You want to protect your business, but what legal strategy will help you to protect it best?
This might sound a little like something Yoda would say, but the particular strategy or strategies will depend upon what you are most interested in protecting.
LLCs & Corporations
Limited liability companies (LLC) or corporations are generally created pursuant to state law in order to protect the owners of businesses from the creditors of their businesses by creating a figurative "wall" between the owners and the business. Rather than a person owning the business directly, an LLC or corporation owns the business directly and the business owner has an ownership interest in the business entity.
For example, Jane incorporates a corporation in Florida called Great Restaurant Corp., which operates various restaurants of the same name, which are all located in Florida. Someone at one of the restaurants slips, falls, and is injured, requiring hospitalization. The injured person cannot sue Jane personally, rather, she has to sue Great Restaurant Corp. because Great Restaurant Corp. owns the restaurants, not Jane.
But an LLC or corporation can also protect the name of the business, right?
The names of entities, such as ACME LLC or ACME Corporation, can provide protection within the state in which an LLC was formed or a corporation was incorporated, but that's probably where the buck stops.
In the example above, Jane will likely be able to prohibit, via the courts, other businesses in Florida from using the name Great Restaurant Corp. However, Jane probably can't stop someone in New York from using the name Great Restaurant Corp. in New York, unless Jane takes other steps to protect the business name.
That's where trademarks come into play.
Trademarks & Trade Names
A trademark or trade name is a legal concept to help the public identify the source of goods or services from the goods or services of another source. For example, the trademark Chevrolet identifies the automobiles produced by General Motors from the automobiles produced by other brands, such as Toyota.
But that's where things get complicated.
in the United States, there are three principal types of trademarks:
- State (sometimes called trade names, depending upon the particular state)
- Common law
The scope, rights, and registration requirements associated with each of these types of trademarks all vary significantly.
1. Federal Trademarks
The most protective and beneficial type of trademark is a federal trademark registered on the United States Patent & Trademark Office's (USPTO) Principal Register.
Some of the benefits are as follows:
- The right to use the trademark nationwide
- The right to file for an injunction
- The right to file for monetary damages
- The right to prohibit importation
Although this bundle of rights may not seem that significant at first glance, it is.
For example, Tom owns a company that manufactures wildly-popular toys in China, which is sells in the U.S. using the trademark "Grunchkins," which is registered on the USPTO Principal Register. A competitor seeking to capitalize on the Grunchkins popularity manufactures counterfeit Grucnhkins in China and tries to import them in the United States. Because Tom owns the right to use the trademark Grunchkins throughout the United States it can file with U.S. Customs to stop the importation of infringing Grunchkins from any company but his own.
Although it provides the most protection, however, the registration requirements associated with federal trademarks registered on the USPTO Principal Register are the most demanding and complex.
In order for a trademark to be registered on the USPTO Principal Register, the trademark must:
- Be distinctive, i.e. not descriptive, or it must have acquired Secondary Meaning;
- Be "used in interstate commerce;"
- Not pose a likelihood of confusion with any other mark registered on the Principal Register;
For some businesses, meeting these requirements is just out of the question, likely because they don't need federal registration in the first place.
In the example above, if Jane doesn't ever plan to open restaurants outside of Florida, she wouldn't be able to satisfy the "use in commerce" requirement and she's already protected in Florida because that's where she incorporated the business.
Although some traditional "brick and mortar" businesses may not need federal registration on the Principal Register to protect their business names or brands, businesses that operate across state lines, e.g. technology or internet-based businesses, are the poster children for federal registration.
2. State Trademarks / Trade Names
What if you don't need the limited liability protection of an LLC or corporation and you don't do business across state lines, but you want to use a fictitious or made up name that is not your own?
That's where state trademark or trade name registration comes into play.
For example, John provides a service in the State of Arizona whereby he makes balloon animals at kids birthday parties. John calls this service "Balloonistics," which he has registered as a trade name in Arizona.
Because John has no employees and provides all the services personally, forming a limited liability entity may not provide him with much benefit, however, the state trade name registration will allow him to stop others from using the name "Balloonistics" in Arizona.
So what's the difference between a trade name and a trademark?
It depends upon state law.
In Arizona, a trademark is a stylized logo or drawing. In contrast, a trade name is simply a word or words.
3. Common Law Trademarks
What if you've been doing business for years, but you haven't applied for either federal or state registration? Well, you may have a common law trademark.
The common law that the founding fathers imported from England and incorporated into our legal system generally confers rights in a word or phrase used to distinguish the source of goods or services without state registration. That said, the common law is state-based and can vary substantially from one state to another an may be much harder to enforce and establish than a registered trademark.
As such, a common law trademark is often a last-ditch resort of most businesses and organizations when it comes to protecting the business names and brand.
State Limited Liability & Federal Trademark Registration
As mentioned above, not all businesses need both limited liability protection and federal trademark registration on the Principal Register, however, businesses that either currently, or in the future plan to, provide services to many customers across states lines, likely need both limited liability protection and federal trademark registration, if possible.
This overview of some important considerations associated with federal trademarks, state trademarks and trade names, and common law trademarks is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.