Property, intangible

a blog about ownership of intellectual property rights and its licensing

It Just Seems Wrong UPDATE

Update: The 9th Circuit has affirmed, in an opinion that only further confuses matters. The analysis is this:

Trademarks are assignable.
Co-existence agreements are enforceable.
Contracts are assignable unless doing so changes the terms or the document says otherwise, and neither is the case here.
Therefore, the co-existence agreement was assignable.

I have no idea why the first two propositions are mentioned at all, since they have nothing to do with the conclusion. Oh well.

But we have been taught a lesson. When drafting a co-existence agreement, good drafting practice should already have you capturing everything that is material to the rationale for allowing co-existence—territory, goods and services, appearance of the mark—the failure of which will be a material breach; don’t rely on anything extrinsic to the contract for your assurances that there won’t be confusion, like the nature of the business of the other party. The agreement should be non-assignable – that is certainly always my desire, but it’s not always possible, sometimes carving out when the business as a whole is transferred, or that it may be assigned to an affiliate company. Another thing that was lacking in the Crazy Horse co-existence agreement was termination of the agreement after a period of non-use of one of the marks. That should be in your standard form too, but the time period can sometimes be quite long because one trademark owner doesn’t want the other party taking advantage of any residual goodwill after the first has ceased using its mark. Now I will probably add an express provision that the agreement cannot be assigned apart from the trademark, which must be in use.

Is anyone else troubled by this case or is it just me?

Russell Road Food & Bev., LLC v. Spencer, No. 14-16096 (9th Cir. July 22, 2016)>

Original post below:

I don’t know whether this case is an unintended consequence or an ill-considered strategy. In any case, I think the outcome is wrong.

We have four different parties using somewhat different trademarks for strip clubs.* Their relative order of priority, and the marks, is this:

Owner Marks Priority date
Spencer (defendant) CRAZY HORSE CLEVELAND
Carl Reid (non-party) CRAZY HORSE
Crazy Horse Too A Gentlemen’s Club (non-party) CRAZY HORSE TOO GENTLEMEN’S CLUB 2001
Russell Road (plaintiff)  CRAZY HORSE III 2009

Although Spencer was the first (of these parties at least) to use a CRAZY HORSE variant, Reid was the first to file, followed by Crazy Horse Too A Gentlemen’s Club (“CHTAGC”). Spencer then filed his application for CRAZY HORSE in 2008. It was refused registration because of a likelihood of confusion with the Reid registrations, and there was a warning that it might be refused if the then-pending application filed by CHTAGC registered. In 2009 the trademark application filed by CHTAGC was also refused registration because of the Reid registrations, so CHTAGC filed petitions to cancel the two Reid registrations. Reid and CHTAGC entered into a consent agreement and the cancellations were dismissed.

The consent agreement provided that CHTAGC could use and register CRAZY HORSE TOO GENTLEMEN’S CLUB and any mark that included the phrase CRAZY HORSE, provided that the mark did not contain the phrase PURE GOLD’S. The Agreement was binding on the parties’ successors.

In 2010 Spencer opposed the CHTAGC application and CHTAGC abandoned it, so the CHTAGC mark ultimately was never registered. Spencer’s wholly-owned company Crazy Horse Consulting then acquired the Reid CRAZY HORSE registration (but not the PURE GOLD’S CRAZY HORSE registration) by assignment and Spencer admitted he was aware of the consent agreement. Thereafter the refusal of the Spencer application was withdrawn.**

Which brings us to the suit. In 2010 Plaintiff Spencer and Defendant Russell Road Food and Beverage, a company entirely unrelated to CHTAGC, engaged in licensing negotiations, but they broke down. In 2012 CHTAGC assigned the consent agreement, but not any underlying trademark rights or business, to Russell Road. The next day Russell Road filed a declaratory judgment action of non-infringement against Spencer.

Russell Road filed a motion for summary judgment on the basis that the consent agreement permitted its use of the CRAZY HORSE mark, and it worked. The court held

 The Consent Agreement … was a contract whereby Reid consented to a defined usage of the CRAZY HORSE mark. Defendants do not dispute that Russell Road’s use of the CRAZY HORSE III design mark is permitted by the terms of the Consent Agreement….

Defendants dispute that CHTAGC’s assignment of the Consent Agreement to Russell Road was a valid and enforceable assignment. Specifically, Defendants assert that CHTAGC’s trademark assignment [sic-no trademark was assigned, just a consent agreement] to Russell Road is unenforceable because CHTAGC did not transfer any good will. Again, Defendants’ arguments are premised on the misplaced notion that CHTAGC sought to assign ownership rights in the CRAZY HORSE trademark to Russell Road. However, because CHTAGC did not acquire any ownership rights in the CRAZY HORSE mark, its assignment of the Consent Agreement could not have purported to either. Instead, CHTACG assigned its contractual right under the Consent Agreement to use the CRAZY HORSE mark in a defined manner to Russell Road.

Defendants do not otherwise dispute that the Assignment Agreement is a valid assignment of CHTACG’s contractual rights under the Consent Agreement. Moreover, there is no indication that the Assignment Agreement was otherwise prohibited by law. Here, the Consent Agreement does not contain any language prohibiting assignment. In fact, it actually contemplates that the agreement would bind assigns. Nor is there any indication that the Assignment Agreement materially changed the terms of the Consent Agreement. Accordingly, the Court finds that CHTACG’s assignment of its rights under the Consent Agreement to Russell Road is valid and enforceable.

So let’s review what happened here. Spencer was the most senior user of the mark; no one seemed to dispute that. But, he was late to the registration game and there were a couple of registrations and applications that he had to get out of the way. With respect to the Reid registrations he was pragmatic; he took an assignment of the CRAZY HORSE registration but left Reid with PURE GOLD’S CRAZY HORSE, which apparently was an arrangement to everyone’s satisfaction. He didn’t take an assignment of the consent agreement, but, as the court rightly found, he took the Reid registration subject to the continuing right of CHTAGC to use CRAZY HORSE TOO GENTLEMEN’S CLUB.

But the mischief began when CHTAGC assigned a bare consent agreement, without any underlying trademark rights, to another party. There were some unusual aspects to this consent agreement that allowed this to happen. First, as the court notes, the agreement was assignable. Typically, because of the personal services nature of trademarks, one wouldn’t allow an assignment of a trademark-related agreement without approval from the other contracting party, or at least permit an assignment only with a transfer of the entire business too. Second, the agreement didn’t have any termination provision. It looks like Crazy Horse Too shut down in 2005 and wasn’t reopening until 2013—had there been a termination provision based on cessation of use of the mark, there wouldn’t have been any agreement to assign. Third, we have an agreement that was perhaps written more broadly than it needed to be; the parties were really thinking about CRAZY HORSE TOO A GENTLEMEN’S CLUB and PURE GOLD’S CRAZY HORSE as their respective marks, yet the agreement covered any use of CRAZY HORSE by CHTAGC.

But even given that, it doesn’t seem right in principle that one can assign a trademark consent agreement without also obtaining any of the rights to which it pertains, like an assignment of any underlying trademark rights, or succeeding to the business of the original party to the contract. From a brief review of McCarthy’s, it looks like, in the cases involving successor companies (Waukesha Hygeia Mineral Springs Co. v. Hygeia Sparkling Distilled Water Co., 63 F. 438 (7th Cir. 1894) and T & T Mfg. Co. v. A. T. Cross Co., 587 F.2d 533, 537, 201 U.S.P.Q. 561 (1st Cir. 1978)), the successor companies had acquired the business and were selling goods identical to those sold by the original party to the agreement. But that wasn’t the case here, and instead we have a case where an co-existence agreement is free-floating, apparently indefinitely, for the use of anyone who can get their hands on it.

The Waukesa case had a similar fact pattern, i.e., the assignee acquired a trademark subject to consent agreement and then tried to escape the legal effect. But, unlike here, in Waukesha the party against whom enforcement of the agreement was sought had no preexisting rights independent from those which it acquired. Here, Spencer hadn’t needed the underlying trademark rights for the registration it acquired because he had independent, senior rights. I therefore find it a surprising outcome that Spencer could have conceded all his far senior rights by gaining a trademark registration he didn’t even really need. If one steps completely into the shoes of your predecessor company and all rights accrue from the acquired trademark that might make sense, but Spencer didn’t do that.

Spencer, as the senior user, likely didn’t need to get an assignment of the Reid trademark registration—he could have instead simply asked Reid to voluntarily surrender it. By acquiring the registration, though, Spencer could avail himself of the legal advantage of an earlier registration date than the one he would have with his own, later-filed application. Without the benefit of hindsight it seems a reasonable decision about how to manage his own trademark prosecution, although it looks like a bad decision now.

Had the court used the consent agreement as guidance to decide when the various uses of CRAZY HORSE were confusing (because we see there are many, many strip clubs named CRAZY HORSE), I would be fine with it. Spencer also had previously failed in his attempt to get a preliminary injunction because he was not in the Las Vegas territory, which I also don’t disagree with. But to say that one can just buy the bare right not to be sued for trademark infringement is, in my opinion, crazy.

Russell Road Food and Beverage, LLC v. Spencer, No. 2:12-CV-01514-LRH-GWF (D. Nev. May 6, 2014).

*Excellent footnote alert: “Courts have alternatively referred to these businesses as ‘nude dancing establishments,’ ‘gentlemen’s clubs,’ and ‘exotic entertainment’ establishments. See, e.g., City of Erie v. Pap’s A.M., 529 U.S. 277, 283 (2000). The Court here follows the conventions of Circuit authority in adopting the term ‘strip club.’ See, e.g., E.S.S. Entertainment 2000, Inc. v. Rock Star Videos, Inc., 547 F.3d 1095, 1097 (9th Cir.2008).”

**As of this writing, the Spencer application was published, then opposed by the Crazy Horse Memorial Foundation, an opposition which the Crazy Horse Memorial Foundation then lost.

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