GPSolo Magazine - March 2004

Intellectual Property Law
The Fallacy Of Trademark Residual Goodwill

When a trademark owner abandons his trademark, what legal rights does he retain to prevent someone else from acquiring and using that mark? A common flawed belief among trademark owners and trademark lawyers is that the owner retains “residual goodwill”—that is, the former trademark owner asserts that he has the power to bar someone else’s use of his old mark owing to a lingering association consumers may continue to have between the mark and the former owner.

The theory behind residual goodwill is that because consumers may associate a discontinued trademark with the producer of a discontinued product, any new user of the trademark would be improperly trading off of the residual goodwill that still exists from when the trademark was used in the marketplace. According to this argument, a new user could employ a discontinued trademark only after consumers have ceased to associate the trademark with the original owner and residual goodwill has dissipated. There is almost no support whatsoever for the residual goodwill theory in trademark law or practice. Once a trademark is abandoned, it reverts to the public do main and is then available to new users. Residual goodwill, if it even exists, does not give the previous trademark owner any right to prevent the new user’s acquisition and employment of the mark.

Once a trademark is “abandoned,” no goodwill remains in the trademark. The abandoned status allows new users of a trademark to launch a new product or service, and importantly this status can serve as a defense to a trademark infringement suit. In discussing trademark abandonment, there are two important issues to understand: (1) how exactly a trademark becomes abandoned under the trademark laws and (2) the impact of abandonment on the trademark.

There is an explicit provision in the Lanham Act describing how a trademark becomes abandoned:

A mark shall be deemed to be “abandoned”. . . when its use has been discontinued with intent not to resume such use. Intent not to resume may be inferred from circumstances. Nonuse for three consecutive years shall be prima facie evidence of abandonment. “Use” of a mark means the bona fide use of such mark made in the ordinary course of trade, and not made merely to reserve a right in a mark.

This means that if a marketer stops using a trademark for three years and has not done anything substantial within that time to reintroduce the trademark into commerce, the trademark becomes abandoned.

After abandonment, all previous “goodwill” and name association that may have existed are gone, and the trademark is available for a new company or entrepreneur to create new goodwill. Its former owner has no legitimate grounds for stopping a new user from adopting its old brand name by asserting that it has residual goodwill.

Many lawyers and commentators argue that consumers that see a discontinued brand on a new product are at risk of being confused about the product’s source. They assert that a new marketer should not have the right to use a discontinued brand until association with the prior user has dissipated. For them, consumer confusion should be prevented at all costs.

Although it is true that there may be some confusion in the marketplace when a discontinued brand is reintroduced by a new user, there are five reasons why residual goodwill should not confer any legal rights on a former trademark owner. First, residual goodwill would encourage “warehousing.” If marketers had their choice, they would own as many trademarks as possible—even if the trademarks were not used—for a certain class of goods and use them as a barrier to new product introductions by competitors. The threat of litigation has a chilling effect on potential new market entrants, who may not introduce products, thus harming competition and the economy in general. Those who argue for residual goodwill in the name of protecting consumers from confusion would deprive those same consumers of the benefits of new product choices and lower prices in the marketplace.

Second, residual goodwill would destroy the abandonment defense to trademark infringement. In a trademark infringement suit, one of the best defenses for an accused infringer is that the plaintiff’s trademark is invalid owing to abandonment. If a trademark owner could stop a defendant from using a trademark even if the trademark was abandoned, the abandonment defense would be toothless and irrelevant.

Third, abandonment encourages marketers to keep brands in use. Because trademark owners cannot rely on residual goodwill to extend their trademark rights, a company that discontinues a brand does not have the same power as a company that uses a brand in commerce. This provides a huge incentive to keep products on the market, thus benefiting consumers and the economy.

Fourth, measuring residual goodwill is too complicated. Recognizing the power problem detailed above, commentators have proposed that instead of looking at whether a trademark owner has the intent to resume use of an unused trademark, courts should instead try to measure levels of residual goodwill. In this process, courts would look at a variety of factors to determine if a trademark owner should be allowed to keep its trademark even if the trademark has not been used for more than the three-year statutory period. This would be an incredibly complicated process to manage and would do more harm than good. Courts and companies considering new product introductions would be put into the position of measuring (1) levels of residual goodwill, (2) the benefits to society from making sure consumers are not confused, and (3) the benefits to society from new product introductions. This would be a time-consuming and subjective process that would vary widely across brands and product categories and would require reams of expensive statistical data. In contrast, the current system is straightforward and predictable: If three years pass with no intent to resume use, the trademark is abandoned.

Fifth, trademark law tolerates confusion. The confusion that might occur from a new user adopting an abandoned trademark is not different from the confusion resulting from other activities about which there is very little concern.

David S. Ruder is an attorney and chairman of River West Brands LLC in Chicago, Illinois.

For More Information About The Section Of Intellectual Property Law

- This article is an abridged and edited version of one that originally appeared on page 1 of IPL Newsletter, Fall 2003 (22:1).

- For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.

- Website: www.abanet.org/intelprop/

- Periodicals: IPL Chair’s Bulletin, a monthly update of Section activities and timely intellectual property issues; IPL Newsletter, a quarterly newsletter with current developments and Section news; Annual Report, a comprehensive summary of committee activities.

- Books and Other Recent Publications: Pamphlet series intended for clients, including Marketing Your Invention, Submitting an Idea, What Is a Patent?, What is a Trademark?, and What Is a Copyright? Extensive course materials in connection with CLE programs are also available.

 

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