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A ‘Clothes’ Call: Anticipating IP Issues in Partnerships

Breaking up is hard to do, in business as in life. Take the story of ‘T’ and ‘M.’ Fresh out of school, T had the vision for a clothing line. The line would be a blend of two cultures, just like its creator: Peruvian and American. It would feature pieces made of Peruvian lima cotton, combining high quality, fashion, and function. M appreciated the vision and was willing to fund the venture. The two entered into a partnership in the form of an LLC. T and M decided to use T’s name for the clothing line, as the combination of a Peruvian first name and an American last name fit the brand perfectly.

Fast forward five years. The brand is doing well—the line has expanded into multiple seasons and pieces, with frequent media mentions, celebrities pictured wearing the garments, and glowing reviews from industry insiders. The brand has a well-regarded reputation.

As can happen in even the strongest of partnerships, T’s and M’s visions began to diverge. Call it creative differences, but the partnership was crumbling. However, neither partner was ready to call it in on the brand. Both wanted to use the company name going forward. Both realized that after five years of hard work, the name was worth something—the company had brand recognition, industry contacts, and a solid reputation. The name had an intangible value, or goodwill, associated with it.

Unfortunately, the original partnership agreement said nothing about intellectual property. Understandably, it can be hard to recognize the value or potential value in a trademark or name before the business has even gotten off the ground. However, by the time the mark has generated goodwill and become valuable, the appropriate time to decide how IP will be divided upon dissolution has passed.  Business ventures often start with a flurry of excitement and honeymoon-esque feelings. At the outset of a venture, the last thing you want to consider is an eventual break-up, but that is exactly when it should be done.

In this story, both T and M contributed to the success of the clothing line, but absent a provision to the contrary, it’s the partnership that owns the rights to the intellectual property. While the partnership acquired common law trademark rights in the name through over five years of use, no federal trademark application was ever filed. Upon the split, both T and M raced to register T’s name, presenting a slew of issues. T’s desire to continue using her own name ran into the reality that the name’s secondary meaning (which makes it a registrable mark) derived from the partnership’s use of, and thus rights in, the name. M had to confront an added wrinkle: the name identifies a living person, whose consent to use is a requirement for registration. The result was a contentious battle for continued use of the name, and eventually costly rebranding.  In the end, both parties had to move forward under different names.

So what could they have done differently?

When a business is starting, and names are being considered, it’s a good idea to carefully evaluate both whether the name infringes on another name and whether it’s a protectable mark.  In the case of T and M, the matter was further complicated because they used T’s name. Using a name can have branding advantages, and is sometimes the best fit for a company—but it also presents risks that materialized in this situation.

No matter what the company name, if the partnership dissolves and there’s no provision for dividing the assets and IP, the resulting issues and dispute can be costly and complex. T’s and M’s story particularly emphasizes the importance of considering IP at the formation stage.

Here, T and M could and should have considered at formation what departure from the partnership would look like, including who would retain rights in the IP or how the IP would be divided, and possible logistics regarding both parties carrying on in the same business. Here are a few possibilities:

  • The partnership agreement could have contemplated a buy-out, whereby one party pays the other to retain the right to continue using the name and its associated goodwill.

 

  • The agreement could have specified a way to divide the business, including the physical and intellectual property.

 

  • A third option is an agreement to share the property upon dissolution, through leases and intellectual property licenses.

When partners don’t see eye to eye, separation may be the preferred alternative to being stuck in business together. Sometimes the most valuable asset the partnership has is its intellectual property, and considering this at formation can save both headache and heartache.

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About this Author

Rachel A. Nicholas, Intellectual Property Attorney, Lewis Roca Law Firm
Associate

Ms. Nicholas is an associate in the firm’s Intellectual Property practice group. She focuses her practice on copyright and trademark law. 

Ms. Nicholas’ experience includes assisting with contractual matters, drafting memoranda, and working on licensing agreements. 

Before joining the firm, Ms. Nicholas worked as a legal intern for Phoenix Children’s Hospital. 

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