The Importance of Annual Intellectual Property Audits

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1 T O O U R F R I E N D S A N D C L I E N T S March 1, 2002 The Importance of Annual Intellectual Property Audits Companies spend millions of dollars developing and promoting products and the trademarks associated with those products. The goodwill developed through the use of trademarks in the marketplace often is extremely valuable. If this value is diminished or destroyed, important assets may be lost and a company s value will be lessened, perhaps irreparably. It is, therefore, important to protect a company s trademarks, whether they are registered or not, and other intellectual property. An annual intellectual property audit ( IP Audit ) is an important tool that can assist in protecting and monitoring a company s trademarks and other intellectual property. 1 Although we (as outside counsel) are happy to conduct both annual and ongoing IP Audits, it is not something that needs to be done by outside counsel. I. Why Conduct An Annual Intellectual Property Audit? The importance of properly monitoring and managing a company s trademarks and service marks (hereinafter, trademarks or marks ) cannot be overstated. Failure to do so can create serious risk to the existence of a company s valuable marks. For that reason, an IP Audit should include an annual review of all existing marks and all trademark licenses and assignment agreements, as well as a review of the company s advertisements and websites. In addition to an annual IP Audit, it is desirable for companies to engage an ongoing watch service 2 on all trademarks, or, at least, on all material trademarks. Furthermore, a company s intellectual property counsel should review advertising campaigns and website additions for any potential copyright, trademark and/or false advertising issues as 1 This Memorandum is based on a presentation made to clients at a seminar on January 17, 2002, entitled Protecting Intellectual Property Rights. While an IP Audit should also include, to the extent applicable, a review of the company s technology, patent and copyright portfolios, that aspect of an IP Audit is not the focus of this Memorandum. 2 Several service companies specialize in monitoring United States and international trademark registers and other databases for potentially conflicting trademarks applications or registrations. We often receive and review the watch notices generated by such service providers and then alert our clients of any potential conflicts with the new applications and advise the clients on how to approach each conflict. See Section II.B, infra. A Partnership Including Professional Corporations New York One New York Plaza New York, NY Washington, DC 1001 Pennsylvania Avenue, NW Washington, DC Los Angeles 350 South Grand Avenue Los Angeles, CA London 99 City Road London EC1Y 1AX United Kingdom Paris 7, rue Royale Paris France

2 such campaigns/additions are proposed and before they are published. 3 Certain tools, such as spreadsheets and databases, may be useful in tracking and managing trademarks and licenses and may make the annual IP Audit easier. The driving force behind conducting an IP Audit is the trademark doctrine of abandonment. Trademark rights arise from the actual use of a mark in connection with the sale of goods or service and such rights exists under both common law and federal statutory law. Use of a mark is required in order to establish trademark rights. However, trademark protection can be lost if the mark is abandoned. Abandonment can be inferred by acts or omissions. Under the federal Lanham Act, 15 U.S.C. 1127, a mark is abandoned if either of the following occurs: (1) If the mark is not being used and there is no intent to resume such use. Intent not to resume may be inferred from different circumstances. Nonuse for three consecutive years is prima facie evidence of abandonment. Use of a mark is limited to bona fide use in the ordinary course of business, and not use merely to preserve rights in a mark. (2) Abandonment arises as a result of acts or omissions by the owner, which cause the mark to become the generic name for the goods or services involved or otherwise to lose its significance as a mark. 4 The doctrine of abandonment applies to common law trademarks as well as registered trademarks. As mentioned above, a mark must be used in the ordinary course of business and on the goods or services to which trademark protection is claimed. Promotional use and sporadic use is insufficient. Once abandoned, the mark reverts back to the public domain, and becomes free for another party to adopt or use. Thus, a party that is found to have abandoned its mark is deprived of any claim to priority in the mark by virtue of use of the mark before the date of abandonment and may regain rights in the mark only through subsequent use. Any previous use will not be considered when determining priority of use vis-àvis a third party. Courts have addressed the abandonment issue in order to interpret the federal statute. If abandonment is claimed under the federal statute, and the presumption of abandonment arises, 5 the owner of the mark has the burden of producing evidence of either actual use during the three-year period or intent to resume use 3 Although we recommend ongoing content review of advertising and websites, these reviews should, at the very least, be conducted at least once a year as part of the annual IP Audit. 4 For example, ASPIRIN and CELLOPHANE both were trademarks that became generic and lost their trademark status. See Bayer Co. v. United Drug Co., 272 F. 505 (S.D.N.Y. 1921); DuPont Cellophane Co. v. Waxed Products Co., 85 F.2d 75 (2d Cir. 1936). 5 The presumption of abandonment arose after 2 years of nonuse until January 1, Fried, Frank, Harris, Shriver & Jacobson 2

3 in the reasonably foreseeable future. The ultimate burden of proof of abandonment however remains on the party asserting abandonment. For example, in Cerveceria Centroamericana, S.A. v. Cerveceria India, Inc. (the Medalla de Oro beer case), the junior user in the United States sought to cancel the senior user s registration as a result of abandonment. 6 The senior user had imported very small amounts of beer into the United States using the Medalla de Oro mark in 1971, 1972, 1975, 1977 and The court affirmed the Trademark Trial and Appeal Board s finding that a prima facie case of abandonment had been established and that the senior user had failed to rebut the evidence of non-use or show intent to resume use. As a result, the mark was abandoned and the junior user was held to have priority over the senior user for the use the Medalla de Oro mark. Nonuse is not the only way abandonment can arise. As mentioned above, abandonment also arises when the owner, by acts or omission, causes the mark to become the generic name for the goods or services or otherwise to lose its significance as a mark. Examples of this form of abandonment include: (1) entering into a license without quality control provisions or failing to actually monitor quality of licensed goods and services; 7 (2) naked licensing; and (3) the failure to police use of marks in the marketplace. 8 Abandonment can also arise when a trademark is sold in gross -- that is, when a trademark is assigned without selling all or part of the associated business or that part of the good will of the business connected with the use of or symbolized by the mark. 9 Thus, in Universal City Studios, Inc. v. Nintendo Co., Ltd. (the Donkey Kong case), Universal sued Nintendo claiming that the Donkey Kong video game infringed Universal s rights with respect to the famous King Kong movies. 10 Universal did not claim ownership of the King Kong mark as a result of owning either the 1933 classic movie King Kong or the 1976 remake; rather, Universal claimed ownership of the King Kong name and a King Kong character as a result of certain assignments. The district court granted summary judgment 6 See Cerveceria, 892 F.2d at It is not enough just to have the right to monitor quality control when licensing trademarks; rather it is important that the licensor actually monitor the quality of the products that will be marked with the valuable trademark on an ongoing basis. 8 When a party fails to police its mark, it allows others to use the same or confusingly similar marks on related or identical products or services without attempting to have them discontinue or license their use. 9 See 15 U.S.C. 1059(a). See also Universal City Studios, Inc. v. Nintendo Co., 578 F. Supp. 911, 929 (S.D.N.Y. 1983), aff'd on other grounds, 746 F.2d 112 (2d Cir. 1984); Cerveceria Centroamericana, S.A. v. Cerveceria India, Inc., 892 F.2d 1021, 1023 (Fed. Cir. 1989). 10 See Universal, 578 F. Supp at 911. Fried, Frank, Harris, Shriver & Jacobson 3

4 dismissing the claims on several grounds, one of which was that Universal had never received the King Kong mark because the mark had been sold in gross. As the court explained, trademark rights do not exist in the abstract. They cannot be bought and sold as a distinct asset; rather, trademark rights exist only in connection with a business or product and can only be transferred by means of a supervised license or in connection with the sale of an ongoing business or some aspect of that business. Thus, since the trademark transfer from RKO Radio Pictures, Inc., the owner of the 1933 classic, to Richard Cooper (Universal s transferor) was not by either of these means, the court held that RKO did not successfully transfer the King Kong trademark. II. Elements of an Intellectual Property Audit The elements of an IP Audit vary according to the needs of a particular company. Typically, a thorough IP Audit will consist of at least the following elements: (1) trademark review; (2) watch services; (3) license and assignment review; and (4) advertising and website review. 11 A. Trademark Review Every annual IP Audit should include a review of all marks owned or used by the company. This includes registered marks and unregistered marks. You may need to review product brochures and speak to your marketing department to get a complete and current list of marks used in commerce. Data about the marks should be maintained on a spreadsheet or in a database with all pertinent information so that the data file need not be re-created annually. Ideally, this database should be set up as part of ordinary trademark management and maintained and updated regularly. Maintaining a trademark spreadsheet or database is often merely a minor expansion of an existing trademark docketing system. Fields in the spreadsheet or database will vary from company to company, but typically include: the mark; the date of first use; the application date; the application serial number; the registration date (if the mark is registered); the registration number; the class(es) of goods/services; the specific goods/services covered by the registration; when affidavits for sections 8 and 15 are due or when they were filed 12 ; when a renewal is due or when it was 11 As mentioned previously, to the extent that a company owns technology, patents and/or copyrights, an IP Audit should also include review of those items, as well as any licenses related thereto. 12 The owner of a mark must file an affidavit of use between the fifth and sixth year following registration and within the year before the end of every ten-year period after the date of registration. See 15 U.S.C This is referred to as a Section 8 affidavit. The first such affidavit is typically combined with the Section 15 affidavit. For purposes of incontestability, this affidavit asserts that the mark has been in continuous use for five consecutive years following registration and is still in use in commerce. 15 U.S.C Fried, Frank, Harris, Shriver & Jacobson 4

5 filed 13 ; whether the mark is currently in use (and, if so, for what specific goods or services is the mark used); whether there is a watch notice service for the mark; and enforcement activities, if any. The legal department should maintain the database and any printouts should be labeled work product, since they contain evaluative impressions of counsel and are used to give legal advice. As part of the IP Audit for each mark, a company should determine whether the mark is still being used and, if so, on what goods and services. That use should be compared with the use described in the registration for the mark (if it is registered) to assess the risk of abandonment for certain goods and services. Also, if the goods and services with which the mark is currently being used are broader than the uses identified in the application(s)/registration(s) it may be desirable to apply for additional registration(s) covering the current uses. For marks that are unregistered, the annual IP Audit is an opportunity to consider registering those common law trademarks. Federal registration confers numerous benefits on the owner and usually is recommended for marks used more than regionally. The benefits of federal registration include: (1) notice to the public of the registrant's claim of ownership of the mark; (2) a presumption of ownership nationwide; and (3) the exclusive right to use the mark on or in connection with the goods or services set forth in the registration. In litigation, federal registration is prima facie evidence of (a) the validity of the mark; (b) the registration of the mark; (c) the ownership of the mark; and (d) the owner s exclusive right to use the mark on or in connection with the goods or services specified in the registration. 14 Moreover, infringement of a registered mark entitles the owner to recover the infringer s profits, damages sustained by the owner and court costs; as well as up to three times actual damages and attorneys fees in cases of intentional infringement. 15 The costs of obtaining and maintaining registration are nominal when compared to the potential and actual value of a registered trademark. The United States Patent and Trademark Office ( USPTO ) charges a fees of $325 per class per mark and trademark availability search 16 costs range from under $1,000 to under $1,500 for a full name search. For marks that are not in use at the time of the IP Audit, companies should determine how long the marks have been inactive. If the inactivity is currently at or approaching the three-year presumption period for abandonment, companies need to determine whether steps should be taken to avoid abandonment. You should assess whether the mark has value even though it is not being used. Value may take the form of either residual value from successful past use or value 13 Renewal applications are due within one year of the end of each successive ten-year period. 15 U.S.C U.S.C. 1115(a) U.S.C. 1117(a)-(b). 16 Trademark availability searches are offered by the same companies that provide watch services. Fried, Frank, Harris, Shriver & Jacobson 5

6 attributable to potential future use. You may have to approach members of your marketing department to get insight into where the value of the mark lies. If you decide to try to avoid abandonment, steps involving use of the mark must be more than cosmetic and more than incidental. The mark must be actually used on or in connection with actual sales of goods or services in the ordinary course of business. If you are relying on the intent to resume use, the intended resumed use must be in the reasonably foreseeable future. Alternatively, at the time of the IP Audit, companies should consider whether certain marks should be abandoned. One reason to abandon certain trademarks is because it is expensive to maintain unused trademarks. For example, the cost of maintaining marks may include continuing to enforce the trademarks through the use of watch notice services and the preparing and filing of affidavits in the USPTO. These additional expenses should not be incurred with respect to those marks that are not in use and are not intended to be used in the foreseeable future. Although it is not necessary to expressly abandon the unused marks, they should be listed with a separate notation in the spreadsheet or database so that no future expense is incurred in maintaining them. With regard to the marks that are still in use at the time of the IP Audit, there are two specific questions to ask during the annual IP Audit: (1) How important are the marks? If a watch service has not been implemented for a particular mark, you should consider whether one should be instituted. (2) For registered marks that are used on different goods or services than those listed in the registration, is an additional registration in additional classes necessary? The filing fee ($325 per class per mark) and cost of preparing an application usually is not cost prohibitive. However, the existing mark may offer sufficient protection if the new goods and services are closely related to the existing goods and services listed on the trademark registration. On the other hand, if the new goods and services are relatively unrelated to the prior listed goods and services or are an important product line expansion, it often is a wise business decision to file trademark applications for the goods and services in the additional classes. B. Watch Services It is also important to monitor and police marketplace use of marks that are similar or identical to yours. Not only is this a good idea in order to avoid abandonment, but it makes good business sense as well. If uses of similar or identical marks on related goods persist in the marketplace, the value of your mark diminishes and the risk of abandonment increases. Clients typically should have a watch service in place for all marks or at least all material marks. The cost of maintaining and monitoring a watch service is small compared to the risk of Fried, Frank, Harris, Shriver & Jacobson 6

7 potentially losing your mark or diluting 17 its value. Watch services should be an ongoing part of protecting a trademark portfolio, and not merely part of an annual IP Audit. Watch services monitor domestic and international trademark databases for uses or proposed uses of trademarks similar to your company s marks. The most comprehensive watch services monitor activity in (1) the USPTO s new applications database; (2) the USPTO s gazette database of published trademark applications; (3) state trademark databases; and (4) common law usage databases, which include business names, business directories and news services. A watch service regularly sends the results (also called watch notices) of all uses or proposed uses of similar marks within the scope of the service(s) you order. A watch notice indicates the mark being used or proposed for use, the geographic location of use, the nature of the goods/services, the classification of the goods/services, and the party using the mark. The annual cost of the most comprehensive domestic watch service is usually between $1,000 and $2,000 per mark, depending on the watch service used. Coverage can also be expanded to include the European Union, the World Intellectual Property Organization, or other specific countries worldwide. The annual cost of those additional services starts at $125 to $200 for a single country and a single class. Once you receive the watch notices, you need to assess the results. When we monitor watch services for clients, we forward the watch service results to the client with a letter describing which of the notices are of concern. Concern arises when the mark that shows up in the watch service notice is identical or confusingly similar to the client s mark, particularly if the goods and services of the junior user are closely related to the client s goods and services. If the client s mark is arbitrary, for example, like the trademark Exxon, any use of a similar mark would raise concern. If the client s mark is descriptive or suggestive of the goods attached to the mark, however, use of a similar mark in an unrelated field might not be of concern. A cease and desist letter should be sent in all situations where a watch notice causes concern. That not only is prudent, but it also establishes a practice of protecting the value of your marks if you end up in litigation where abandonment is claimed. If the cease and desist letter is ignored, a follow-up letter should be sent. If that follow-up letter is ignored, it is desirable to make an advertent decision whether to sue. Do not let potentially infringing use of your trademark sit. You must decide whether the junior use of the similar mark is of sufficient marketplace and legal concern to merit the investment in litigation. You need to assess the risk of abandonment. You must ask questions, such as: (1) How close is the new mark to 17 The term dilution means the lessening of the capacity of a famous mark to identify and distinguish goods or services, regardless of the presence or absence of competition between the owner of the famous mark and other parties; or likelihood of confusion, mistake, or deception. 15 U.S.C Fried, Frank, Harris, Shriver & Jacobson 7

8 yours? (2) How close are the goods to yours? (3) How significant is the junior user s use in the marketplace? and (4) What is your prior success rate when enforcing your mark? Although litigation is expensive, there are many situations where the risk of abandonment and dilution of the value of the mark requires a business decision to pursue litigation in order to protect the value of the trademark and to avoid abandonment. C. License and Assignment Review The next step in an annual IP Audit is to review all trademark license agreements and trademark assignments. This review should be of trademarks licensed and assigned by and to the company, although the abandonment issue only arises in connection with trademarks licensed by the company and trademark assignments to the company. As with the trademark portion of the IP Audit, good intellectual property management suggests that important information about licenses be maintained on a spreadsheet or in a database. This should not only be performed annually; rather, it also should be an ongoing process where new licenses are input as soon as they are executed. As with the trademark database, potential fields in the license database will vary from company to company, but typically include: the identity of the licensor and licensee; the intellectual property licensed; the fields of use; the geographic areas of use; any use restrictions; exclusivity; royalty terms and/or royalties paid, payable and due; the term of the license; the renewal dates and any renewals that have occurred; whether sublicenses or assignments are permitted and, if so, the permitted conditions; quality control provisions; quality control activity; and indemnification provisions. Since in-house or outside counsel should have been involved in the negotiation and drafting of the licenses and assignments, very few surprises should arise during the annual IP Audit of licenses and assignments. The principal concern in the annual IP Audit of licenses and assignments is abandonment. Assignments of trademarks received by your company should not be assignments in gross. 18 During negotiations for an assignment of a mark, assignments in gross should be modified. If you determine that there has been an assignment in gross, the mark received may be valueless. During the IP Audit, if you discover an assignment in gross, an effort should be made to correct the assignment. If that cannot be done, the company should use the mark received to create new trademark rights. The annual review of license agreements should focus on quality control. Licensing marks without quality control provisions and without actually exercising quality control can lead to abandonment. The quality control provisions in each trademark license by the company need to be identified. You 18 As noted above, an assignment in gross is an assignment that does not include that portion of the transferor s business that is symbolized by the mark being assigned (and the goodwill associated therewith). See Section I, supra. Fried, Frank, Harris, Shriver & Jacobson 8

9 should also determine when the last quality control inspection actually was made. Quality control needs to be a reality. Merely having the right to control the quality of the licensed goods/services, without actually controlling the quality, is not sufficient. Depending on the product involved, the manufacturing involved, and way in which the mark is used, the frequency of quality control required will vary. Quality control may need to be exercised monthly, quarterly or annually, and it may be needed in connection with disparate production facilities. If quality control has not been actively exercised, you should encourage the department responsible for licensing at your company to regularly monitor quality control of licensed marks. D. Advertisement and Website Review The final aspect of the annual IP audit is advertisement and website review. 1. Advertisement Review As with some of the other aspects of the IP Audit, advertising review should be ongoing. Before any advertisement is released for publication, it should undergo a legal review. Each factual statement in the advertisement should be challenged. All advertising should be reviewed to ensure that it does not violate the federal Lanham Act and/or federal Copyright Act. To do so, you should review advertisements the same way a court would. 19 When reviewing advertising for false advertising issues, it is important to understand that two categories of statements violate the Lanham Act s prohibition of false advertising: (1) commercial claims that are literally false; and (2) claims that may be literally true or ambiguous, but which implicitly convey a false impression, are misleading in context, or likely to deceive consumers. 20 In assessing whether an advertisement is literally false, you need to identify the message conveyed by the advertisement by analyzing the advertisement in its full context. A visual image, or a visual image combined with an audio component, may convey a message that is literally false. One obvious example of that was a case in which the image of leaking storage bag was found to convey a literally false message of rapid and substantial leakage despite the fact that those claims were never verbalized in the commercial See, e.g., United Industries Corp. v. Clorox Co., 140 F.3d 1175 (8th Cir. 1998); Clorox Co. of Puerto Rico v. Procter & Gamble Co., 228 F.3d 24 (1st Cir. 2000); Rhone Poulenc Rorer Pharmaceuticals, Inc. v. Marion Merrell Dow, Inc., 93 F.3d 511 (8th Cir. 1996); Coca-Cola Co. v. Tropicana Products, Inc., 690 F.2d 312 (2d Cir. 1982). 20 See United, 140 F.3d at See S.C. Johnson & Son, Inc. v. Clorox Co., 241 F.3d 232 (2d Cir. 2001)(Zip-loc v. Glad Lock). Fried, Frank, Harris, Shriver & Jacobson 9

10 False statements may also include statements that are conveyed by necessary implication by ads. For example, the Eighth Circuit in Rhone-Poulenc, 93 F.3d at 516, found that asking, which one would you choose? necessarily and falsely implied that the products were comparable. A claim is conveyed by necessary implication when, considering the advertisement in its entirety, the audience would recognize the claim as readily as if it had been explicitly stated Website Review Like advertising review, the website review should take place as web pages are proposed and developed, and before they are posted on the company s website. The new material should be reviewed for accuracy under the standards created by the Lanham Act. The new web pages should also be reviewed for copyright violations and trademark infringement. Often, companies and their website developers mistakenly believe that they can copy material from other sources (with or without attribution) and put the material on the company website. Like any other copyright violation outside of cyberspace, this unauthorized use of copyrighted material may be a violation of the federal Copyright Act. Website review should not only be ongoing as new material is added, but also should be part of the annual IP Audit. Websites tend to be developed, launched, and then forgotten. However, facts often change and although the website may have been accurate when created, the content could currently be inaccurate. It is worth the investment in an annual IP Audit website review to avoid this from occurring. III. Conclusion Although an annual IP Audit (and related ongoing IP maintenance) may seem like a major undertaking and a large expense, if it is done every year, the magnitude of the task and the costs involved will diminish. The longer a company waits to conduct its annual IP Audit, the larger both the task and the risks of abandonment become. New York Ira S. Sacks Rita M. Odin Craig J. Brody Clorox Co. of Puerto Rico, 228 F.3d at 35. Fried, Frank, Harris, Shriver & Jacobson 10