Property, intangible

a blog about ownership of intellectual property rights and its licensing

Why the Paperwork is Important

Defendant River West Brands LLC is a company that, in its own words, “identifies, acquires, redevelops, and monetizes iconic brand intellectual property that is significantly distressed.” In other words, its business is in zombie brands. I previously blogged on some of the methods the company uses here.  It’s a business model with fairly significant challenges, which aren’t any easier when there is some squirrely licensing practice going on.

Non-party Unilever was the original owner of trademark registrations for the mark SALON SELECTIVES for hair products.  The disputed ownership and licensing history goes like this:

  • Unilever grants River West Brands an exclusive license in exchange for royalties, with a right to purchase the trademarks
Late 2007
  • River West Brands and co-defendant Almar Sales Company form Selective Beauty Brands, LLC
  • River West Brands sublicenses the marks to Selective Beauty Brands, which sub-sublicenses the marks to Almar in a five-year, irrevocable oral license
February, 2008
  • Selective Beauty Brands pays off the remaining royalty obligation to Unilever and the trademarks are assigned to it
  • Selective Beauty Brands gives non-party Hilco Financial LLC a security interest in the marks
October, 2008
  • Hilco becomes the assignee of the trademarks
Date unknown
  • River West Brands, Almar, and non-parties Beautology Brands and A.P. Deauville agreed orally to create a company Salon Selectives LLC to buy the marks back, each 25% owners of the company
February, 2009
  • Beautology Brands buys the marks and places them into Salon Selectives, but does not distribute the 75% ownership share to the three other companies
March, 2010
  • The three companies sue Beautology Brands in state court
May, 2010
  • Salon Selectives demands that Almar cease and desist from distributing hair combs and brushes under the SALON SELECTIVES mark
June, 2010
  • Salon Selectives assigns the marks to plaintiff 1177216 Ontario Ltd.
  • Co-plaintiff CLT Logistics, Inc. is the exclusive licensee
August, 2010
  • 1177216 Ontario and CLT Logistics sue River West, Selective Beauty Brands and Almar for trademark infringement

The first question was whether the federal court should abstain in favor of the state court action.  It did not, and you can read the decision if you’re interested in why the court didn’t.

Next, the defendants raised a license defense, claiming that they have an irrevocable license from Selective Beauty Brands to use the marks.  This defense failed for a couple of reasons. First, Almar started using the marks when they were still owned by Unilever. Thus, the only license it could have had was River West Brands => Selective Beauty Brands => Almar. The problem with this theory was that a trademark licensee may not further sub-license unless there is an explicit grant of the right to do so. The Unilever => River West Brands license was not in evidence, so there was no proof that the license allowed River West Brands to further license to Selective Beauty Brands. Further, there was also no evidence that River West Brands had granted Selective Beauty Brands the right to further grant the oral license to Almar.

Second, When Selective Beauty Brands became the owner of the marks, its sublicense from Unilever would have been extinguished. Since the Almar license was derived from the Selective Beauty Brands’ sublicense, the Almar license would also have been extinguished. (I’m not sure this necessarily had to be an obstacle. Since Selective Beauty Brands and Almar were aligned, I’m not sure why there just couldn’t be an argument that when the Selective Beauty Brands’ sublicense was extinguished, it simultaneously granted Almar a direct license.  A license doesn’t have to be in writing, but I guess hat tip for not making up a conversation that didn’t happen.)

So no proof that any defendant had a license and their defense fails.  All in all, its a situation that I find pretty surprising for a company whose entire business model is based on acquiring and licensing trademarks.

But the absence of a license defense doesn’t mean the plaintiffs win, either. The plaintiffs also suffered a failure of proof, so their motion for preliminary injunction was denied.

Salon Selectives first made the sure loser of an argument that an assignee’s ownership of an incontestable mark is also incontestable.  Not so, as taught by Federal Treasury Enter. Sojuzplodoimport v Spirits Int’l N.V., (blogged here); one can still challenge the validity of the assignment.

So while there was evidence that Salon Selectives was the owner of the marks, there was also evidence that River West Brands and Almar were owners of Salon Selectives. If they were, the validity of the assignment from Salon Selectives to 1177216 Ontario was in doubt. Under Illinois law, the sale or transfer of “substantially all” of an LLCs assets requires approval from every LLC member. Since Salon Selectives was a holding company for the marks, the marks were arguably all or substantially all of the company’s assets and the assignment therefore possibly invalid.

The court also made an interesting point about the balance of hardships in its analysis. It didn’t have a lot of sympathy for the plaintiffs, who purchased the marks after the state court lawsuit was filed and thus knowing full well that there was a cloud on title to the marks, and that Almar had refused to cease using the marks. “Plaintiffs can be seen to have assumed some risk that they would not be awarded a preliminary injunction when they acquired the marks. This fact mitigates some of the harshness of denying an injunction.”  Defendants had also assumed risk, though,  knowing they might not re-acquire the rights to the marks.  Nevertheless, altogether the balance of the hardships tipped in favor of defendants.

Plaintiff’s motion for preliminary injunction denied without prejudice; defendants’ motion to dismiss or for summary judgment denied.

CLT Logistics, Inc. v River West Brands, LLC, No. 10-13282 (E.D. Mich., March 4, 2011).

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