Almost 15 years ago I published an article about the then-common practice of creating a wholly-owned subsidiary to be an “IP holding company.” It was a tax strategy, where royalty payments, an expense to the parent, would be made to a subsidiary in a jurisdiction that didn’t tax the income on royalties.
I don’t take credit for wondering whether this was a trademark problem. Tony Fletcher gets the credit for that, by asserting an affirmative defense suggesting that the structure, used by our client, meant that the registration was invalid. The case settled long before the legal issue was litigated but my curiosity was piqued—I couldn’t find an answer. So I wrote one. For 15 years I’ve been waiting to see if anyone would litigate it, and my wait has ended, sort of.
In Noble House Home Furnishings,LLC v. Floorco Enterprises, LLC, registrant Noble House was a wholly-owned subsidiary of Floorco Enterprises, LLC. The TTABlog explains the opinion in more detail, but it was a case where the parent operating company was using the mark registered by a subsidiary company. There was no suggestion that the subsidiary was an IP holding company, but rather quite possibly just owned it as the result of a rational business-based decision about who the owner should be. The problem was that the business decision didn’t comport with the behavior required of a trademark owner. The exact legal theory at play here was abandonment, that the mark was not being used because the use was by a company other than the registrant. That would be ok if the entity using the mark was a “related company,” but a “related company” is one whose use is controlled by the owner of the mark. The facts evidencing control are therefore considered and it didn’t come out very well for Noble House. Interestingly, the opinion says pretty categorically that if the parent owns and the subsidiary uses that’s ok (perhaps presumptively so), but not so much the other way around:
In most situations, the inherent nature of the parent’s overall control over the affairs of a subsidiary will be sufficient to presume that the parent is adequately exercising control over the nature and quality of goods and services sold by the subsidiary under a mark owned by the parent, without the need for a license or other agreement. If there is any doubt on that score in a particular situation, it can be made clear by a proper trademark license agreement between parent and subsidiaries. Justice Brennan observed that “the parent corporation–not the subsidiary whose every decision it controls–better fits the bill as the true owner of any [trademark] property that the subsidiary nominally possesses.” K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 108 S. Ct. 1811, 100 L. Ed. 2d 313, 6 USPQ2d 1897, 1905 (1988) (concurring in part and dissenting in part).
However, in this case, Furnco International Corporation, the parent company, authorized its subsidiary, the Respondent, to be the owner of the registration at issue. We have not forgotten that Furnco International Corporation is the owner of Respondent and that it could be argued that Furnco International Corporation owned the registration all along. But the application for registration and the subsequent statement of use was not filed by Furnco International Corporation. Furnco International Corporation chose to structure its business using a legally distinct subsidiary, which counts as a “person” under the Trademark Act. Such a business structure may offer some advantages, but it also comes with some strictures, and the existence of a separate and distinct legal entity (e.g., in this case a limited liability company) cannot be turned on or off at will to suit the occasion. This result is merely the flip side of the principle that a parent corporation is not liable for the wrongs of its subsidiary absent disregard of corporate separateness, such as an “alter ego” relationship. Furnco International Corporation formed, maintained and controlled Respondent as a separate legal entity, and Respondent, not Furnco International Corporation, filed the NOBLE HOUSE application, asserting that it had a bona fide intention to use the mark in commerce, as well as the subsequent statement of use asserting that it actually had used that mark in commerce.
Because Furnco International Corporation (i) uses the NOBLE HOUSE mark, (ii) controls Respondent (and not vice versa) and (iii) has no agreements with Respondent concerning the use of the NOBLE HOUSE mark, and (iv) controls the nature and quality of the furniture sold and/or intended to be sold under the mark, the use of the NOBLE HOUSE mark by Furnco International Corporation does not inure to the benefit of Respondent, as registrant, because Furnco International Corporation does not meet the definition of a related company (i.e., an entity whose use of the mark is controlled by the registrant of the mark with respect to the nature and quality of the goods). Accordingly, the advertising and marketing materials that identify Furnco International Corporation as the source of the NOBLE HOUSE furniture products cannot be deemed use of the mark by Respondent and cannot show that Respondent intended to resume use of the NOBLE HOUSE mark.
In view of the foregoing, we find that Respondent abandoned the NOBLE HOUSE mark by three years nonuse with no intent to resume use.
(Internal citations omitted). The law takes longer than you expect.
Noble House Home Furnishings, LLC v. Floorco Enterprises, LLC, Cancellation No. 92057394 (April 4, 2016).
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