Violation of the Assignment-In-Gross Rule for Trademarks
A recent case that addressed rights in the trademark reign provides a cautionary tale of the consequence of the failure to assign a trademark with its goodwill.
By Scott D. Locke and Jessica J. Kastner | June 30, 2020
Trademark rights are property rights. Like real property and personal property, as well as other intellectual property rights such as patents and copyrights, they can be assigned. However, the transfer of trademarks is unique in that any assignment of a trademark must also transfer the goodwill that is associated with that trademark. The requirement is deeper than a perfunctory recitation in an assignment document. The failure to transfer goodwill can invalidate the assignee’s rights under the agreement. A recent case that addressed rights in the trademark REIGN provides a cautionary tale of the consequence of the failure to assign a trademark with its goodwill.
The Anti-Assignment in Gross Rule
The owner of trademark rights can assign those rights to other persons or entities. The ability to assign trademark rights is significant because between competitors who wish to use the same or a confusingly similar trademark for the same or related goods, the party that began using the trademark first will generally prevail, and with any assignment the purchaser inherits the seller’s date of first use, i.e., the seller’s priority. Carnival Brand Seafood Co. v. Carnival Brands, Inc, 187 F. 3d 1307, 1310 (11th Cir. 1999).
However, any assignment of a trademark, must include an assignment of the goodwill that is associated with the trademark. 15 U.S.C. §1060(a)(1). For this reason, most assignments of trademarks explicitly recite that the assignor assigns specific trademarks and the goodwill associated therewith. However, the mere recitation of this language will not in and of itself render an assignment proper and confer priority. Failure to actually transfer the goodwill associated with a trademark is deemed an “assignment in gross” and renders the assignment invalid.
More than a century ago, in United Drug Co.. Theodore Rectanus Co., 248 U.S. 90 (1918), Justice Pitney explained the theory behind the prohibition against “assignments in gross” for trademarks. As he noted, trademark rights are part of a broad law of unfair competition and the rights in trademarks grow out of the use of them. Consequently, they are not property rights apart from their use in connection with a business. Id. at 97. Thus, unlike the owner of a patent right, the owner of a trademark right cannot park its rights and make use of them merely by enforcing those rights to prevent others from using the same or similar trademarks. Id. at 98.
One of the core components of the anti-assignment in gross rule is that it precludes a purchaser from benefiting from the goodwill of the seller if the purchaser applies the mark to different goods. This sounds similar to the “similarity of goods” factor used in the likelihood of confusion analysis that is used for determining whether there is trademark infringement. However, purchasers of trademarks may be surprised to learn that these standards are quite different. Under a likelihood of confusion analysis, goods may be loosely related and still weigh in favor of holding a trademark to have been infringed.
By contrast, in the context of determining whether an assignment is “in gross,” courts strictly require goods to be very similar in order to uphold an assignment. As such, even if an assignment expressly assigns the goodwill associated with the trademark, the assignment may be ineffective if the assignee’s products are not nearly the same as the assignor’s goods.
‘PepsiCo v. Grapette’
In the seminal case PepsiCo, Inc. v. Grapette Co., 416 F.2d 285 (8th Cir. 1969), the U.S. Court of Appeals for the Eighth Circuit established a framework for considering the proximity that goods must be in order to avoid a finding of an assignment in gross. In that case, a first company, H. Fox and Co., had registered the name PEPPY in connection with the cola syrups in 1926. In 1965, a second company, Grapette Co. bought the trademark PEPPY from H. Fox and Co. in the context of Chapter 11 bankruptcy proceeding. H. Fox and Co. made a formal assignment of its goodwill. Id. at 286. Grapette began to use the trademark in connection with a bottled soft pepper drink. No inventory and no other assets were transferred. Id.
In 1965, PepsiCo warned Grapette about a possible litigation if Grapette did not cease using the mark, and in 1966, PepsiCo initiated suit based on an alleged infringement of its trademark PEPSI. Id. Pepsi’s use predated 1965, Therefore, the issue was whether the assignment from H. Fox and Co. was one in gross and thus invalid. If the assignment were invalid, then Grapette would not receive the benefit of H. Fox and Co.’s priority date and would not be able to assert a defense of laches.
In explaining the contours against the prohibition against an assignment in gross, the court explained that for assignment of a trademark to be effective, it must not be “naked,” meaning that the purpose of the assignment must be consistent with the object of trademark law, i.e., to indicate the origin of the article by the association of the trademark with it. Id. Consequently, the court held that “any assignment of a trademark and its goodwill (with or without tangible or intangibles assigned) requires the mark itself to be used by the assignee on a product having substantially the same characteristics.” Id. at 288.
Turning to facts before it, the Eighth Circuit determined that H. Fox and Co.’s cola flavored syrup and Grapette’s pepper type bottled beverage were too dissimilar for there to have been an effective assignment of goodwill. Id. The court emphasized that the issue of having substantially the same characteristics was to be viewed through a lens that focuses on the public welfare. Consequently, the fact that the products were related or even in the same international class in the Trademark Office did not matter. Ultimately, the harm of holding otherwise would “condone public deceit” in that “[t]he consumer might buy a product thinking it to be of one quality or having certain characteristics and could find it only too late to be another.” Id.
‘Vital Pharmaceuticals v. Monster Energy’
More recently, another case involving beverages, Vital Pharmaceuticals, Inc. v. Monster Energy, 2020 WL 2091996 (S.D. Fla. 2020), reminds practitioners and assignees for trademarks, that the prohibition against assignments in gross continues to be a problem for litigants. In that that case, the parties disputed whether the assignment of rights to the trademark REIGN was invalid.
In 2015, Dash LLC, not a party to the lawsuit, began using the trademark REIGN and obtained a registration for the dietary supplement drink mixes as well as supplements and other products. One of the drinks that Dash sold was a powdered, fruit flavored, pre-workout supplement that was caffeinated. Id.
By March 25 2019, Monster Energy Company, through a subsidiary, launched energy drinks under the name REIGN. At about the same time, Vital Pharmaceuticals (VPX) entered into a trademark purchase and assignment agreement with Dash for Dash’s trademark rights. VPX did not acquire anything other than the REIGN trademark. Id. at *2. Following the sale, Dash ceased using the REIGN trademark.
On March 28, 2019, three days after Monster launched its product, VPX announced that it would be launching an energy drink under the trademark REIGN. VPX’s REIGN product differed from Dash’s REIGN product in that: (1) VPX’s product was ready to drink while Dash’s product was a powdered supplement; and (2) VPX’s product contained no ingredients in common with Dash’s product. Id.
The court considered four factors.
First, as the court in PepsiCo v. Grapette did, the court in this case focused on whether the assignee was using the mark for a substantially similar product. Id. Emphasizing the need to protect consumers, the court was explicit that even minor difference can be enough to threaten customer deception, and thus harm customers because they would mistakenly rely on a brand that they had come to trust. Id.
Noting that VPX entirely abandoned the product line that Dash had sold, the court concluded that VPX has “left behind any goodwill Dash had earned for its mark.” Id. VPX tried to advance an argument that the products need not be identical and that they were sufficiently similar because both its products and the products of the assignor of the mark were: (i) fruit-flavored, (ii) pre-workout, (iii) dietary supplements that (iv) contain caffeine. Id. However, the court concluded that these similarities were insufficient, particularly because VPX implemented a complete change of ingredients.
Second, the court considered whether VPX acquired any assets from Dash. Although the transfer of tangible assets is not a prerequisite for an assignment to be valid, the court noted that the absence of any tangible acquisition can undermine the public’s legitimate expectation that a mark will go on in real continuity. Id. at *6-7. Thus, the factor weighed in favor of a finding of an invalid assignment of trademark rights.
Third, the court considered whether the assignor continued to capitalize on its goodwill under a new trademark. In this case, the assignor emphasized to its customers that it was replacing its REIGN products with products sold under the trademark SLAY. Id. This course of action suggested that the assignor was retaining its goodwill and not transferring it, despite using a different trademark. Thus, because the assignor retained its customers’ goodwill, even if it used a different trademark, it could not transfer that goodwill.
Fourth, the court considered whether there was a continuity of management between the assignor and the assignee such that the assignee would continue to provide the same quality of services. Id. The absence of this continuity of management also weighed in favor of a finding of an assignment in gross because it suggested a lack of continuity of the quality of the goods.
Because all four of the factors weighed against Grapette and suggested that there was no transfer of goodwill, the court held that the assignment was in gross. Consequently, the court entered an injunction in favor of the plaintiff that precluded VPX from using the REIGN trademark in connection with its beverage products.
Most practitioners who draft assignments that cover trademark rights know that the assignments should include an express transfer of the goodwill that is associated with the subject trademarks. However, this assignment of goodwill must be one of not only form but also of substance. The four factor test that the court in Vital Pharmaceuticals recently applied is a reminder that if the assignee’s products are dissimilar from the products of the assignor, a court may find that the circumstances surrounding the transfer suggest that the parties truly intended only an agreement by the assignor to refrain from future use of its trademark and not to ensure both continuity of type of goods and quality under the assigned trademark. In such cases, then the assignment may be found in gross and thus invalid.
Accordingly, in order to reduce the likelihood of a finding an assignment to be in gross, assignees should consider whether any one or more of the following procedures, which would help to ensure a continuity of quality, would be consistent with their business plans: (1) acquiring physical assets from the assignor; (2) retaining personnel of the assignor or hiring them as consultants; (3) requiring the assignor to abandon selling the same goods; and (4) offering at least some of the same products, even if there is a desire to expand into other goods and services. Although the tag should not wag the dog, failure to be able to demonstrate that goodwill has in fact been transferred, can jeopardize what the assignee thought was a valuable asset.