologyThe final category of the continuum is composed of generic terms, whichcannot under any circumstances be trademarks. A generic term is a commonname for a product or service, such as “restaurant” for an eating establishment,“car” for automobiles, or “carrot” for a particular vegetable. In some cases, ageneric term was at one time a trademark that fell into common usage as acommon term for a category of goods or services and, therefore, lost itsdistinctiveness as an indicator of origin. Examples of trademarks that have

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deteriorated to generic terms include “linoleum,” “cellophane,” “aspirin,”“kerosene,” “shredded wheat,” “yo-yo,” and “escalator.” The owners of severalprominent trademarks, including Jell-O, Band-Aid, and Xerox, have spentmillions of dollars educating consumers about the brand significance of theirmarks to avoid having their trademarks become generic terms. For this reason,the creators of new kinds of goods and services are strongly encouraged toprovide generic terms for the goods and services upon their introduction so asto identify them while preserving their marks as specific source designations(e.g., NutraSweet brand aspartame).

7. The Suggestive/Descriptive ConundrumThe majority of marks in use today fall in the suggestive or descriptivecategory. Unfortunately for trademark owners, although the consequences ofa trademark being legally categorized as suggestive or descriptive may besignificant in terms of protectability and registrability, the line separatingthese categories is hardly clear. As a general rule, a trademark will not bedeemed descriptive if a multistage reasoning process, or the use of imagination,thought, or perception is required to discern the nature or attributes of thegoods or services associated with the trademark. For these reasons, thefollowing categories of trademarks have been held to be suggestive as opposedto descriptive:

• Double entendres (e.g., Sugar & Spice)• Alliteration, rhyming, or other distinctive verbal usage (e.g., Light

& Lively)• Incongruous grammatical use (e.g., Uncola)• Incongruous use of foreign and English terms (e.g., La Yogurt)• Incongruous use of individually descriptive terms (e.g., Snorake)

D. STRENGTH OF TRADEMARKS

The more distinctive, unique, and well known a trademark is, the “stronger”it is considered to be. The strength of a trademark defines the scope ofprotection it is accorded by the courts and the U.S. Patent and TrademarkOffice. The stronger the trademark, the more extensive its scope of legalprotection against infringing trademarks over: (1) a wide range of productand service categories; (2) a wide range of geographic markets; and (3) awider range of appearance, sound, and meaning variations.

Strength is a relative notion, and trademarks can range from being verystrong to weak. Three factors play significantly in determining the strengthof a mark:

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1. How common the trademark is in general use and in the specificfield of use. Terms that are used as trademarks by many businesses ina number of distinct fields such as Star, Gold Medal, Best, Platinum,and Universal as well as those composed of numbers or letters, aregenerally weak source identifiers as a result of such common use.When many identical trademarks exist in the marketplace, each ofthe respective trademarks in the “crowd” is not very distinctive and,therefore, is weak and has a relatively narrow scope of protection.

2. The level of descriptiveness of the trademark in relation to the goodsor services. Fanciful and arbitrary trademarks are generally consideredto be inherently strong and are, therefore, given a wider range ofprotection. Suggestive trademarks are in the middle ground anddescriptive trademarks are, at least initially, at the weak end of thespectrum. The more descriptive the trademark of the goods and/orservices with which it is used, the less distinctive and thus weaker itis, at least initially.

3. The degree of fame and marketplace recognition of the trademark.Even if a trademark is fanciful or arbitrary, it might be relativelyunknown to the consuming public for a number of reasons includinglimited geographic use, minimum sales, narrow target market, etc.Conversely, after continuous significant use and advertising, adescriptive trademark initially classified in the weaker part of thespectrum may become a strong trademark and very well known tothe consuming public. For example, Kentucky Fried Chicken(consisting of a geographic and generic term) and McDonald’s (asurname and thus descriptive) have accumulated (and continue toaccumulate) substantial amounts of secondary meaning with the resultthat they have become both strong and famous.

E. TRADE DRESS

Combinations of elements that together make up the look, feel, or environmentof a product or business, also known as “trade dress,” can achieve trademarksignificance and are protected under the same laws that protect trademarks.Trade dress can refer to individual elements of a product or business image aswell as to the image created by a combination of those elements.

There is neither a defined list of elements that constitute protectabletrade dress nor a statutory definition of the term. A product’s trade dress mayinclude its size, shape, label, packaging, color, color combinations, texture,or graphics. The trade dress of a service may include exterior and interiorarchitectural designs and décor, vehicle decoration, clothing, signs, menus,

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cuisine, or entertainment features; anything and everything that individuallyor in combination identifies and distinguishes the services offered by abusiness.

Prominent examples of legally protectable trade dress include the exteriordesign of certain well-known fast-food restaurants such as The InternationalHouse of Pancakes and McDonald’s; the interior décor of Fuddruckersrestaurants; the “G” shape of a Gucci watch; a Goldfish-shaped cracker, theoverall design of a sports shoe, and even the appearance of a bathroom scale.

Trade dress protection does not, however, extend to vague or abstractimages or themes. For instance, courts have refused to extend trade dressprotection to the concept of a “full-service restaurant serving down-homecountry cooking in a relaxed and informal atmosphere” or a Scandinavianmarketing theme for ice cream. On the other hand, trade dress protection hasbeen granted to an arbitrary, extensive, and distinctive “signature” collectionof interior design characteristics of a restaurant.

Trade dress protection attempts to balance three public policy objectives:

• The protection of consumers from confusion.• The protection and reward of investment in unique and original

features identifying a product or service.• The protection of the rights of others to compete freely by having

unrestricted access to the ordinary public domain features of productsor attributes of providing services, or design elements that arefunctional in nature or necessary to allow competition.

Certain types of trade dress may be federally registered as a trademark onthe Principal Register. Other types of trade dress are unregistrable because ofdefinition and specificity issues (such as the interior design of a restaurant).Whether or not trade dress is registered, courts may protect such rights inlitigation brought under Section 43(a) of the Lanham Act and similar stateunfair competition laws.

III. Selection and Clearance of Marks for Usein the United States

A. SELECTION

Trademark litigation in the United States can be extremely costly. The defenseof an infringement action through trial generally costs several hundred thousanddollars or more, with surveys and survey experts, if needed, alone frequentlycosting tens of thousands of dollars. The inordinate expense and time lost inunnecessary litigation often can be avoided by a careful search and clearanceprocess incorporating quality legal advice before adopting and commerciallyusing a new trademark.

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1. General ConsiderationsThere are three important issues that a trademark owner should always considerwhen selecting a trademark.

• Qualification. Does the designation under consideration function asa trademark? For example, is the proposed trademark the genericname for the product or service or does it principally describe acharacteristic or feature of the product or service?

• Infringement. Is the trademark available? Does it infringe, or will itsapplication for registration be blocked by any other party assertingprior rights in the trademark or a closely similar trademark? Theanswer to this question depends on whether use of the trademarkunder consideration will be deemed to create a “likelihood ofconfusion” with the trademarks of other parties.

• Protectability. Is the trademark distinctive, weak, or strong? Will itneed time and expense to develop secondary meaning?

Moreover, the process of selection of trademarks often presents a classic“Hobson’s Choice” for trademark owners. On the one hand, trademark owners(and particularly their marketing representatives) are often attracted todescriptive terms because those terms easily communicate to potentialpurchasers information about the goods and services such as their features,ingredients, or other characteristics. Unfortunately, from a legal perspective,descriptive terms tend to be less distinctive and thus less protectable. As aresult, in order to enhance their protectability, owners of weak trademarksneed to invest significantly greater amounts in marketing and advertising toeducate the public that the trademark is proprietary and thereby has acquiredsecondary meaning.

On the other hand, fanciful and arbitrary trademarks are inherentlydistinctive and strong, but convey little or no message about the product orservice to the consumer and might require expensive advertising to teach theconsumer to remember a particular trademark. One way out of this dilemma isto avoid both extremes and select a trademark that is marketable and attractiveand yet suggests features of the product or service. In selecting an optimaltrademark, the following types of terms should generally be avoided becausethey are harder to protect and subject to higher scrutiny when federal registrationis sought.

2. Avoid Descriptive Termsa. Selection Factors

The selection of a trademark is a creative process seeking to send an attractivemessage to the consumer while avoiding merely describing the goods or services.

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The investment required to confer secondary meaning on a weak descriptiveexpression might be better invested in educating the public through advertisingto associate a coined or arbitrary trademark with a product. Coined trademarksmay be used to create a family of related trademarks (e.g., Kodak, Kodacolor,and Kodachrome). Moreover, once a strong trademark is recognized in themarket, it can be used as a magnet to introduce new goods or services with lessadvertising costs and with a smaller risk that a third party may have alreadyappropriated the trademark in that category of goods or services. Descriptiveand other weak types of trademarks also present increased risks of third partieshaving superior common law rights in local trading areas.

Success stories like McDonald’s, Wendy’s, and similarly famous trademarksconsisting of inherently weak terminology are the exception rather than therule. On the other hand, to have a successful brand, one need not totally adoptinvented names like Mr. Eastman did with “Kodak.”

b. Practice Pointer—Recognizing Descriptive Marks

As indicated above, because descriptive marks offer a relatively inexpensivemeans for trademark owners to convey information to consumers about thetrademark owner’s goods and services, trademark owners are often stronglypredisposed to adopt and use such marks. Recognizing the inherent protectabilityproblems presented by descriptive marks, some trademark owners will go togreat extremes to mask their descriptiveness, usually with a limited amount ofsuccess. In that regard, the following types of trademarks have been found tobe descriptive despite the efforts of their owners to prove otherwise:

• Acronyms and abbreviations. Acronyms and abbreviations have beenheld to be descriptive and not registrable if the underlying words onwhich they are based are considered to be descriptive. For example,SPEX was held to be merely descriptive for eyeglasses and HOMOwas held to be merely descriptive for homogenized milk. In addition,in view of the advent of an increasingly wide range of goods andservices available through electronic means or through the Internet,the prefixes “I” and “E” (e.g., “ITOOL”) are generally recognized tobe descriptive abbreviations for the words “Internet” and “electronic.”

• Foreign equivalents. A trademark owner cannot escape a finding ofdescriptiveness by substituting a foreign equivalent for a descriptiveEnglish word. For example, Kuhlbrau for beer was held to be merelydescriptive because it was the equivalent of “cool brew.”

• Misspellings. A finding of descriptiveness also cannot be avoided bymisspelling words that are otherwise merely descriptive of goods orservices. For this reason, FOM was held to be merely descriptive forfoaming carpet cleaner.


3. Avoid Geographic NamesA geographic name may not be protectable as a trademark if the product orservice with which the trademark is used is generally expected to, and infact does, originate from that area. If, however, an area is not known forthat type of product, the geographic name may be protectable. For example,Philadelphia for cream cheese was found to be an arbitrary trademark becausethis cheese is made in the small city of Philadelphia, New York (and not inthe more obviously recognized city of Philadelphia, Pennsylvania), andneither of these two cities has a particular reputation for the production ofcheese. Similarly, California Innovations was held to be registrable forthermal insulated food and beverage bags. A geographic name may also beprotectable where the trademark owner is successful in showing that theprimary significance of the name is something other than its geographicsignificance. For example, Park Avenue was found to be protectable becauseit connotes high quality and Dixie was found to be protectable because ithas many non-geographic meanings. A trademark owner may also be ableto protect a geographic term where it is able to show that there are amultiplicity of locations sharing a common geographic name thatdemonstrates no direct consumer association of the geographic term to asingle location. Nonetheless, registering and protecting trademarks consistingof or including geographic terms can be an uphill struggle and, generally,any protection obtained will be narrowly construed.

4. Avoid SurnamesSurnames are also not good choices for trademarks because they are viewed asanother species of descriptive marks. Where a mark is categorized as beingprimarily a surname, registration on the Principal Register will be deniedabsent proof of secondary meaning. Another problem with surnames is thatthey are likely to be already used as common law trademarks or as part oftrade names somewhere in the United States, creating both distinctivenessand potential prior-rights issues. A term that arguably has surname significancecan be protected where the trademark owner is successful in showing that theprimary significance of the name is something other than surname significance.For example, Fairbanks was found to be protectable because it had geographicsignificance equal to its surname significance.

Trademark owners are also sometimes successful in protecting nameswith arguable surname significance where they are able to establish that thename at issue is rare, is a recognized acronym (e.g., SAVA for “SecuringAmerica’s Valuable Assets”), has another meaning (“hackler” defined in thedictionary as a person who separates long fibers of flax), or has historicalsignificance for a place or person (Sousa for John Philip Sousa). The use

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by a trademark owner of initials or a first name preceding the alleged surnameis a strong indicator of surname significance. Marks that consist of or includesurnames can present additional registrability problems on an internationallevel, since many countries are more restrictive than the United States withregard to the registration of surnames.

5. Avoid Laudatory TermsTerms that are deemed to be merely laudatory of the goods or services withwhich they are used are also not good choices for marks because they requirea showing of secondary meaning to be protectable. Examples of such termsare “premium,” “best,” and “gold.”

B. CLEARANCE

1. Clearance SearchesAlthough not mentioned in the federal trademark statute, and not required bymost courts, some reported decisions imply a duty to conduct a trademarkclearance search, for example, before using a new trademark in a nationaladvertising campaign. Moreover, once a search is undertaken, some courtshave held that an obligation arises to do it in a competent manner. The processfor screening new marks generally involves conducting an online search throughthe records of the Patent and Trademark Office to locate directly conflictingfederal registrations. In the absence of such a direct conflict, online searchesmay be expanded to cover state registrations and certain directory and tradename sources through, for example, Dun & Bradstreet searches (which includea database with millions of trade names). Most sophisticated trademark lawyers,however, rely on private commercial research services, which maintainsubstantial databases, and which employ search strategies that may be difficultor too costly to replicate using online services. Therefore, if online screeningfor federal registrations does not disqualify a mark, the next step usually is amore comprehensive commercial search covering federal and state registrations,as well as common law and trade name sources, including industry publicationsand the Internet.

In most cases, the evaluation of a search report requires a significantexercise of judgment based on experience and knowledge of case law. Atypical comprehensive trademark search report includes the following sections:

• A federal report, containing existing, expired, canceled, abandoned,and pending claims of rights in the U.S. Patent and Trademark Office(PTO).

• A state trademark registration section.


• A common law report, containing information from a variety ofpublished sources, including the Internet, trade directories, newproduct publications, and advertising journals.

• A trade name listing that includes trade names from the Dun &Bradstreet or similar database and various industry sources.

• A domain name registration report that can also include links to, orcopies of the home pages from, active Web sites used in connectionwith the domain names.

The reviewing attorney may further investigate companies found by thecommercial search through online searches or by accessing their Web sites togather additional information about potential conflicts. By comparing themarks disclosed in these sections of the reports to the proposed mark, anexperienced trademark attorney often can provide a reasoned opinion as tothe availability of particular marks. Through such advice, companies cangreatly reduce the odds of being the target of infringement or dilution actions,or having their applications for federal registration refused by the Patent andTrademark Office or opposed by prior rights holders.

2. Practice Pointer—A Final Word about ClearanceThose charged with the responsibility of clearing new trademarks for businessesshould note the following factors:

• Duty to avoid conflicts. Courts generally impose a duty on the lateruser to differentiate its trademark from all existing trademarks. Inthe federal registration process, any doubt about confusing similarityis resolved against the later applicant. If the existing trademark issufficiently strong and well known so that it can be fairly characterizedas “famous,” a later user may not be allowed to adopt the trademarkeven for non-competing goods or services because the consumingpublic might infer a common sponsorship or because the value andawareness of the famous trademark might become diluted.

• Good business judgment. The decision not to search, a faulty orincomplete search, or a failure to investigate and resolve potentiallyproblematic references properly can result in severe consequences,including the inability to obtain a federal registration, suits againstthe later user by the owner of a confusingly similar trademark forinjunctive relief, damages, and an accounting of the later user’s profits,and loss of goodwill and investment. In some cases, multimillion-dollar judgments have been awarded to owners of prior rights ignoredby later users. Moreover, in the licensing or franchising context, a

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loss of trademark rights could expose the licensor/franchisor to yetanother lawsuit, this time from the licensee/franchisee for breach ofcontract, rescission, and damages.

• Opinions of counsel. It is typically sound business practice for atrademark owner to seek the advice of competent counsel prior toadoption and use of a trademark in commerce. In fact, a number ofcourts have held in trademark infringement lawsuits that a defendant’sreliance on a legal opinion of counsel as to availability of a trademarkis relevant to whether the defendant is a willful infringer and thereforeliable for an accounting of its profits and/or attorney’s fees.

IV. Establishing Rights in a Trademark

A. COMMON LAW RIGHTS

If no federal registration is involved, U.S. trademark rights are territorial innature. In other words, the right of a trademark owner to use its trademarkwill generally be limited to the geographic areas in which it does business orhas a reputation. As a practical matter, this means that another party’s adoptionand use of a confusingly similar mark in a geographic area remote from thetrademark owner will result in the other party acquiring rights superior to thetrademark owner in that other party’s geographic area. This is true evenwhere the other party’s adoption and use of its mark occurs after that of thetrademark owner, if the other party’s adoption was both in a geographicallyremote area and in good faith (i.e., was done without knowledge of thetrademark owner’s use). Therefore, when the trademark owner attempts toexpand its operations into the remote area where another party has establishedrights to a similar mark in good faith, the trademark owner may find itselfsubjected to a lawsuit by that other party and ultimately enjoined fromexpanding into that area. At the same time, however, the other party cannotexpand its operations into the geographic area in which the trademark owneralready operates.

B. THE FEDERAL REGISTRATION SYSTEM

Because the common law sometimes allowed junior users to misappropriatethe goodwill associated with senior users’ marks and then escape liability byarguing that they were unaware of the prior use, federal trademark laws wereestablished in part to create nationwide protection for registered marks, andCongress repeatedly has expanded the protection available to mark owners.In 1946, congressional passage of the Lanham Act recognized service marksand expanded the remedies available to the owners of federal trademarkregistrations. In 1988, the Trademark Law Revision Act (TLRA) created the


“intent-to-use” application, which recognized that trademark owners needthe ability to stake their claim to rights while still in the start-up stage of abusiness or development of a product. An application based on an “intent touse,” however, will not mature to registration unless actual use is initiated.The TLRA also contained the significant provision that all applicants, contingentupon the ultimate issuance of a registration, obtain a nationwide priority ofrights as of the application’s filing date.

Therefore, in contrast to the common law system of trademark protection,applicants in the United States can now procure nationwide priority for marksat a date predating the mark’s actual use. Thus, to a certain extent, U.S.trademark law has become harmonized with the laws of other countries byallowing applications for registration without prior use. Some of the moresignificant features of the registration framework created by the Lanham Actfollow.

1. The Federal Registration ProcessThe process of applying for a federal trademark registration is subject tovarious technical requirements. A proper application must identify and besigned by the applicant (or someone acting on its authority) and must includea filing fee, a depiction of the mark, and a list of goods and services forwhich registration is sought. Upon receipt of an application, the PTO grantsa filing date and assigns a serial number. The application then is reviewed byan examining attorney, who determines the mark’s registrability, includingan evaluation of its inherent or acquired distinctiveness and the acceptabilityof the specification of goods and services recited in the application. Theexamining attorney also conducts a search of PTO records for any prioractive registrations or prior pending applications deemed to be confusinglysimilar. Accordingly, another entity’s trademark registration or applicationcan block an application without any action by the prior entity.

In the event the examining attorney has any objection, an Office Actionwill be issued setting forth specific grounds for initially refusing theapplication. Applicants are entitled to respond to Office Actions and, whereappropriate, may argue against the examining attorney’s objections orotherwise address issues or requirements presented by the examining attorneyby amending the application. If all objections are overcome, the applicationis passed on for publication in the PTO’s Official Gazette. If the objection isnot overcome and a final refusal is issued, the applicant has an opportunityfor administrative and judicial appeal.

An application based on actual use requires a specimen showing thetrademark used in connection with the goods or services for which registrationis sought. An intent-to-use applicant must furnish such a specimen together

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with an Amendment to Allege Use filed before the application is approved bythe U.S. PTO for publication or a Statement of Use after the issuance of aNotice of Allowance. Once a Notice of Allowance issues, the applicant has atime limit of six months to submit a Statement of Use showing the trademarkin actual use. The time limit for filing the Statement of Use may be extendedfor five additional six-month periods, the last four of which require a showingof good cause as to what activities are being undertaken to commercialize thetrademark.

Publication in the PTO’s Official Gazette is designed to give any partythat believes it would be damaged by the proposed registration the opportunityto oppose its issuance. The period for filing an opposition is 30 days from thedate of publication although the deadline may be extended up to an additional90 days (without the trademark applicant’s consent) upon filing an appropriateextension request with the PTO. If an opposition is filed, an inter partesadministrative proceeding is initiated before the Trademark Trial and AppealBoard. That proceeding has certain elements that mirror court litigation, suchas discovery, but there are a number of distinguishing features—there is noactual live trial, for example. Because such proceedings are conducted pursuantto a blend of the Federal Rules and specific PTO rules, initiation and pursuitof opposition proceedings require special scrutiny. In principle, an oppositioncan be based on any statutory ground, but most often it is predicated onconfusing similarity with a prior registered (or sometimes prior used, commonlaw) trademark. Opposition proceedings can take several years before a finaldecision is rendered.

The primary requirement for maintaining a federal registration is thefiling of an Affidavit of Use first between the fifth and sixth anniversary ofthe registration, and then, along with a renewal application, between theninth and tenth anniversary of the registration, and every ten years thereafter.A claim of actual use (with the submission of a specimen) is a prerequisite forall these filings to keep a registration alive. As discussed in greater detailbelow, an Affidavit of Incontestability also may be filed after five years ofcontinuous use.

2. Statutory Bars to RegistrationSignificantly, not all marks are eligible for registration under U.S. law. Rather,the Lanham Act contains both absolute and conditional prohibitions againstthe registration of certain marks, which may come into play in twocircumstances: (1) an administrative refusal by the PTO in the applicationprocess to register a particular mark; and (2) a challenge to the registrabilityof the mark by an interested party in either administrative or court litigation.


a. Absolute Prohibitions

Under Section 2 of the Lanham Act, a trademark cannot be registered if it:

• Consists of or contains immoral, deceptive, or scandalous matter; ormatter that may disparage or falsely suggest a connection withindividuals, institutions, beliefs, or national symbols.

• Consists of or contains the flag or coat of arms or other insignia ofthe United States, or of any State or municipality, or of any foreignnation, or any simulation of those items.

• Consists of or contains a name, portrait, or signature identifying aparticular living individual except with his or her written consent.

• Is primarily geographically deceptively misdescriptive.• Consists of functional material.

These provisions are, for the most part, straightforward and self-explanatory. The test for deceptiveness under Section 2(a), however, hasevolved over time and deserves some attention. Formerly, the issue ofdeceptiveness was decided by evaluating the intent of the trademark owner.Today, instead of evaluating intent, a mark will be found deceptive if itimplies a falsehood that would “materially affect” the purchaser’s decision tobuy the goods or services sold under the mark. Thus, the test is one of impacton the purchaser, rather than the intent of the mark owner. For example, themark Italian Maid for a detergent that is not made in Italy might be registrablebecause a purchaser probably would not purchase the cleanser thinking it wasItalian-made. If the product were pasta, however, a different result is probable.

The issue of whether a mark consists of functional material typicallyarises in connection with protection of design features of productconfigurations. Functional features of a product’s configuration (i.e., thosewhich contribute to its utility) are not entitled to protection if those featuresare superior to other available designs. Design features of a particular productconfiguration that are directed to the product configuration’s performanceof a function may be “de facto” functional, that is, functional as a matter offact. For example, the shape or design of a spray bottle may be directed tothe performance of the function of holding and spraying liquid. If the designfeature of the product’s configuration is merely de facto functional, it maybe registrable on the Principal Register upon a showing of secondarymeaning. “De jure” functional means that the configuration is functional asa matter of law. If the configuration of a product or its packaging embodiesa design feature that is superior to other available designs and thus providesa competitive advantage to the user, then the configuration is de jurefunctional. If the design feature is de jure functional, it cannot be registeredon either the Principal Register or the Supplemental Register of the PTO.

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b. Conditional Prohibitions

Consistent with the general hostility under U.S. law to claims of exclusiverights to descriptive terms generally, Section 2(e) of the Lanham Act prohibitsthe registration of any mark that: (1) is merely descriptive or deceptivelymisdescriptive; (2) is primarily geographically descriptive; or (3) is primarilymerely a surname, unless the mark has acquired secondary meaning. In additionto the methods of demonstrating secondary meaning discussed previously, anapplicant in the registration context may rely on a presumption ofdistinctiveness arising from five years of continuous and exclusive use. Thisprovision contrasts with the absolute bars to registration contained in Section2(a), (b), and (c), under which marks are not registrable even if they haveacquired secondary meaning.

c. Previously Registered and Used Marks

Section 2(d) of the Lanham Act also precludes registration of a mark “whichso resembles a mark registered in the Patent and Trademark Office, or a markor trade name previously used in the United States by another and notabandoned, as to be likely . . . to cause confusion, or to cause mistake, or todeceive. . . .” This can be the basis for a rejection by the PTO or an oppositionby an interested party. Moreover, any interested party has the opportunity toalso challenge the registration of a mark that it believes “dilutes” thedistinctiveness of its own marks, although the PTO will not on its own initiativereject an application on this basis. The tests for “likelihood of confusion” and“dilution” are outlined below.

3. Benefits of Federal Registration on the Principal RegisterFederal registration of a mark carries with it a number of competitiveadvantages. These include:

a. Constructive Notice

The 1946 Lanham Act expanded the geographic scope of trademark rights byestablishing that registration constitutes “constructive notice” of the markthroughout the United States. Because a junior user could obtain rights in amark merely by using it in good faith in a geographic area remote from anearlier user of a mark, constructive knowledge based upon a federalregistration eliminated the ability to allege good-faith adoption after theregistration issued. For the first time, federal law provided a U.S. registrantwith the ability to protect its trademark rights against subsequent good-faithusers, when the registrant was not making use of the mark in all parts of thecountry. The enactment of the Trademark Law Revision Act of 1988 hasresulted in even greater rights for holders of federal trademark registrations.


Contingent on the issuance of a trademark registration on the Principal Register,applications filed after November 16, 1989 constitute “constructive use” of atrademark from the application filing date. Consequently, the Lanham Actnow encourages mark owners to apply for registration of their marks quicklyby providing that one who adopts and uses a mark confusingly similar to afederally registered mark after the filing date for an application cannotordinarily acquire any rights superior to those of the federal registrant.

b. Incontestability

Under U.S. law, the fifth anniversary of a registration is significant for tworeasons. First, prior to that date, a registration may be canceled for any reasonthat would have prevented its issuance in the first place. Thus, for example,any party enjoying priority of use of a confusingly similar mark may petitionto cancel the registration in an administrative proceeding before either theTrademark Trial and Appeal Board or in litigation related to the mark in afederal court. Once a registration is five years old, however, Section 14(3) ofthe Lanham Act arguably limits dramatically the grounds upon whichcancellation may be sought, eliminating, in particular, allegations that thepetitioner was using the mark prior to the registrant or that a mark is merelydescriptive without secondary meaning.

Second, the Lanham Act also contains a provision allowing a federallyregistered mark to become “incontestable” after five years of continuous andexclusive use following registration, provided that the registrant files a so-called “Section 15 affidavit” averring that the mark has been in continuoususe during this period and that there have been no judicial decisions adverseto the owner’s claims of rights to it. Prior to the filing of a Section 15 affidavit,a registration constitutes “prima facie” evidence that the registered mark is avalid one, for example, that it is not merely descriptive. Although thispresumption shifts the burden to the defendant in an infringement action toprove that the plaintiff does not own a valid mark, the defendant neverthelessmay rebut the presumption.

Incontestability, however, eliminates the ability of defendants chargedwith infringement to challenge the validity of the mark on a variety of grounds,including prior use, descriptiveness, use as a surname, and use as a geographicname. Thus, one notable U.S. Supreme Court case upheld a registrant’s abilityto foreclose competitors from using marks similar to the Park ’n Fly® markfor airport parking services, notwithstanding the fact that the mark in questionmight have been challenged as descriptive during the first five years after itsregistration. Incontestability, however, does not foreclose challenges on certainother grounds, including fraud, functionality, abandonment, and genericness,or raising certain defenses based on “fair use” (i.e., use in a non-trademark

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sense) or certain equitable principles (including laches, estoppel, andacquiescence).

c. Presumption of Validity of Ownership

A federal trademark registration is prima facie evidence of the validity of theregistered trademark and of the registrant’s exclusive right to use the trademarkin commerce nationwide.

d. Federal Court Jurisdiction

A federal trademark registration provides jurisdiction in federal courts forinfringement or dilution claims regardless of diversity of citizenship or theamount of damages.

e. Importation of Infringing Articles

A federal trademark registration can serve as a basis for having the U.S.Customs Service exclude the unauthorized importation of articles that bearthe registered trademark.

4. Federal Registration on the Supplemental RegisterTrademarks already in use that are deemed to be too descriptive for currentprotection but nonetheless are deemed capable of identifying the trademarkowner’s goods or services at some point in the future may be registered on theSupplemental Register. Although such registration provides little substantivebenefits beyond those available at common law, it has certain benefits includingthe ability to use a registration notice such as an ®. The registration willappear in searchable databases, thus giving notice of a claim of trademarkrights to those clearing new trademarks. The registration can be cited by anexamining attorney in blocking later-filed applications for closely similarmarks for closely related goods or services. Because the benefits accorded aregistration on the Principal Register are much greater than one on theSupplemental Register, registration of a trademark on the SupplementalRegister should generally be pursued only as a last resort after all efforts toregister a mark on the Principal Register have failed.

5. Other Bars to RegistrationMarks consisting of pictures, designs, or symbols may face an additionalhurdle in the registration process as they may be refused registration on theground that the relevant consuming public is likely to perceive them as “merelyornamental” rather than marks. However, where the mark “serves as a sourceidentifier and is only incidentally ornamental,” it may be registrable on thePrincipal Register. Trademark owners may be successful in overcoming


“merely ornamental” objections by providing evidence of advertising designedto get consumers to “look for” the design for which registration is sought.Examples of such advertising include: “Look for the rainbow-striped can” or“We’re the one with the green polka-dot label.”

C. STATE TRADEMARK LAW

Although federal law constitutes the largest body of trademark law, theimportance of state statutes is often underestimated. Most states have enactedstatutes prohibiting unfair competition, including trademark infringement,and, as a supplement to state common law protection, it is possible to registertrademarks in every state, in addition to federal registration. The trademarkstatutes in most states are based on the Model State Trademark Act, whichrecognizes service marks, collective marks, and certification marks, as wellas trademarks. In most states, no additional substantive rights are acquiredby these registrations beyond those common law rights that arise as a resultof the use of the trademark in a particular geographic area. Some states,however, do have constructive notice provisions in their statutes (notably,Texas and Massachusetts).

Although state registrations are of limited value once a federalregistration has issued, they usually may be obtained quickly andinexpensively with minimal examination, and, in many states, may affordcertain additional remedies against infringement and counterfeiting. In somestates, in the absence of a federal registration and depending on othercircumstances, having a state trademark registration may provide the basisfor an exemption from coverage under state business opportunity laws wherethe mark in question is licensed in conjunction with a marketing plan.Furthermore, when litigating, it is often helpful to hold the state registrationfor the mark in the forum where suit is brought, lest the defendant obtainthe registration and confuse the court.

V. Protection of Trademark Rights

A. INFRINGEMENT ACTIONS

“Likelihood of confusion” is the basic test of infringement under the federalLanham Act, as well as under the common law and the Model State TrademarkAct, the Uniform Deceptive Trade Practices Act, and the state fraudulentencroachment statute. Section 32 of the Lanham Act, for example, prohibitsthe use of “any reproduction, counterfeit, copy, or colorable imitation of aregistered mark . . . which . . . is likely to cause confusion, or to causemistake, or to deceive.” Similarly, Section 43(a) of the Lanham Act, whichprotects both registered and unregistered marks, provides for liability for:

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any false designation of origin, false or misleading description offact, or false or misleading representation of fact, which . . . is likelyto cause confusion, or to cause mistake, or to deceive as to theaffiliation, connection, or association of such person with anotherperson, or as to the origin, sponsorship, or approval of his or hergoods, services, or commercial activities by another person. . . .

A finding of likelihood of confusion is typically based on a review of avariety of factors, including: (1) the strength or weakness of the trademark;(2) the similarity of the parties’ trademarks, including a comparison of sound,appearance, and meaning; (3) the similarity of the products or services; (4)the similarity of the purchasers and channels of trade; (5) the similarity ofadvertising media; (6) the degree of care purchasers are likely to exercise; (7)the intent of the subsequent user; and (8) evidence of actual confusion. Althoughnot required, showings of bad faith, intent, or actual confusion are generallythe strongest evidence of likelihood of confusion.

B. DILUTION ACTIONS

Independent of the relief available in an infringement action, the owners ofcertain marks also may be eligible for protection against the use of the sameor similar trademarks that threaten the distinctiveness of the senior user’strademark. Relief against this type of injury is authorized by so-called“dilution” statutes, which are generally available only to the owners of trulyfamous marks. Consequently, if a trademark has not acquired a sufficientlyhigh degree of fame and distinctiveness, its owner for the most part will belimited to causes of action based on the likelihood of the confusion standard.

Where a trademark is sufficiently famous and distinctive to qualify forprotection from dilution, relief may be available under both state and federallaw. The federal dilution statute, which became effective in January 1996under Section 43(c) of the Lanham Act, provides that:

The owner of a famous mark shall be entitled, subject to the principlesof equity and upon such terms as the court deems reasonable, to aninjunction against another person’s commercial use in commerce of amark or trade name, if such use begins after the mark becomes famousand causes dilution of the distinctive quality of the mark. . . .

Over half the states have enacted similar dilution statutes, with othersadopting the doctrine by judicial decree. Most state dilution statutes arecomparable to the relevant provisions of the Georgia dilution statute, whichprovide:


Every person, association, or union of working men adopting andusing a trademark, trade name, label, or form of advertisement mayproceed by action; and all courts having jurisdiction thereof shallgrant injunctions to enjoin subsequent use by another of the same orany similar trademark, trade name, label, or form of advertisementif there exists a likelihood of injury to business reputation or ofdilution of the distinctive quality of the trademark, trade name, labelor form of advertisement of the prior user, notwithstanding theabsence of competition between the parties or of confusion as to thesource of the goods or services. . . .

Dilution statutes reflect the growing trend in the United States towardrecognition of trademarks as a valuable property-type right rather than merelyas a means to aid consumers in identifying goods or services they wish topurchase and to avoid confusion and deception. Historically, these statuteshave provided broader protection than infringement or unfair competitioncauses of action based on two independent harms: (1) tarnishment of businessreputation and (2) “whittling away” of the distinctiveness of the mark. Inmore recent years, they also have provided a basis for challenging“cybersquatting,” or the practice of incorporating famous trademarks intoInternet domain names.

Dilution statutes do not require proof of likelihood of confusion on thepart of the purchaser for the trademark owner to prevail. In contrast to therange of remedies available against infringement of a trademark, however,and absent unusual circumstances, only injunctive relief prohibiting furtheruse of the defendant’s trademark or domain name is available in dilutioncases.

Although dilution statutes were originally intended to protect truly famousmarks, they have been interpreted in some jurisdictions to extend to marksthat are famous or well known only in a limited geographic area, or in nichemarkets. Thus, for instance, a well-known local or regional service providermay be able to stop unrelated uses that “dilute” their names or marks, just asthe Coca-Cola Company could enjoin sellers of perfume or bicycles bearingthe Coca-Cola marks. By the same token, Mead Data Central, the owner ofthe LEXIS mark, was initially successful in preventing Toyota from marketingautomobiles under the Lexus mark on a showing that the LEXIS mark wasfamous among a particular segment of the population. Although Toyotaultimately prevailed on appeal, the problems this litigation created for itsmarketing efforts were enormous, even though Mead Data Central spelled itsmark differently and used it in an entirely different field.

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There are other issues that make application of dilution statutesproblematic. Although most state statutes allow for relief on a showing by theplaintiff that the defendant’s use is merely “likely” to dilute the distinctivenessof the plaintiff’s mark, the federal statute does not contain similar language.This omission has led the Supreme Court to conclude that liability under thefederal dilution statute results only when actual dilution is shown. (A correctiveamendment is under legislative consideration.) The eligibility of marks forprotection under particular dilution statutes therefore is an issue that requirescareful consideration by specialized counsel.

C. ANTICYBERSQUATTING ACTIONS

1. The Anticybersquatting Consumer Protection ActThe term “cybersquatting” means the bad-faith registration, sale, or use of adomain name typically for the purpose of profiting from the goodwill of aanother party’s trademark. An example of cybersquatting would be if someoneregistered the domain name “doritos.com” and then attempted to sell it toFrito-Lay. When cybersquatting first emerged in the mid-1990s, trademarkowners quickly discovered traditional infringement and dilution remedieswere inadequate to combat this new practice. After much lobbying bytrademark owners, Congress enacted the Anticybersquatting ConsumerProtection Act of 1999 (ACPA), which, although technically not a piece ofthe federal Lanham Act, is nevertheless codified therein as Section 43(d).

As discussed in more detail in the chapter on domain names, the ACPAprovides an alternative for relief to trademark owners who believe that theirtrademarks have been misappropriated as part of another party’s Internetdomain name. Specifically, the ACPA provides for a cause of action againstanother party who in bad faith registers or uses a domain name that: (1) isidentical or confusingly similar to a distinctive trademark; or (2) is identicalto or confusingly similar to, or dilutes a famous trademark. Whether badfaith exists in a particular case rests on the assessment of a series ofnonexclusive statutory factors that attempt to distinguish between domainname holders with legitimate explanations for having registered their domainnames from those who do not. In addition to the same remedies availableagainst infringement, defendants found liable for a violation of this prong ofthe statute face potential “statutory damages” between $1,000 and $100,000per domain name at issue if they registered their domain names after theNovember 29, 1999, effective date of the ACPA.

2. The Uniform Domain Name Dispute Resolution PolicyBecause actions under the ACPA are often time-consuming and expensiveand many cybersquatters are not located in the United States, a trademark


owner faced with a cybersquatting issue may choose instead to avail itself ofthe online arbitration procedures established by the Internet Corporation forAssigned Names and Numbers (ICANN). As the domain name chapter details,this procedure can be invoked in challenges to all registrants of generic top-level domain names (gTLDs) through the registrant’s individual contractswith the registrars from whom they received the registrations. They also maybe invoked in challenges to certain country-code top-level domain names(ccTLDs). Although these procedures are less expensive than a lawsuit andrelatively quick and easy, they can solely result in the transfer of a domainname to the trademark owner, unlike an ACPA proceeding, which can adjudicatea multiplicity of issues and result in injunctive relief and damages.

ICANN currently authorizes several arbitration providers to hear actionsunder its Uniform Domain Name Dispute Resolution Policy (UDRP). Theapproved providers include the World Intellectual Property Organization, theNational Arbitration Forum, eResolution, and the CPR Institute for DisputeResolution. Each provider is obligated to transfer a challenged domain nameto the complainant if: (1) the domain name is identical or confusingly similarto a trademark in which the complainant has rights; (2) if the registrant cannotarticulate a legitimate interest in the domain name; and (3) the domain namehas been registered and used in bad faith. The determination whether therequired bad faith exists is made by assessing a number of non-exclusivefactors similar but in some respects different than those used in the ACPA.

D. POLICING TRADEMARKS

Trademark owners (with the assistance of counsel) should diligently monitorapplications for federal registration, the marketplace, and the Internet anddomain names, and challenge unauthorized uses of identical or confusinglysimilar trademarks to avoid consumer confusion and serious weakening oftheir trademark rights. Valuable trademarks should be policed promptly,diligently, and vigorously. Failure to do so can result in a diminished scope oflegal protection, potential inability to protect the trademark, or even a technicalabandonment of the trademark. The more the public is exposed to numeroususes of similar trademarks, the less it will recognize or rely on a trademarkowner’s trademark as a symbol of uniform quality. From a practical standpoint,disgruntled licensees may have a breach of contract cause of action against atrademark owner licensor that fails to police its trademark properly, resultingin the reduced value of the trademark and the license or franchise system.

The issue of policing and effective enforcement of trademark rightsbecomes even more complicated in the context of geographic expansion.Geographic expansion raises a number of significant issues, not the least ofwhich is whether the trademark owner’s trademark for its goods or services is

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identical or confusingly similar to the trademarks of a party in other remoteareas where the trademark owner is not currently operating, but may be sodoing in the future. Indeed, at the time new geographic areas are beingpreliminarily assessed for expansion, or even before, a trademark owner maybe surprised to discover one or more similar businesses in remote geographicareas using the same or closely similar trademarks for the same or closelysimilar goods or services. Can the trademark owner challenge that party’s useof a confusingly similar trademark in the remote geographic area? If so,when can or should such a challenge be brought? If the challenge is notbrought immediately, does the trademark owner risk forfeiting the right toever challenge that use as a result of “sleeping on its rights”?

As discussed in section IV. A. above, if no federal registration is involved,trademark rights are territorial in nature and, in essence, subject to a “race” toestablish use and a reputation in a particular area. On the other hand, theterritorial rules change to some extent where the trademark owner owns afederal trademark registration. Under the federal trademark statute, a federalregistrant enjoys “nationwide constructive priority” dating from the filingdates of its trademark application. This means that a trademark owner whoowns a federal trademark registration will, under certain circumstances, havepriority of rights over another party’s subsequent adoption and use of atrademark confusingly similar to the trademark owner’s trademark for relatedgoods or services even where the other party (1) adopted its trademark withoutknowledge of the trademark owner’s operations and (2) used that trademarkin a geographic area in which the trademark owner does not currently dobusiness. However, where the other party’s adoption of its trademark in aremote geographic area is prior to the trademark owner’s nationwideconstructive priority date, the other party’s rights in its trademark will besuperior to those of the trademark owner in the geographic area in which theother party operates. Under those circumstances, the other party will in mostcases be able to enjoin the trademark owner from expanding the use of itstrademark into that area.

Moreover, a trademark owner’s ill-conceived challenge to another party’srights to use its trademark in a remote geographic area can have an even moredevastating result than a failed expansion effort. The other party may besufficiently riled by the trademark owner’s activities to institute a challengeto the trademark owner’s right to maintain its federal trademark registrationfor its trademark. In the event that the other party’s adoption and use of itstrademark predates the trademark owner’s nationwide constructive prioritydate, and if the trademark owner’s federal registration is less than five yearsold, that challenge will likely succeed, a result that could seriously harm thetrademark owner’s business.


In order to successfully challenge another party’s remote use of aconfusingly similar trademark for related goods or services, the trademarkowner must establish that confusion in the marketplace is likely. This ordinarilyrequires the trademark owner to show that either (1) it has a sufficient degreeof notoriety that transcends its current area of actual use so that customers inthe other party’s area are aware of its reputation or (2) it has entered or isabout to enter into the geographic area in which the third-party user isoperating. This principle is called the “Dawn Donut” rule, derived from theCourt’s decision in Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358(2d Cir. 1959). Although trademark owners often attempt to satisfy the “aboutto enter” requirement of Dawn Donut by pointing to nonspecific, generalplans to expand in the future, courts following Dawn Donut uniformly requirethe trademark owner to go further and provide “concrete” evidence that it hasimminent plans to expand into the other party’s geographic area.

Because a trademark owner cannot successfully challenge a remote userof a confusingly similar trademark for related goods or services until it canprove a cross-territorial reputation or it has entered or is imminently about toenter the other party’s geographic area, a trademark owner’s failure to challengethe other party’s use until expansion is imminent will not be viewed as “sleepingon one’s rights,” that is, giving rise to the equitable defense of laches. Thus,the fact that the trademark owner may have knowledge of another party’sremote operations under a confusingly similar trademark for many yearsprior to the trademark owner’s expansion will not preclude a trademark ownerhaving nationwide constructive priority from later expanding into that otherparty’s geographic area and then enjoining its use.

The message to be taken from Dawn Donut is that timing is an importantconsideration in the successful pursuit of trademark disputes in remotegeographic areas. Delaying the institution of a legal action until the trademarkowner’s plans to expand into that area are imminent can actually result in agreatly increased likelihood of success for the trademark owner.

E. REMEDIES

There are a number of remedies that may be available to the trademark owneronce it establishes infringement of its trademark.

1. InjunctionsThe most common relief for trademark infringement is an injunctionpreventing the infringer from continuing its unauthorized use of theconfusingly similar trademark in any manner in connection with its business.Under certain circumstances, the court may also issue injunctions orderingthe infringer to publish corrective advertising or withdraw from the market.

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The court may also grant preliminary injunctions and temporary restrainingorders to protect the trademark owner at the outset of and during thelitigation.

2. Monetary RecoveryMonetary awards may be sought under the Lanham Act for infringement offederally registered trademarks based on Section 32 and for unregisteredtrademarks based on Section 43(a). The recoveries to which a successfulinfringement plaintiff is entitled are specified in Section 35 of the LanhamAct as follows:

When a violation of any right of the registrant of a mark registeredin the Patent and Trademark Office, or a violation under Section[43(a)], shall have been established in any civil action arising underthis [Act], the plaintiff shall be entitled, subject to . . . the principlesof equity, to recover (1) defendant’s profits, (2) any damagessustained by the plaintiff, and (3) the costs of the action.

a. Actual Damages

A trademark owner wishing to recover damages for infringement of itstrademark generally must prove the defendant’s Lanham Act violation, thatthe violation caused actual confusion or deception among consumers of thetrademark owner’s goods or services, and, as a result, the trademark ownersuffered actual injury. In assessing actual damages, courts have allowedrecovery for “all elements of injury to the business of the trademark ownerproximately resulting from the infringer’s wrongful acts,” whether or not theconsequences of the wrongful acts were anticipated. The most straightforwardbasis for a monetary award is a recovery for the actual losses sustained by thetrademark owner due to the infringing activity. Where such losses haveoccurred, it could hardly be argued that injunctive relief constitutes an adequateremedy. Consequently, courts have routinely awarded actual damages even inthe absence of bad faith. In such cases, however, the trademark owner has theburden of proving both the cause and extent of actual damages.

b. Defendant’s Profits

In most circuits, courts require a finding of willfulness by the defendantprior to awarding the trademark owner the defendant’s profits. Assumingthat the trademark owner is successful in doing so, the trademark ownermerely has the burden to prove the defendant’s gross sales. Once the trademarkowner has successfully done so, the burden falls exclusively to the defendantto prove deductions that should be subtracted from gross revenues to arrive at


defendant’s profit from the infringement. Initially, the defendant must establishthat it has borne a specific cost or expense. The defendant must then showthat a specific cost sought to be deducted was related to, or necessitated by,the sales of the infringing goods or services. If the defendant fails to presentany evidence of deductible costs, some courts have responded by awardingthe defendant’s entire gross revenues as profits to the trademark owner.

c. Cumulative Nature of Remedies

In some cases, courts have permitted the recovery by the trademark owner ofactual damages and an accounting of the defendant’s profits so long as therecoveries are not duplicative.

d. Equitable Adjustments

Section 35 of the Lanham Act allows the court great discretion to add to ortake away from a monetary award based on the court’s view of thecircumstances by (1) trebling the trademark owner’s actual damages and (2)increasing or decreasing any award of profits if the award is “either inadequateor excessive.” Equitable adjustments to monetary awards can take any numberof forms. For example, in cases of willful infringement, doubling or eventrebling of awards of damages and accountings or profits is not unusual.Moreover, in the case of willful infringement, a defendant may also be barredfrom deducting certain costs from its gross revenues in an accounting ofprofits. On the other hand, a delay by the trademark owner in asserting itstrademark against an alleged infringer or evidence of the trademark owner’sunclean hands may result in a court’s refusal to award any monetary relief.

e. Attorneys’ Fees

Section 35 of the Lanham Act was amended in 1974 to provide that: “TheCourt in exceptional cases may award reasonable attorneys’ fees to theprevailing party.” The Senate Committee on the Judiciary suggested that acase was “exceptional” where acts of infringement could be characterized as“malicious, fraudulent, deliberate and willful.” Courts have often recited thislanguage as the standard for identifying an “exceptional” case. Most statetrademark statutes do not provide for the recovery of attorneys’ fees. However,a number of state deceptive trade practices statutes do provide for the recoveryof attorneys’ fees in certain situations.

f. Punitive Damages

Other than as described above under “Equitable Adjustments,” punitive damagesare not available under the Lanham Act. They may, however, be available to asuccessful plaintiff under related state or common law claims.

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g. Prejudgment Interest

Although Section 35 of the Lanham Act does not provide for prejudgmentinterest, such an award is within the discretion of the court and is normallyreserved for exceptional cases.

h. Costs

The prevailing plaintiff is, as a rule, entitled to recover the costs of the action.

3. Other Infringement RemediesOther remedies a court could order include:

• Confiscation and destruction of infringing articles or instruments formaking them.

• The court may impose the use by the defendant of a notice disclaimingthe affiliation with the trademark owner. In the case of a terminatedlicensee/franchisee, the licensee/franchisee may be required to transferits telephone number to the licensor/franchisor.

• De-identification of the location where a business was previouslyconducted using the format and trade dress of a franchisor in order tosufficiently differentiate it from the franchisor/licensor’s franchisesystem.

• In any action involving a registered trademark, a federal court mayorder the cancellation or a modification of the registration. However,cancellation cannot be the sole basis for a plaintiff’s suit. Otherwise, acancellation proceeding must be initiated in the PTO rather than incourt.

• Criminal penalties may be imposed. Trafficking in counterfeit goodsis punishable by up to five years imprisonment and $250,000 in fines.

4. Dilution RemediesGenerally, in cases involving dilution of a trademark owner’s trademark asopposed to infringement, the successful plaintiff will generally only be entitledto injunctive relief unless the person against whom the injunction is soughtwillfully intended to trade on the trademark owner’s reputation or to causedilution of the famous mark. If such willful intent is proven, the trademarkowner may also be entitled to damages and/or an accounting of profits subjectto the discretion of the court and the principles of equity.


VI. Proper Marking and Use

A. PROPER MARKING

Only federally registered trademarks may bear the ® symbol to put others onactual notice of the registration. Once a registration is issued, it is important forthe trademark owner to use the ® symbol prominently in its advertising anduse of the trademark. If a trademark owner fails to use the ® symbol once theregistration issues, it will be precluded from recovering profits and damages inan infringement action under the Lanham Act, unless it can prove that thealleged infringer had actual knowledge of the registration.

Prior to registration, however, the trademark owner should not use the ®symbol in advertising its goods or services as such improper use may impair thetrademark owner from being able to obtain a federal registration for its markand may be actionable as false advertising. In that regard, the PTO may rejectspecimens of use in connection with a registration application that containpremature use of the ® symbol. Instead, the trademark owner may use a TM orSM symbol with a trademark. The use of such symbols gives notice to the worldof the trademark owner’s claim of rights in and to the trademark. Although thisusage has no legal significance, it may serve as a basis for proving willfulinfringement by a defendant in some circumstances and may serve as a deterrentto others considering adoption of the same or a confusingly similar trademark.

B. PROPER USE

Although trademark owners often devote enormous resources to protecting andenforcing their trademarks, in many cases it is the actions of the trademarkowners and their licensees themselves that put the protectability of the trademarkowner’s trademarks at risk through improper usage. As indicated above, a numberof previously famous marks have fallen into common usage as the name of theproduct or service itself and therefore have become generic terms. By followingsome simple “best practices,” trademark owners can better ensure theprotectability of their valuable trademarks.

1. Trademarks Should Be Used as AdjectivesProper use of trademarks in a branding sense mandates that they be used asadjectives rather than as nouns or verbs. Use of the trademark as an adjectiveemphasizes the brand rather than the product itself. For example, compareand contrast the following:

Improper Use• All documents in your business should be Xeroxed.• Band Aids should be used on cuts.

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• You should buy Jello because it really tastes good.

Proper Use• Xerox copying machines have superior features to the competition.• Band-Aid adhesive strips protect against infection.• Jell-O gelatin is a light and healthy dessert.

2. Trademarks Should Be Used UniformlyTrademarks should be used consistently in all advertising and promotionconducted by the trademark owner and its licensees. Trademarks should notbe used with different spellings or modified with prefixes, suffixes, or otherchanges (such as use in possessive form or in varied capitalization orabbreviated). For example, compare and contrast the following:

Improper Use• Cast-Away trash bags.• CastAway trash bags.• Cast Away trash bags.• Castaways are strong.• Cast awaye trash bags.

Proper Use• Castaway trash bags or CASTAWAY trash bag.

Uniform use is of equal importance when the mark at issue is a logo or acombination mark consisting of words and a logo.

3. Trademarks Should Not Appear in Advertising as “Running Text”Trademark owners should always make an effort to set off use of theirtrademarks in advertising and promotional materials so that they appeardifferent from other text. This can be accomplished in a number of ways,including use of the TM or SM symbols, or use of an initial capital letter, allcapital letters, or italics for the mark.

Improper Use• During the flu season, you should always have a Kleenex in your

pocket.

Proper Use• Consumers prefer KLEENEX® tissues because they are so soft.


4. Trademark Owners Should Monitor Use by Authorized Third PartiesTrademark owners to varying extents use other parties to assist in promotingand marketing the goods and services of trademark owners under a particulartrademark. For example, in the medical field, many manufacturers of medicaldevices retain well-known physicians to help promote and market such devicesto a targeted group of potential customers. Although the spokesperson oftenenthusiastically takes on the role of promoting the trademark owner’strademark, these efforts can be counterproductive and could subject thetrademark at issue to challenges by third parties, where the spokespersonmakes repeated improper use of the trademark owner’s trademark in interviewsand in published works such as research or testimonials reporting the successfuluse of the trademark owner’s goods and services.

In an effort to educate authorized users and the consuming public aboutproper use of trademarks and to help maintain and emphasize the trademarksignificance of such trademarks, certain owners of well-known brands haveconducted extensive educational campaigns. For example, the followingadvertisement by the Poulan/Weed Eater division of White ConsolidatedIndustries, Inc., explains:

Don’t confuse a weedeater with WEED EATER®. Sometimes peoplesay they want a “weedeater” when they really want a WEED EATER®

brand trimmer. And, while a weed eater might be anything from avoracious goat to a little green creature from a gardener’s nightmare,there is only one WEED EATER® brand trimmer. It’s America’snumber one brand of trimmer—the one people ask for, time aftertime. The one-and-only genuine WEED EATER® brand trimmer.Anything else could be a nightmare.

Similarly, a Xerox company advertisement states:

You can’t Xerox a Xerox on a Xerox. But we don’t mind at all if youcopy a copy on a XEROX copier. In fact, we prefer it. Because theXEROX trademark should only identify products made by us. LikeXEROX copiers and XEROX printing systems. As a trademark, theterm XEROX should always be used as an adjective, followed by anoun. And it’s never used as a verb. Of course, helping us protect ourtrademark also helps you. Because you’ll continue to get what you’reactually asking for. And not an inferior copy.

To ensure uniform and proper use by the trademark owner’s employeesand licensees, the trademark owner should consider developing writtentrademark usage guidelines. Ideally, these guidelines should be written foruse by non-lawyers. They should include an explanation of basic trademark

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concepts and practical examples of proper and improper use of the trademarkowner’s marks.

C. ABANDONMENT

A serious issue that must always be considered by a trademark owner iswhether any rights it may have in a trademark may be held to have been“abandoned” as a result of its (or perhaps a predecessor’s) cessation of use ofthe trademark for a period of time, or other action or inaction by the trademarkowner and/or its licensors or franchisees. When an abandonment of rights ina trademark occurs, the trademark enters the public domain and is free to beused by anyone including competitors. As a general rule, rights in a trademarkwill be held to be abandoned where a trademark owner has discontinued itsuse without any intent to resume such use. In most cases, the intent of atrademark owner to resume or not to resume use of a trademark is not explicit.Accordingly, a trademark owner’s intent is often inferred by courts based onan objective evaluation of the circumstances surrounding the cessation of use.

A significant period of cessation of use in and of itself may support afinding of abandonment. In that regard, non-use of a trademark for threeconsecutive years is considered to be prima facie evidence of abandonmentunder the Lanham Act. A temporary suspension of use of a trademark, whichis caused by factors outside of the control of the trademark owner, willgenerally not result in a holding of abandonment. Likewise, non-use of atrademark due to lack of demand for the trademark owner’s goods or serviceswill not in and of itself constitute an abandonment if the trademark ownercontinues its efforts to promote and use the trademark. On the other hand, aninference of abandonment may be appropriate where the trademark ownerhas withdrawn from the business in which the goods and/or services at issuewere offered or fails to object to subsequent use of the trademark by others.

The actions of the trademark owner and/or its franchisees or licenseeswith respect to improper use can result in abandonment of a trademark whenthe trademark becomes the generic name for the goods or services with whichit is used. Abandonment can also occur when the trademark owner engages inuncontrolled or “naked” licensing of its trademark. Naked licensing occurswhen a trademark owner attempts to license its trademark for use by anotherparty without exercising reasonable control over the use of the trademark.Trademarks have also been held to be susceptible to an abandonment challengewhen they are assigned “in gross,” that is, separate from the goodwill, whichis symbolized by the trademark. Because abandonment constitutes a forfeitureof a significant property interest, a party asserting that a trademark owner hasabandoned a trademark is generally required to prove abandonment by clearand convincing evidence.


VII. Trademarks and the Franchise Relationship

A trademark license is usually the core of a franchise relationship. The licenseto use one or more trademarks allows a franchisee to become part of a businesssystem and subjects it to the franchisor’s uniform format and quality standards.The necessity and role of the trademark license depends on the nature of therelationship between a trademark owner and the parties who offer the trademarkowner’s goods and services.

A. WHETHER OR NOT A TRADEMARKLICENSE IS NECESSARY

A trademark license is necessary if another party manufactures and sells aproduct or offers a service bearing the trademark to someone other than thetrademark owner or those operating under license from the trademark owner.In franchise relationships, the franchisor is usually the trademark owner butsometimes may be a licensee or sublicensee of the trademark owner.

A trademark license is not necessary if one party merely distributes,sells, or advertises the goods of the trademark owner without conductingbusiness under the trademark owner’s trademark or name. For example, agrocery store does not need to obtain a trademark license from each of themanufacturers of the branded goods that it sells.

A license is also unnecessary if one party manufactures products for thetrademark owner (or its licensees) on a private-label basis—for exam ple,where the trademark owner itself (or a licensee) then uses, sells, or distributesthe product. It is not necessary to grant a trademark license to parties whomanufacture, at the trademark owner’s behest, signage, paper goods, ormemorabilia bearing the trademark owner’s trademarks for use in a franchisesystem.

B. THE ROLE OF TRADEMARKS IN DIFFERENTTYPES OF FRANCHISE SYSTEMS

A product distribution franchise relationship is used for the marketing ofproducts that are made by or for the account of the franchisor. Its purpose isto provide the franchisor with a distribution system to market its products. Itis similar to an ordinary supplier-dealer relationship, but the franchisee has agreater identification with the franchisor’s trademark and might be precludedfrom selling competitors’ products. Examples include gas stations andautomobile dealerships.

Under a business format franchise relationship, the franchisor providesone party a license to use one or more trademarks and also provides a businessformat for the retail sale of goods or services under the trademark. The

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franchisor typically does not manufacture any products; instead, it suppliestraining, expertise, equipment, ingredients, raw materials, packaging materials,advertising, and so forth. The franchisee typically performs services, butmay sell products in conjunction with those services. The franchisee usuallydeals exclusively in the franchisor’s branded goods or services and is requiredto use the franchisor’s trademark and overall presentation format as its exclusivetrade identity. Examples include restaurants, hotels and motels, auto repair,car rental, and temporary employment services.

Under an affiliation franchise relationship, the franchisor recruits into itssystem as licensees persons who are already established in the particular lineof business. Each of the businesses is required to adopt and use the franchisor’strademark, but they may be permitted to continue using their own trademarksas secondary trademarks. These businesses rarely use the same overallpresentation or identity format except for the trademark itself. Examples areinsurance, financial, and real estate brokerage services.

VIII. Trademark Licensing

A license agreement is a business arrangement pursuant to which a partyother than the trademark owner is permitted to use the trademark owner’strademarks under certain specified conditions. Without the granting of such alicense, the use of the trademark owner’s trademark would constitute aninfringement. A license is distinguishable from an assignment because, in alicense arrangement, the rights in the underlying trademark continue to residewith the trademark owner, while in an assignment, title in the trademark istransferred from one party to another.

Although there is no legal requirement that a trademark license be inwriting, it is clearly a sound business practice to spell out the specific termsof a trademark license as part of a comprehensive written document thataddresses the entire relationship between the licensor and licensee. In addition,there are no “standard” and very few required license provisions that apply toall situations. Rather, licensing agreement provisions should be carefully tailoredto the type of business involved and the particular circumstances of therelationship. The following are typical trademark-specific provisions containedin license agreements.

A. PREAMBLE

In addition to describing the parties and the subject matter of the agreement,the preamble offers the opportunity to emphasize the uniqueness, value,distinctiveness, and importance of the trademarks to the entire licenserelationship and agreement, thus justifying terms such as the payment of


royalties, adherence to strict quality-control standards, as well as stringenttermination and de-identification provisions.

B. GRANTING CLAUSE

The granting clause is an essential provision of a license agreement. In thisclause, the trademark owner spells out the extent of rights granted to thelicensee to use the trademark owner’s trademarks. This clause typicallyidentifies the trademarks being licensed, the particular goods or services withwhich the trademarks can be used, and the particular geographic area in whichuse of the trademarks is authorized. Care should be taken to clearly defineeach of these elements to avoid confusion. Clarity of scope is even moreimportant when multiple licenses are granted by the licensor such as in afranchise system or in a merchandise licensing context.

Another key decision in licensing a trademark is whether the license willbe exclusive or non-exclusive. A license may be exclusive in the sense thatthe trademark owner cannot itself use or grant others the right to use thelicensed trademarks or it may be exclusive except for the trademark owner’sown use. A license may further be exclusive as to a category of goods orservices (e.g., a specified premium brand of ice cream), sales channels (e.g.,grocery stores or the Internet), or territory (e.g., the southeastern UnitedStates or a five-block radius in New York City).

If the agreement is silent with regard to exclusivity, it will usually beconstrued as non-exclusive. However, the intent of the parties will becontrolling. In any event, licensors should reserve any rights in the trademarknot specifically granted to the licensee so that there is no question about thelicensor’s right to license others to use the licensed trademarks.

C. QUALITY CONTROL

An indispensable element of a trademark license is quality control. TheLanham Act allows the use of a trademark by someone other than the owneronly when the owner exercises sufficient control over the nature and qualityof the goods or services sold under the trademark by the other party. Underthe Lanham Act, the use of a registered trademark by another inures to thebenefit of the registrant if the parties are “related companies.” A relatedcompany is one that is controlled by the owner with respect to the quality ofthe goods or services. It can be an entity controlled through equity ownershipor by an arm’s-length agreement between two parties.

The significance of quality control is twofold: (1) from a practicalperspective, it is clear that the success of the business usually depends on aconsistent and uniform level of quality throughout the license system, and (2)legally, the licensor may lose its rights in the trademark if it fails to control

40 CHAPTER 1

adequately the nature and quality of the goods or services sold by its licensees.Quality control is mandatory so that the trademark owner and its licenseescan qualify as “related companies” in order to:

• Establish trademark rights.• Enforce trademark rights against others.• Avoid a legal determination of abandonment of the trademark.

There is no standard or required approach for drafting an enforceablequality-control provision. In drafting such a provision, the licensor shouldtake into account a number of factors including the customs and practice in aparticular industry and the experience of the licensee in connection with thelicensed goods or services. Pro-licensor license agreements often containdetailed specifications for licensed goods or services including inspection andpreapproval of samples, packaging, and advertising materials prior to theirdistribution in commerce. Compliance with stringent quality-control provisionscan be inconvenient and costly for licensees and should be negotiated wherepossible to ensure they are reasonable. Where the licensee has an establishedrecord in connection with the goods or services that are subject to the license,it may be appropriate to base a quality-control provision on a requirementthat the licensee maintain equal or better standards in connection with thelicensed goods or services. In addition to providing that licensees complywith certain specific quality standards, license agreements should also includemore general language obligating the licensee not to use the licensed trademarkin a manner that would bring the trademark or the licensor into disrepute.

D. ACTUAL EXERCISE OF CONTROL

It is not sufficient merely to recite a right to control in a license agreement toqualify for “related company” status under the Lanham Act. The trademarkowner should actually exercise the quality control specified in the licenseagreement, or else the license might be held invalid as having been “naked,”resulting in an abandonment of protectable rights in the trademark at issue.Because the Lanham Act does not define quality control, it is a factual questionas to whether the means of control or the degree of control is sufficientlyexercised under the particular circumstances.

E. PRACTICE POINTER—LICENSOR LIABILITY ANDEXERCISE OF CONTROL

Trademark licensing can result in tremendous financial rewards for the licensor.Unfortunately, it can also result in significant financial exposure if the licensor


is successfully sued by third parties as a result of the transgressions of itslicensees. Licensors often face a difficult choice in their attempt to controlthe activities of the licensees while at the same time avoiding liability for thelicensee’s acts and omissions. Care should be taken by licensors to stress thedistinction between the licensor and licensor’s businesses (in terms ofmanagement, personnel, or finances) and to avoid controlling the overallday-to-day activities of the licensee (e.g., the licensee should operate as anindependent contractor and not as an agent of the licensor).

F. REPRESENTATIONS AND WARRANTIES

Licensors typically make few representations and warranties in licenseagreements beyond providing assurances of their ownership and/or right tolicense the trademarks being licensed and that the licensee’s use of the licensedtrademarks strictly in conformance with the terms of the license agreementwill not infringe or otherwise violate the rights of any third party. On theother hand, licensees are typically required to make a number of representationsand warranties including the following: (1) the licensee has the right andauthority to enter into the license agreement; (2) the licensee will provide thelicensed goods and/or services in accordance with all applicable laws,regulations, and ordinances; and (3) the licensee will use its best efforts topromote and sell the licensed goods or services in the licensed territory.

G. POLICING LICENSEES

Courts have generally placed an affirmative duty upon trademark ownerswho license their trademarks to take reasonable measures to detect and preventmisleading uses of their trademarks by licensees such as use of the trademarkson goods or services of inferior quality or on unauthorized goods or services.Moreover, as indicated above, improper use of a licensed trademark bylicensees (e.g., as a descriptive or generic term) may result in the trademarklosing its trademark significance and becoming a generic term.

H. TRADEMARK RELATIONSHIP AND OWNERSHIP

The following provisions are generally included in license agreements becauseof their importance to the licensor:

• The licensee’s acknowledgment that the trademark is valid, that thetrademark owner is the owner of the trademark and of the goodwillassociated therewith, and that the licensee will not contest the validityof the trademark or any relevant registrations therefore during theterm of the agreement or thereafter.

• The licensee’s acknowledgment that all use of the trademark by the

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licensee inures to the benefit of the trademark owner.• The licensee’s acknowledgment that it acquires no right, title, or

interest in the trademark or any associated goodwill, save for thelimited license under the agreement.

I. DISPLAY OF THE TRADEMARK

The license agreement should provide that the licensee shall only display thetrademark in such manner and form as are prescribed by the trademark owner’sguidelines and standards or as otherwise instructed by the trademark owner.The trademark owner should reserve the right to approve all advertising andother materials that display the trademark before they are used in commerce.

J. TRADEMARK ENFORCEMENT

Although not “guaranteeing” the trademark, trademark owners should alwaysreserve the right to protect and defend it, with all decisions involving suchmatters being in the trademark owner’s sole discretion and specificallyprohibiting licensees from litigating without permission. Absent such a bar, acourt could find a licensee qualified to bring suit, thus potentially placing thevalidity of the trademark in the hands of the licensee without any input orcontrol by the trademark owner. Although protection and defense costs usuallyare borne by the trademark owner, the licensee should agree to cooperatefully in any litigation and to report promptly any infringements it discovers.

K. EXPIRATION AND TERMINATION

Virtually all license agreements have a defined term with specified beginningand ending dates and some provide for renewal of the license agreement bythe licensee and/or licensor on certain specified conditions. The term of alicense agreement will vary depending on consideration of a number of factors.In addition to providing for expiration upon reaching the end of a specifieddefined term, license agreements also typically provide for early terminationupon the occurrence of specified events, including notice being provided bya party that the other (usually the licensee) committed a material breach ofone or more of its obligations under the license agreement. Licensees typicallyattempt to negotiate notice or cure provisions to allow them to rectify at leastcertain types of breaches that may have resulted from inadvertence in orderto avoid early termination.

The right of a licensee to use the licensed trademark implicitly ceasesupon expiration or termination of the license agreement, even without anexpress provision. However, it is recommended to include a provisionmandating immediate discontinuance of all uses of the trademark, including


steps to be taken such as notification to phone companies, cancellation ofassumed name registrations, and de-identification of principal physicalattributes, if appropriate. For instance, where the license includes a grant ofrights to use the trademark owner’s trade dress, the licensee may be requiredto change distinctive building design elements or colors and to remove signs.Use of the trademark after expiration or termination is usually considered tobe trademark infringement and can be the best cause of action to pursue in a“holdover” or “breakaway” situation. For example, failure to de-identify thepremises where services are conducted can be the basis for effective action bya trademark’s owner, but it usually entails a not insignificant burden of proof.Thus, it is essential that the license agreement contain detailed de-identificationprovisions so that the trademark owner can pursue both infringement andbreach of contract actions upon breach of such provisions.

When the license agreement at issue is for goods as opposed to services,licensees will often attempt to negotiate a right to sell off inventory for aspecified period (typically 30 to 90 days). When allowed by a licensor, suchsales are ordinarily subject to payment of royalties specified in the licenseagreement. Upon conclusion of the sell-off period, licensors occasionallynegotiate with licensees to purchase all remaining inventory at a significantdiscount or require the licensees to verify that all remaining inventory hasbeen destroyed.

In drafting license agreement provisions involving term and termination,licensors should carefully consider whether and to what extent they intend totreat expiration and termination differently. Occasionally, imprecise draftingof expiration and termination provisions has resulted in a licensor being foundto have compromised important rights in enforcing its trademarks againstformer licensees.

L. INDEMNIFICATION AND INSURANCE

License agreements ordinarily contain provisions designed to allocate certainrisks between the parties. For example, in view of possible tort liabilityexposure, licensees are routinely required to indemnify the trademark ownerfor all claims arising out of the licensee’s use of the trademark and of thelicensee’s operations. The licensee should seek to limit any suchindemnification obligation to exclude liabilities that result from the acts oromissions of the trademark owner (e.g., defectively designed equipmentspecified by the trademark owner as “required” that subsequently injures anemployee or customer, or contaminated food procured from an “approvedvendor” that causes illness to a customer).

In order to ensure that a license agreement’s indemnification obligationshave “teeth,” licensees are routinely required to carry sufficient insurance to

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protect both parties against claims during the term of the license agreementand for a sufficient period thereafter. The licensee should be required toname the licensor as an additional named insured and to provide the licensorwith a certificate of insurance upon execution of the license agreement.

M. MISCELLANEOUS TRADEMARK PROVISIONS

There are several miscellaneous trademark provisions worthy of considerationin a license agreement:

a. A licensee should be expressly prohibited from assigning the licensedrights or the agreement without the trademark owner’s permission.

b. The licensee should not be allowed to use the trademark, or thetrademark owner’s name, as part of its corporate name or domainname.

c. The trademark owner should reserve the right to change or modifythe trademark at its discretion at any time upon reasonable notice,with reasonable time for the franchisee to dispose of inventory andaccomplish the transition. The agreement should also specify whowill bear the costs and expenses of such a change or modification.

d. The agreement should state whether the licensee has the right tosublicense the granted rights. If the agreement is silent, generally nosuch right will be presumed, but it is best specifically to recite eitherthe prohibition or the permission under certain detailed conditions.

e. The agreement should contain a choice of law provision as theenforcement of license agreements and/or individual provisions varyfrom jurisdiction to jurisdiction. Absent a choice of law provision,courts will typically apply the law of the state where a lawsuit isbrought.

f. Many license agreements also include forum selection provisions inwhich one (typically the licensee) or both parties agree to personaljurisdiction and litigation in courts in a particular forum. Courtsusually will enforce forum selection provisions except where theyare deemed to violate public policy.

g. The agreement should contain a provision confirming that the licenseagreement does not create any sort of agency or other fiduciaryrelationship between the parties.


N. PRACTICE POINTER—DRAFTING EFFECTIVELICENSE PROVISIONS

There is no one-size-fits-all approach to drafting license agreements. Eachprovision of the license agreement must be carefully drafted and consideredfrom all viewpoints to ensure that it mirrors business realities. This is true foralmost all provisions in the agreement. Oftentimes agreement provisions aregiven little thought, are treated as “boilerplate,” and are simply copied fromother license or franchise agreements. Licensor’s counsel would do well tospend sufficient time and give careful consideration to drafting provisionsthat properly reflect the particular license relationship.

IX. Conclusion

Trademarks are becoming increasingly important to trademark owners andclearly impact every aspect of their businesses. As this chapter hasdemonstrated, however, developing a clear strategy for selection, clearance,adoption, use, federal registration, and maintenance should be undertakenwith the utmost care. Moreover, trademark owners are well advised to seekthe services of skilled counsel to help avoid the pitfalls of this process andultimately to help protect their investment in their hard-earned goodwill.

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