• Goodwill for Sale

    by  • August 21, 2008 • trademark

    The area of “residual goodwill” seems to be a hot one lately. I posted recently on River West Brands and Chrysler LLC v. Pimpo, two “residual goodwill” situations, and the TTABlog recently posted on a third one involving the LaSalle trademark for automobiles. “Residual goodwill” describes the significance of a trademark when it is no longer in use but consumers nevertheless still recognize the brand. Conflicts arise where a company unrelated to the original trademark owner adopts the mark specifically intending to take advantage of that residual goodwill, but the original trademark owner objects. Some owners become former owners, some remain current owners.

    There is a discontinuity in trademark law that allows this to happen. Whether a trademark has been abandoned is a two-part question: whether there has been discontinuation of use and whether the trademark owner has an intent not to resume use.

    A mark shall be deemed to be “abandoned” if either of the following occurs:
    (1) When its use has been discontinued with intent not to resume such use. Intent not to resume may be inferred from circumstances. Nonuse for 3 consecutive years shall be prima facie evidence of abandonment.

    Section 45 of the Lanham Act, 15 U.S.C. § 1127.

    The existence (or dissipation) of goodwill isn’t part of the statutory test. This is what River West Brands, Pimpo and others rely on; that they can prove abandonment of a trademark while the mark still has some goodwill left. There is case law that helps them (notably the 5th Circuit in Exxon Corp. v. Humble Exploration Co., 695 F.2d 96 (5th Cir. 1983)) and case law that hurts them (Defiance Button Machine Co. v. C & C Metal Prods. Corp., 759 F.2d 1053 (2d Cir. 1985)). Note that Defiance Button actually doesn’t go as far as residual goodwill proponents would have it; that case said that residual goodwill + intent to resume use + resumed use = no abandonment, which is a far cry from residual goodwill = no abandonment.

    When cases do consider residual goodwill, they rarely have any analytical rigor tying residual goodwill to the statutory definition of abandonment. Some cases just seem to treat it as a separate factor entirely (like in the Pimpo case and Defiance Button); others talk about it in the general context of the trademark owner’s intent. A generous interpretation of the relevance of residual goodwill to intent would be that a trademark owner is more likely to have an intent to resume use if there is still goodwill left, but the cases don’t generally bother connecting those dots. Compare the more typical Seidelmann Yachts, Inc. v. Pace Yacht Corp., Civ. No. JH-87-3490, 1989 WL 214497, at *11 (D. Md. April 26, 1989) (“Moreover, other courts have considered the existence of goodwill as evidence to negate an intent to abandon”) with the theoretical musings offered by the court in Emergency One, Inc. v. American FireEagle, Ltd., 228 F.3d 531, 537 (4th Cir. 2000) (“Because fire trucks have very long lives (often twenty or thirty years), the mark stays visible, and the good will value of the mark persists long after production of trucks with that mark has ceased. Thus, it might be reasonable for a fire truck manufacturer to spend five or six years considering the reintroduction of a brand, even through the same passage of time would be unreasonable for a maker of a more ephemeral product, say potato chips.”)

    Professor McCarthy believes that residual goodwill is relevant, citing protection of the consumer. In his treatise he says that “it is error to give greater weight to the non-user’s subjective intent than to the marketplace perception of customers,” citing as his reason, “consumers know nothing of the state of mind of the former trademark user. But they may well mistakenly think that a new use of the mark by another is a renewed use by the former user.” See McCarthy on Trademarks, § 17:15.

    But if the former trademark user is not using it, and has no intention of resuming use, the trademark owner hasn’t really lost anything. In theory a company may suffer some harm along the lines of “I know that the LaSalle is a General Motors car and this LaSalle is a piece of junk, so therefore all General Motors cars are junk.” First, the value to the new adopter is exactly the favorable association consumers have with the mark, so there is a business disincentive to put a different character of product on the market. Further though, this theory is untested and unproven. Query whether instead it’s more appropriate to use a business tort theory, subject to the rigors of evidentiary proof, to redress an identifiable harm rather than overreach in the protection of trademark rights by relying on a nonstatutory factor to guard against what may be only a theoretical harm.

    As for the consumer, we allow assignment of trademarks all the time without caring a wit whether there is an adverse effect on consumers. At most we would say that a subsequent use too dissimilar to the former use can’t claim priority to it (but not if the dissimilarity is in quality, only if it is in type of goods), but we don’t force the new user to stop. As pointed out by Kevin Parks in “Naked” Is Not a Four-Letter Word: Debunking the Myth of the “Quality Control Requirement” in Trademark Licensing, 82 Trademark Rep. 531 (1992), we also don’t oblige a trademark owner to maintain any particular quality of goods. Is there a reason to protect consumers more in this situation than those?

    Assuming we protect residual goodwill, is there nevertheless a point where we should allow someone else to capture the pent-up value of the goodwill if the trademark owner won’t? Is the end of the three year period, during which time it is more difficult to prove abandonment, an appropriate point in time to allow the balance to shift in favor of a new user? If we are going to consider residual goodwill as affecting the abandonment question, shouldn’t the statute at least recognize it, or at least require trademark owners to explain what effect residual goodwill has on their intent? There may be a good reason the definition of abandonment doesn’t consider residual goodwill and perhaps we shouldn’t be so cavalier about ignoring what the statute actually says.