Choosing a Name for Your New Business: Trademark Law Issues

One of the first choices a new business must make is what name to give the business. Businesses think first and foremost about the marketing and branding considerations going into the name. Is it a memorable name? Does it help to create positive images in consumers’ minds about the product or service? All of these concerns will help businesses create a universe of names from which to choose.

In addition to the business issues involved in choosing a name, businesses should also consider trademark law. First, a new business should consult with legal counsel to make sure that the names it is thinking of using is not already taken by another business. If another business is already using the name, that business could assert a claim against the new business for trademark or service mark infringement.

Second, under trademark law, some names are easier to protect than others. For instance, famous marks like Exxon and Apple (for computers) are entitled to strong protection. By contrast, generic words such as “milk” and “car” are completely in unprotectable when used with the products they describe. No one is permitted to gain exclusive rights to use these common words.

The strongest types of marks are either made-up words having no meaning in English or have a meaning, but not in connection with the product with which it is used. Made-up marks include Exxon and Kodak, which are referred to as “fanciful” marks. English words unconnected with their product are “arbitrary” marks, and include Apple for electronics and Camel for cigarettes. Fanciful and arbitrary marks are entitled to the strongest protection under the law, and are therefore preferable, other things being equal.

The next strongest marks are called “suggestive,” because the mark is suggestive of a characteristic of a product without directly describing the product. It takes a leap of imagination to connect with them the product or service. For instance, the word mark “poison” when used with perfume suggests danger, intrigue, and excitement without directly describing perfume.

The weakest marks are called “descriptive,” because they describe a product or a characteristic of it. For instance, words like “best,” “giant,” or ” gold medal” are descriptive. Descriptive marks are unprotectable unless they acquire what is called “secondary meaning.” A business can obtain secondary meaning of a mark via repeated significant advertising that links the mark to the business as the source of the product. All three of the descriptive marks above have acquired secondary meaning, namely Best for mayonnaise, Giant for groceries in the DC area, and Gold Medal for flour. The companies using these marks have heavily advertised them with their products and thus can protect them. For other products, however, these words are merely descriptive and are unprotectable.

Finally, as stated above, generic words such as milk and car are completely unprotectable. Interestingly, the generic words “aspirin” and “gasoline” used to be trademarks. Because the companies that created them failed to protect them, and people used them as generic words, they are now unprotectable in connection with the products to which they refer.

Our firm has helped numerous businesses to create corporations and limited liability companies. We help our clients in choosing a name by checking for possible prior use. We also counsel them on what name is most protectable from a trademark law perspective. Choosing a good name from a trademark law perspective will help a business start on the right foot.

StevenSWu3

Attorney Stephen Wu is a partner in the law firm of Cooke Kobrick & Wu LLP in downtown
Los Altos.  He can be reached at (650) 917-8045 or at swu@ckwlaw.com.

 

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Starting Your Own Business – 5 Key Decisions

Our law firm helps numerous businesses incorporate or organize limited liability companies.  Many of our clients ask, as their first question, “What information do you need to start organizing our new business?”  In this article, I will lay out the top decisions you will need to make and the kinds of information I ask for when organizing a new business.  These decisions relate to the process of organizing the business from a legal perspective, and are in addition to the many business decisions the new business must make.  Most frequently, our firm sets up corporations and limited liability companies (LLCs) for our clients, and the terminology I use here applies to them, but the answers to these questions also apply to partnerships, including limited partnerships and limited liability partnerships.

First, new businesses need to decide who will participate in the new business.  Participants in the new business include owners and managers.  Owners own the equity in the company, either stock for a corporation and membership interests in LLCs.  Owners own the company, can sell their equity for profit, are entitled to profits from the company, and can vote their interests to choose the people managing the company.  Managers run the business.  For example, the shareholder owners of a corporation choose a board of directors to oversee the corporation, and the board chooses corporate officers to manage the corporation’s everyday management affairs.  LLCs can be managed by the owner members, or the members can choose a person or business to manage the LLC’s affairs.  Managers may, but need not be, owners of the equity in the new business.  In any case, when you start a new business, you will need to decide who are the owners, and who will manage the business.

Second, new businesses need to know what roles the participants will play.  For a new corporation, at a minimum, the founders need to decide who will be on the board of directors, who will be the president, who will run the finances of the corporation as treasurer, and who will be in charge of the corporation’s records as secretary.  The business can also designate additional vice president roles.  It is possible to start a one-person corporation, with a single individual holding all these roles.  LLCs will need to decide whether the owner members will manage the LLC, or whether an outside manager will do so.

Third, new businesses need to decide how much money to put into the new business upon its organization.  There is no minimum amount or formula to answer this question.  Nonetheless, the failure to put in enough capital places the business at risk for failure, from a business perspective.  Undercapitalization also places the business at risk for creditors seeking to ignore the corporation and seeking to take the personal assets of the founders to pay the debts and liabilities of the business.  A key reason for having a corporation is to limit the liability of the owners and managers.  Thus, undercapitalization may defeat the purpose for organizing a corporation in the first place.  Accordingly, the business should have sufficient funds to cover its debts and liabilities for a sufficient period of time until they can be covered by the revenue of the corporation or further funding.

Fourth, new businesses need to decide how to divide ownership and control.  For instance, many businesses have equal owners, each having an equal share of the profits, and each having a single vote in management affairs.  Nonetheless, ownership and control need not be shared equally.  Sometimes, a founder contributing more to the business than others has a larger percentage of the equity than others.  Also, the percentage of ownership and voting rights may even be different from each other.

Finally, new businesses need to decide on a name for the business.  Choosing a name is a critical decision from a branding perspective and from a trademark law perspective.  See my other article about choosing a name for more guidance about this choice.

In sum, when our law firm organizes a business, we ask who will participate in a new business, what roles will they have, how much money will the founders put into the company, how will the participants divide ownership and control, and what will be the name of the new business.  We recommend that founders consider these questions when starting a new business, and if you are thinking of organizing a new business, the time to think about them is now.

StevenSWu3

 

Attorney Stephen Wu is a partner in the law firm of Cooke Kobrick & Wu LLP in downtown
Los Altos.  He can be reached at (650) 917-8045 or at swu@ckwlaw.com.

 

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