MEMO TO:
Alexsei Demo US
RESEARCH ID:
#4000516983a688
JURISDICTION:
Federal
STATE/FORUM:
New York, United States of America
ANSWERED ON:
December 28, 2021
CLASSIFICATION:
Intellectual property
Business associations

Issue:

When a corporation is dissolved without distributing the company's trademark and tradename to the shareholders, can one shareholder legally use the trademark and tradename for their own new entity?

Facts:

ACME Corp., a company that sold explosives, dissolved, paid off its liabilities, liquidated and distributed most of its assets, but did nothing about its trademark or tradename. One shareholder, Wiley Coyote, wants to use the name ACME Corp. to create a new start-up selling anvils and roadrunner traps.

Conclusion:

The mere dissolution of the entity that holds rights to a trademark does not amount to an extinction of the rights of the party in the mark. Dissolution must be coupled with an intent to discontinue interest in the mark and the good will accompanying it. (Durango Herald, Inc. v. Riddle, Sonista, Inc. v. Hsieh)

The registration of a mark may be canceled under 15 U.S.C. § 1064 if the mark has been abandoned.

A mark has been abandoned once its use has been discontinued with an intent not to resume within the reasonably foreseeable future. Nonuse for 3 consecutive years is prima facie evidence of abandonment. (Silverman v. CBS Inc., 15 U.S.C. § 1127)

Minor activities using the trademark do not constitute "use" for the purpose of determining whether a trademark has been abandoned. In order to satisfy the "use" requirement, the use of the trademark must be sufficient to maintain the public's identification of the mark with the proprietor. (Stetson v. Howard D. Wolf & Associates)

The burden of proving abandonment is on the party asserting that a mark has been abandoned. However, non-use for three consecutive years creates a rebuttable presumption of intent not to resume use. (Mele v. Davidson & Assocs., Inc.)

In Kingsmen v. K-Tel Intern. Ltd. the members of an unincorporated association, the disbanded musical group "The Kingsmen," disputed whether an individual member had the right to use the name "The Kingsmen". The United States District Court for the Southern District of New York applied the principles of abandonment to determine if the defendants had the right to use the name for a new recording. The Court held that the defendants had not established either non-use or intent to abandon, despite the fact that the group had broken up several years prior. They had continued to use the name to promote their previously recorded albums, and the former band members had continued to receive royalties for those recordings.

Law:

N.Y. Bus. Corp. Law § 1005 governs the distribution of assets after the dissolution of a corporation. Subsection (3)(A) provides that a corporation may sell its remaining assets and/or distribute its assets to shareholders:

(3) After paying or adequately providing for the payment of its liabilities:

(A) The corporation, if authorized at a meeting of shareholders by a majority of the votes of all outstanding shares entitled to vote thereon may sell its remaining assets, or any part thereof, for shares, bonds or other securities or partly for cash and partly for shares, bonds or other securities, and distribute the same among the shareholders according to their respective rights. In the case of a sale under this subparagraph where the consideration is in whole or in part other than cash, any shareholder, entitled to vote thereon, who does not vote for or consent in writing to such sale, shall, subject to and by complying with the provisions of section 623 (Procedure to enforce shareholder's right to receive payment for shares), have the right to receive payment for his shares. Section 909 (Sale, lease, exchange or other disposition of assets) is not applicable to a sale of assets under this paragraph.

(B) The corporation, whether or not it has made a sale under subparagraph (A), may distribute any remaining assets, in cash or in kind or partly each, among its shareholders according to their respective rights.

No relevant New York statutes that govern what happens to a dissolved corporation's undistributed intangible assets were identified, nor was any federal or New York caselaw discussing whether a former shareholder may use a dissolved corporation's undistributed trademark or tradename.

In Sonista, Inc. v. Hsieh, 348 F.Supp.2d 1089 (N.D. Cal. 2004), the United States District Court for the Northern District of California held that the mere dissolution of the entity that holds rights to a trademark does not amount to an extinction of the rights of the entity in the mark. Dissolution must be coupled with an intent to discontinue interest in the mark and the good will accompanying it (at 1095-1096):

The parties do not contest that Sonista sold products under the DVONE name as recently as Spring 2003, Hsieh Dec. ¶ 3, thus the Lanham Act's statutory abandonment period does not assist defendants in making out a prima facie case. Defendants present evidence that Sonista's board voted to dissolve the company on April 22, 2004. Id. ¶ 8, Ex. 3. However, mere dissolution of the trademark holder does not amount to an extinction of the rights of the parties in that mark. Dissolution must be coupled with an intent to discontinue interest in the mark and the good will accompanying it. Durango Herald, Inc. v. Riddle, 719 F.Supp. 941, 945 (D.Colo.1988). Moreover, this April 2004 vote to dissolve the company and liquidate its assets cannot serve as Hsieh's authorization to sell the DVONE mark to Techpac first, because the sale happened at least six months before the vote in October 2003 and, second, because Hsieh resigned all

Page 1096

offices he held with Sonista at that meeting.

In Durango Herald, Inc. v. Riddle, 719 F.Supp. 941 (D. Colo. 1988), the United States District Court for Colorado dealt with the rights of partners in a dissolved partnership. The Court noted that in order to affect the rights to a trademark, dissolution must be coupled with an intent to discontinue interest in the mark and the good will accompanying it (at 945):

The problems which flow from the individual rights of partners to a dissolved joint enterprise are often complex. See, e.g., Oklahoma Beverage Co. v. Dr. Pepper Love Bottling Co., 565 F.2d 629, 631 (10th Cir.1977) (partner has no claim to individual rights in trade name without perfection by use). Defendants contend that trademark or trade dress cannot be infringed once the entity owning the marks has dissolved. Mere dissolution of the holder of a trademark, however, does not amount to an extinction of the rights of the parties in that mark. Kingsmen v. K-Tel International, Ltd., 557 F.Supp. 178, 183 (S.D. N.Y.1983). Dissolution must be coupled with an intent to discontinue interest in the mark and the good will accompanying it. Id.; 15 U.S.C. § 1127(a) (statutory abandonment). Neither party has indicated an intent to disaffirm its rights in the good will inuring to "DIRECTORY PLUS" and, in fact, this litigation is basically a dispute over the ways the parties may lawfully appeal to that good will.

Under 15 U.S.C. § 1064, a party may apply to cancel the registration of a trademark if the mark has been abandoned:

A petition to cancel a registration of a mark, stating the grounds relied upon, may, upon payment of the prescribed fee, be filed as follows by any person who believes that he is or will be damaged, including as a result of a likelihood of dilution by blurring or dilution by tarnishment under section 1125(c) of this title, by the registration of a mark on the principal register established by this chapter, or under the Act of March 3, 1881, or the Act of February 20, 1905:

[...]

(3) At any time if the registered mark becomes the generic name for the goods or services, or a portion thereof, for which it is registered, or is functional, or has been abandoned [...]

15 U.S.C. § 1127 provides that a mark has been abandoned if it is found that its use has been discontinued with intent not to resume use:

A mark shall be deemed to be "abandoned" if either of the following occurs:

(1) When its use has been discontinued with intent not to resume such use. Intent not to resume may be inferred from circumstances. Nonuse for 3 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.

[...]

As explained by the United States Court of Appeals for the Second Circuit in Silverman v. CBS Inc., 870 F.2d 40, 9 USPQ2d 1778 (2nd Cir. 1989), a mark has been abandoned once use has been discontinued with an intent not to resume within the reasonably foreseeable future (at 46):

Ordinarily, 21 years of non-use would easily surpass the non-use requirement for finding abandonment. See, e.g., I.H.T. Corp. v. Saffir Publishing Corp., 444 F.Supp. 185 (S.D.N.Y.1978) (denying preliminary injunction to protect trademark after 12 years of non-use). The District Court concluded, however, that CBS had successfully rebutted the presumption of abandonment arising from its prolonged non-use by offering a reasonable explanation for its decision to keep the programs off the air and by asserting its intention to resume use at some indefinite point in the future. This conclusion raises a question as to the proper interpretation of the statutory phrase "intent not to resume": Does the phrase mean intent never to resume use or does it merely mean intent not to resume use within the reasonably foreseeable future?

We conclude that the latter must be the case. The statute provides that intent not to resume may be inferred from circumstances, and two consecutive years of non-use is prima facie abandonment. Time is thereby made relevant. Indeed, if the relevant intent were intent never to resume use, it would be virtually impossible to establish such intent circumstantially. Even after prolonged non-use, and without any concrete plans to resume use, a company could almost always assert truthfully that at some point, should conditions change, it would resume use of its mark.

We do not think Congress contemplated such an unworkable standard. More likely, Congress wanted a mark to be deemed abandoned once use has been discontinued with an intent not to resume within the reasonably foreseeable future. This standard is sufficient to protect against the forfeiture of marks by proprietors who are temporarily unable to continue using them, while it also prevents warehousing of marks, which impedes commerce and competition.

We are buttressed in this conclusion by the fact that the statute requires proof of "intent not to resume," rather than "intent to abandon." The statute thus creates no state of mind element concerning the ultimate issue of abandonment. On the contrary, it avoids a subjective inquiry on this ultimate question by setting forth the circumstances under which a mark shall be "deemed" to be abandoned. Of course, one of those circumstances is intent not to resume use, which is a matter of subjective inquiry. But we think the provision, by introducing the two concepts of "deemed" abandonment and intent not to resume use, contemplates a distinction, and it is a distinction that turns at least in part on duration of the contemplated non-use.

Minor activities using the trademark do not constitute "use" for the purpose of determining whether a trademark has been abandoned. Rather, as explained by the Second Circuit Court of Appeals in Stetson v. Howard D. Wolf & Associates, 955 F.2d 847 (2nd Cir. 1992), to satisfy the use requirement, the use of the trademark must be sufficient to maintain the public's identification of the mark with the proprietor (at 851):

In finding that CBS abandoned its trademark by its actions, we rejected both arguments. We held that in determining non-use, the motive for cessation of use is irrelevant. Id. at 47. Furthermore, we stated that neither "challenging infringing uses" nor "sporadic licensing" for non-commercial activities constitutes use. Id. at 47-48. To satisfy the use requirement, application of the trademark must be sufficient to maintain "the public's identification of the mark with the proprietor." Id. at 48. Minor activities and worthy motives for non-use do not alter the analysis which requires use of the mark to avoid abandonment.

In Mele v. Davidson & Assocs., Inc., 2004 U.S. Dist. LEXIS 33176, 2004 WL 2285111 (W.D.N.Y. October 7, 2004), the United States District Court for the Western District of New York noted that the burden of proving abandonment is on the party asserting that a mark has been abandoned. However, non-use for three consecutive years constitutes prima facie evidence of abandonment and creates a rebuttable presumption of intent not to resume use (at 23-24):

The burden of proving abandonment is on the party asserting it. Emmpresa Cubana del Tabaco v. Culbro Corp., 213 F. Supp. 2d 247, 268 (S.D.N.Y. 2002). Non-use for three consecutive years, however, constitutes prima facie evidence of abandonment, creating a rebuttable presumption of intent not to resume use, which must be refuted with "'more than conclusory testimony or affidavits.'" Id. at 271, quoting Imperial Tobacco, Ltd. v. Philip Morris, Inc., 899 F.2d 1575, 1581 (Fed. Cir. 1990), and also citing Cerveceria Centroamericana, S.A. v. Cerveceria India, Inc., 892 F.2d 1021, 1027 (Fed. Cir. 1989) (holding "vague" testimony regarding intent to resume given "little or no weight") and Rivard v. Linville, 133 F.3d 1446, 1449 (Fed. Cir. 1998) (finding evidence must be more than a mere denial of an intent to abandon). See also 15 U.S.C. §1127. Once the presumption is established, the party opposing abandonment has the [*24]  burden of producing "objective, hard evidence of actual 'concrete plans'" to intend to resume use within the reasonably foreseeable future. Emmpresa Cubana Del Tabaco, 213 F. Supp. 2d at 268, quoting Silverman v. CBS Inc., 870 F.2d 40, 46 (2d Cir. 1989) (explaining that a mark is abandoned once use has been discontinued with an intent not to resume use within the reasonably foreseeable future). See also Rivard, at 1449 (finding that "[t]o prove excusable nonuse, the registrant must produce evidence showing that, under his particular circumstances, his activities are those that a reasonable businessman, who had a bona fide intent to use the mark in United States commerce, would have undertaken.").

In Kingsmen v. K-Tel Intern. Ltd., 557 F.Supp. 178 (S.D.N.Y. 1983), the members of the disbanded musical group "The Kingsmen" disputed whether an individual member had the right to use the name "The Kingsmen". The band was an unincorporated association, not a corporation or partnership, but the United States District Court for the Southern District of New York applied the same principles of abandonment to determine if the singer had the right to use the name for a new recording. The Court held that the defendants had not established either non-use or intent to abandon, despite the fact that the group had broken up in 1967. They had continued to use the name to promote their previously recorded albums, and the former band members had continued to receive royalties for those recordings (at 183):

Defendants argue vigorously that the fact that the five plaintiffs herein ceased recording and disbanded in 1967 constitutes abandonment of any interest in the name Kingsmen under the Lanham Act. Section 45 of the Lanham Act provides, in relevant part:

A mark shall be deemed to be "abandoned" —

(a) When its use has been discontinued with intent not to resume. Intent not to resume may be inferred from circumstances. Nonuse for two consecutive years shall be prima facie abandonment.

15 U.S.C. § 1127. The Lanham Act thus requires two elements: non-use and an intent not to resume use. Saratoga Vichy Spring Co. v. Lehman, 625 F.2d 1037, 1043 (2d Cir.1980). The Second Circuit has held that the prima facie abandonment provided under the Lanham Act after two years of non-use is merely a rebuttable presumption of abandonment. Id. at 1044.

We find that defendants have failed to show either non-use or intent to abandon. Even though plaintiffs disbanded their group in 1967 and ceased recording new material, there is no evidence suggesting that they failed to use the name Kingsmen during the period from 1967 to the present to promote their previously recorded albums. Moreover, the fact that these individuals continue to receive royalties for Kingsmen recordings flies in the face of any suggestion of intent to abandon use of the name Kingsmen. These plaintiffs have no more abandoned their right to protect the name of Kingsmen than have The Beatles, The Supremes or any other group that has disbanded and ceased performing and recording, but continues to collect royalties from the sale of previously recorded material. We must reject defendants' contentions that the name Kingsmen has been abandoned to the public domain.

Authorities:
N.Y. Bus. Corp. Law § 1005
Sonista, Inc. v. Hsieh, 348 F.Supp.2d 1089 (N.D. Cal. 2004)
Durango Herald, Inc. v. Riddle, 719 F.Supp. 941 (D. Colo. 1988)
15 U.S.C. § 1064
15 U.S.C. § 1127
Silverman v. CBS Inc., 870 F.2d 40, 9 USPQ2d 1778 (2nd Cir. 1989)
Stetson v. Howard D. Wolf & Associates, 955 F.2d 847 (2nd Cir. 1992)
Mele v. Davidson & Assocs., Inc., 2004 U.S. Dist. LEXIS 33176, 2004 WL 2285111 (W.D.N.Y. October 7, 2004)
Kingsmen v. K-Tel Intern. Ltd., 557 F.Supp. 178 (S.D.N.Y. 1983)