This blog on Selling and Assigning Trademarks is the eleventh installment in Finkel Law Group’s trademark law series. In Blog 10, we examined how your company can license its trademarks to generate revenue while retaining ownership and control of your brand. In this blog, we focus on a different monetization strategy – selling trademarks outright through legal assignments. Whether part of a rebranding, asset sale, or divestiture of unused marks, assigning a trademark can unlock immediate value. But the process must be handled with care. Failure to properly transfer goodwill, comply with federal law, or properly document the transaction may invalidate the sale and jeopardize the trademark. This blog provides a detailed look at the legal and procedural steps required to sell and assign your company’s trademarks effectively.
Legal Requirement to Transfer Goodwill
Trademarks cannot be sold “in gross,” meaning disconnected from the business goodwill they represent in your company. The Lanham Act explicitly provides that a mark is assignable only “with the good will of the business in which the mark is used, or with that part of the good will of the business connected with the mark.” An assignment that attempts to transfer a trademark without its goodwill is void under the law. This rule exists to prevent deception of consumers by dishonest merchants. The idea is that a trademark’s significance comes from the reputation — goodwill — of the particular source of the goods or services, namely your company. Overtime the quality of the goods or services produced by your company is intimately connected to your company; or more accurately the people who work at your company who produce those goods or services. If you could sell your company’s trademarks alone to another company with a completely different group of people producing the products or services of a completely different quality, consumers could be misled.
In practical terms, “assigning the goodwill” means the seller of the trademark must also transfer the portion of the business that the trademark has come to symbolize – for example, customer lists, recipes, manufacturing techniques, or other assets tied to the goods or services provided under the mark. In many cases, the goodwill naturally follows because the seller stops producing the branded product and the buyer starts producing it in the same or similar fashion as the seller, ensuring continuity of the brand’s quality and meeting consumer expectations.
Most trademark assignment agreements include a clause explicitly stating that goodwill is included. However, simply reciting in the contract that “goodwill” is included in the transfer and sale of the marks is not enough if in reality the buyer of the mark doesn’t continue producing the goods or services of the same quality that consumers have come to expect from the goods or services sold under those marks. If the buyer fails to uphold the brand’s quality the marks will become worthless either immediately or almost certainly over time.
When evaluating this issue, courts apply a “substantial continuity” test. The test states if the buyer uses the mark on products or services that are substantially similar to the seller’s, then the goodwill is deemed to have transferred with the mark. If, however, the buyer uses the mark on wildly different or inferior goods or services, the assignment could be deemed an illegal assignment-in-gross, and the mark is destroyed and loses all its legal value.
For example, in PepsiCo v. Grapette (1969) 416 F.2d 285, the U.S. Court of Appeal for the Eighth Circuit refused to recognize an assignment of the trademark “PEPPY” because the buyer of the mark did not acquire any of assets from company that sold and assigned the mark, nor did it acquire any formula or processes used in making the selling company’s cola flavored syrup on which the mark was used. Instead, the buyer used the mark on a “pepper” type beverage, which was completely different from the seller’s cola products. The court found no real goodwill was transferred with the mark and the assignment was void.
The consequences for violating this rule is steep. The trademark assignment is invalid, meaning the purported buyer doesn’t actually own the mark. The trademark could be canceled, ownership could revert to the seller or the mark could be lost entirely if the seller did not plan to continue its use. When selling a trademark, it is important to document the transfer of the associated business assets, whether tangible or intangible, and ensure the buyer will continue to use the brand in a consistent way ensuring consistent quality of the goods or services sold under the mark.
Assignments of Intent-to-Use Applications
A special wrinkle applies to trademarks that are not yet being used in commerce. Under section 10 of the Lanham Act, an intent-to-use trademark application (filed under 15 U.S.C. §1051(b)) generally cannot be assigned to a third party before the applicant has actually used the mark in interstate commerce and filed the required allegation of use with the U.S. Trademark Office, unless the assignment is to a successor of the entire business or portion of the business to which the mark pertains. This is an anti-trademark trafficking provision designed to prevent people from reserving trademarks merely to sell them to other companies.
In practice, this means if you’ve filed a trademark application based on intent to use a mark, you must either (1) start using the mark and submit proof of use to the Trademark Office before assigning it, or (2) only assign it as part of the sale of your entire business (or that product line) to someone else. Assignments made in violation of this rule are void and can jeopardize the application and registration of the proposed mark. So, you should plan trademark transactions accordingly. Often the solution is to launch the brand (even minimally) before executing the assignment, or fold the trademark assignment into a larger asset purchase and sale agreement for the business itself.
Proper Documentation and Lanham Act § 10 Requirements
Trademark assignments must be in writing and signed by the party transferring the mark to be effective. Although an assignment is essentially a contract between buyer and seller, it should contain certain key elements: (1) identification of the mark(s) being assigned, including registration or application numbers if applicable, (2) a statement that the associated goodwill is included, (3) the effective date of transfer, and (4) signatures of authorized representatives.
Notarization is not strictly required, but an acknowledged (notarized) assignment is prima facie evidence of execution if ever challenged. Once the assignment document is signed, the assignee should take steps to update records and provide notice – notably by recording the assignment with the U.S. Trademark Office.
Recording Your Trademark with the U.S. Trademark Office
While a trademark assignment is valid between the parties upon execution, recording the assignment with the U.S. Trademark Office’s Assignment Recordation Branch is highly recommended and carries legal advantages. Under the Lanham Act, an assignment “shall be void against any subsequent purchaser for valuable consideration without notice, unless” it is recorded in the Trademark Office within 3 months of the assignment or prior to the subsequent purchase.
In plain terms, if you sell your trademark to A, but fail to record it and later (perhaps by mistake or fraud) someone purporting to be the owner sells the same mark to B, who doesn’t know of A’s rights, and B records their assignment first, B could prevail at trial. Timely recordation protects the buyer’s claim and puts the world on notice of the ownership change.
The U.S. Trademark Office’s on-line database makes it relatively easy to record trademark assignments, and doing so also updates the public registration records so that future renewals or office actions go to the correct owner.
Trademark Assignments and TTAB Example
From an enforcement perspective, recording an assignment is critical. If the Trademark Office and public records still show the old owner, it can create standing issues in court or complications in administrative proceedings. In fact, the Trademark Trial and Appeal Board’s (TTAB) procedures expect that if a trademark involved in a TTAB opposition or cancellation proceeding is assigned, the new owner will be joined or substituted into the proceeding. The TBMP (TTAB’s administrative procedures manual) notes that while recording the assignment isn’t a strict prerequisite to substitution, doing so greatly aids in proving chain of title and is strongly advisable.
If your company has bought a trademark that is tied up in a dispute (or might face one), record the transfer promptly and inform the TTAB or court so that the case can continue with the correct party in interest. Failing to record can also lead to missed deadlines or default judgments if notices go to the wrong party.
Additionally, any licensed use of a mark ties into assignments: If your company sells a trademark that is licensed to another person, the licenses should be formally assigned in writing or addressed in some way as part of the deal, often via consent of licensees or termination if needed. The buyer will want to inherit those license agreements or renegotiate them.
Common Pitfalls in Selling Trademarks
While trademark assignments can be lucrative and strategically valuable to your company, they are also rife with potential missteps that can undermine the transaction or even invalidate the trademark. Below are some of the most common pitfalls to watch out for when selling trademarks.
- Incomplete Assignments: Make sure all variations of the mark, related marks, logos, and pending applications are included. If your company’s brand has a portfolio, the assignment should list each asset. A mistaken omission could leave ownership fragmented.
- Assignments of Registered vs. Unregistered Marks: You can assign both registered trademarks and unregistered common law trademarks. For registered marks, use the registered name or number. For unregistered marks, describe them and ideally include the associated business goodwill explicitly. Keep in mind that unregistered marks are only as valuable as their actual market recognition in whatever geographic or product market your company has established.
- Failure to Update Business Names: If the selling-assignor or buying-assignee has a name change or merges into another company during the process, update the documentation. The U.S. Trademark Office has procedures for recording name changes as well so the chain of title is clear.
- Tax and Valuation Issues: Selling a trademark may have tax implications. For instance, an assignment might be treated as sale of intangible property. Ensure you conduct a valuation of the trademarks transferred so you can substantiate and prove your basis in the marks. Trademarks can be difficult to appraise, but factors include (1) revenue associated with the branded products, (2) brand recognition, and (3) any independent valuation methods. A misunderstanding of the mark’s value could lead to selling too cheaply or scaring off buyers with an unrealistically high price. Some companies engage IP valuation experts for significant deals.
- Assignments in Bankruptcy or Corporate Transactions: If trademarks are sold as part of a bankruptcy, confirm that the sale includes them and that court approval is obtained if required. Under the U.S. Bankruptcy Code, trademarks can be sold by the debtor’s estate, but executory contracts like licenses have special rules. Always clarify which party is responsible for post-sale obligations (e.g. if prior licenses existed, who deals with them).
Conclusions
Assigning a trademark can be an excellent way to realize the value of a brand that no longer fits your company’s business strategy. But it’s not as simple as transferring a domain name or selling a product. A trademark assignment must include the associated goodwill, comply with restrictions under the Federal Lanham Act, and be recorded properly with the U.S. Trademark Office to preserve the mark’s legal rights and establish public notice. When done properly, a trademark sale can benefit both buyer and seller by unlocking capital while preserving brand integrity. When done carelessly, it can invalidate the mark altogether. As with all intellectual property transactions, guidance from skilled trademark attorneys is wise.
About Finkel Law Group
Finkel Law Group, P.C., with offices in San Francisco, Oakland and Washington, D.C., has almost 30 years of experience helping clients maximize the value of their intellectual property, including structuring trademark licensing programs, negotiating trademark sales and assignments, and securing IP-backed financing. Our attorneys regularly assist startups, established companies, and investors in navigating the complexities of trademark transactions. When you need intelligent, insightful, conscientious, and cost-effective legal counsel to assist you in monetizing your trademarks or managing your trademark portfolio, please contact us at (415) 252-9600, (510) 344-6601, or info@finkellawgroup.com to speak with one of our trademark attorneys about your matter.