Pitfalls to Avoid When Securing a Business Name

One helpful service a lawyer can provide for start-up clients is assistance in securing a name for the new business. Although the California Secretary of State’s website offers some guidance and permits “availability inquiries” by letter prior to the reservation of a specific name, getting a business name approved by the Secretary of State alone does not assure its safe use. And finding out after the fact that a business name is not protected can be disruptive to correct and very expensive.

There are many common misconceptions about the legal right to use a name that has been selected. For example, many attorneys wrongly believe that a client can use a name with impunity if:

  • the California Secretary of State’s office has approved it;
  • the name is spelled differently from another name in use;
  • the client has already been using the name without a problem for a few years;
  • the client owns an Internet domain name(s) that contains the name that has been selected; or
  • the name includes the client’s last name.

Each of these assumptions is wrong. Although many people (including lawyers) believe state corporate law governs business names, the truth is that the actual governing law is federal trademark law. If a chosen name for a client’s business doesn’t qualify under, or is not protected by, federal trademark law, the client could be subject to legal attack and exposure to injunctions, damages, and litigation costs.

Case History

Here’s a real-life example: A Colorado hair salon began using “Haircrafters” as its new name. A few years later, the salon received a cease and desist letter from a New York-based haircutting franchisor who owned a federal trademark registration of the same name. The dispute ended up in litigation. The Colorado salon lost and had to change its name, even though it had been using “Haircrafters” for years and had registered the name with the state of Colorado. (Mesa Springs Enters., Inc. v. Cutco Industries, Inc., 736 P.2d 1251 (Colo. App. 1987).)

The dilemma arose because federal trademark law trumps state corporate law; it also overrides state trademark law.

Given these realities, the best way to protect a client’s business name is to do a full trademark clearance. This work includes a formal search and investigation before selecting the name, and then, if it’s available, registering it as a federal trademark.

Registering the Mark

Federal trademark law is embodied in the United States Code. (See 15 U.S.C. §§ 1051-1141n.) The code protects both registered and unregistered trademarks and service marks. Federal trademark law protects distinctive words, designs and logos, product and packaging design (called trade dress), sounds, smells, and virtually anything else used by a person or entity to identify and distinguish its products or services. (Qualitex Co. v. Jacobsen Products Co., Inc., 514 U.S. 159, 163 (1995); see also 15 U.S.C. § 1127.) Federal registration lasts for ten years and can be renewed as long as the mark remains in use. (15 U.S.C. § 1059.)

Beyond Registration

In addition to registration, trademark rights can be created through use of the name. However, such common law rights are limited to the geographic area where the company’s reputation extends, which could be as small as a few square miles. (See All Video, Inc. v. Hollywood Entm’t Corp., 929 F. Supp. 262 (E.D. Mich. 1996).)

Because many marks in use are unregistered, a search on the U.S. Patent and Trademark Office website is not enough. One option is to hire a commercial trademark search company to find and identify federal and state registrations, common law uses, and domain names. But assessing factors that may block the use or registration of a client’s potential trademark is a challenge, and a wise advisor will enlist a trademark lawyer to analyze the findings.

It’s always safest to get a formal federal trademark registration. Better to obtain these rights at the outset of a new business than be forced to scramble to recover later on – after untold sums have been spent on signage, stationery, marketing, and other start-up expenses.

New business owners have enough on their plates without facing an injunction to stop using their favorite name just when the operation is taking off.

Reprinted with permission of Steven M. Weinberg, Esq. (Partner, Holmes Weinberg PC)