Six Considerations for Trademark Due Diligence

By Kevin A. Thompson and Marsha K. Hoover

When companies acquire or merge with other companies, corporate lawyers often conduct a process called “due diligence” to make sure the deal is “as advertised.” As part of that process, lawyers confirm that the assets being transferred do exist and are properly documented. Trademarks are often among the assets transferred, but there are some important differences with regard to these valuable intellectual property rights which should be considered.

Every case is fact specific, so the due diligence required for any particular deal will vary. However, these six considerations are a good starting point:

1. Who is the owner of the trademark?

Does the seller own the trademark being transferred, or does another entity hold the rights? A check of the United States Patent and Trademark Office (“USPTO”) assignment database can often tell you who the Trademark Office believes to be the owner, but that may or may not be up to date. It may be necessary for a prior transfer to be recorded with the USPTO before a new assignment can be recorded.

2. Does the assignment document include the “good will” represented by the trademark?

US law prohibits the transfer of a trademark without its accompanying goodwill. This is called an “assignment in gross” and can result in the loss of trademark rights. Sometimes a confirmatory assignment may need to be prepared and signed by the parties in order to ensure that this language is part of the deal.

3. If the seller purports to transfer an Intent to Use (“ITU”) application, is it also selling the accompanying business?

ITU applications cannot be sold without an accompanying sale of the entire business or that portion of the business represented by the application. US law prohibits trafficking in marks as a matter of public policy. Failure to transfer the business with the ITU can make the application or any resulting registration void.

4. Are there any deadlines to consider?

It is important to make sure that all applications and registrations to be transferred are indeed considered “live” applications or registrations by the USPTO. Deadlines arise with respect to pending applications as well as registrations, and missing deadlines can prove fatal to either. If any deadlines fall during the period of the transaction, the parties should specifically agree about which party is financially responsible for those deadlines. Note that only the owner of an application or registration or counsel of record may take action, so if the deadline arises before the transaction is complete, the transferor will have to be signatory to any required declarations. Of course, the parties can agree that the costs will be covered by the acquiring party if desired.

5. Are there any intellectual property assets that are being sold, but not represented by an application or registration?

Trademark rights that have not been registered may also exist. Good faith use of a mark in commerce may create common law trademark rights, so in addition to federal or state applications or registrations, these common law rights should be mentioned and documented in the transaction.

6. What representations and warranties is the seller prepared to make (and the buyer is willing to accept) about the trademark rights?

The purchase agreement, whether for stock or assets, should articulate the seller’s representations with respect to the trademarks. If the seller makes no representations, then the buyer should be aware that there may be known issues that could affect the vitality of the marks, such as conflicts with third parties over the rights to the marks, improper use, or flawed applications, for example. If the seller wants to make it clear that there are no warranties, it should so state in the agreement. The seller’s statement should be clear enough that a warranty in the marks is not arguably implied.

Knowing the answers to these six questions will help you be prepared to discuss due diligence issues with your trademark counsel.