Business Buyer’s Owner Loses Trademark to Competitor and Ends Up in Bankruptcy

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M&A Stories

December 08, 2020

Introduction

You have to kick the tires of a business you want to buy. That includes asking whether the target’s tradename infringes upon a competitor’s tradename.

The deal

This deal involved the sale of the assets of a San Diego based business which sold firearm parts and accessories. The sale included a tradename.

During negotiation, the seller’s owner told the buyer’s owner that an affiliate company filed in early 2014 an application to trademark the tradename with the U.S. Patent and Trademark Office. However, the seller’s owner did not tell the buyer’s owner that a Florida-based company that designs, manufactures, and sells firearms and related components under a similar trademark filed an extension with the U.S. Patent and Trademark Office to oppose the seller group’s trademark application. This opposition was filed in September of 2014.

In November of 2014, the buyer purchased the seller’s business, including the right to use the tradename in the business. The buyer’s owner did not know about the Florida competitor’s trademark claim. The owners of the buyer and seller guaranteed their company’s asset purchase agreement obligations.

The lawsuit

After the closing the competitor sued the buyer for trademark infringement. The competitor claimed that it had been using the tradename since 1990’s. The buyer and the seller settled the dispute with the buyer agreeing to drop the use of the name and operate under a new trade name. “The new name, and a corresponding change to the company’s website address, caused both online traffic and sales to plummet. … Neither traffic nor sales ever rebounded.”

The buyer’s company went out of business and the buyer filed for chapter 7 bankruptcy.

This case is referred to as In Re Stirlen, Bankruptcy Case No. 17 B 06666, Adversary Case No. 17 A 00424, United States Bankruptcy Court, N.D. Illinois, Eastern Division, (April 30, 2020) 

Comment

This case is hard to read because of the what if.

The buyer knew that the seller group had filed an application to register the tradename as a trademark with the U.S. Patent and Trademark office. Now if the tradename was important to the buyer then he should have made sure that he was getting the tradename.

In this case a trademark lawyer would tell him that they should not close if anyone had come out of the woodwork before closing to challenge the seller’s trademark registration application. In this case a competitor did file opposition papers two months before closing.

Then with the competitor’s presence known before closing, the buyer could evaluate the viability of the deal.

By John McCauley: I help people manage M&A risks involving privately held companies.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291 

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Posted in copyrights, due diligence, patents, trademark infringement, trademarks Tagged with: ,

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