Learn from a cautionary tale of bankruptcy resulting from a trademark dispute in an M&A deal. Understand the importance of addressing trademark conflicts before acquisition and the role of legal advice.
M&A Stories
December 08, 2020
Introduction:
When considering the acquisition of a business, it’s crucial to thoroughly examine all aspects, including potential trademark conflicts. A recent case highlights the significant impact of overlooking trademark issues in a merger or acquisition.
The Story:
In this instance, a business in San Diego that specialized in selling firearm parts and accessories was up for sale. The transaction involved transferring the business’s assets, including its trade name. During negotiations, the seller’s owner informed the buyer’s owner that an application to trademark the tradename had been submitted to the U.S. Patent and Trademark Office in early 2014. However, crucial information was omitted: a Florida-based firearms company with a similar trademark had filed an opposition against the seller’s trademark application in September 2014.
In November 2014, the buyer purchased the business, gaining the rights to use the tradename. Unfortunately, the buyer’s owner was unaware of the Florida competitor’s trademark challenge. Both the buyer’s and seller’s owners had assured their compliance with the asset purchase agreement.
The Conflict:
After the acquisition was finalized, the Florida competitor filed a lawsuit against the buyer for trademark infringement, asserting their use of the tradename since the 1990s. To resolve the dispute, the buyer and seller agreed to discontinue the use of the tradename and adopt a new one. This change led to a significant decline in online traffic and sales, with no recovery in sight.
The aftermath was dire: the buyer’s company ultimately went out of business, leading to their filing for Chapter 7 bankruptcy.
Key Lesson:
This case underscores the importance of addressing potential trademark conflicts in M&A deals. The buyer was aware of the seller’s trademark application but failed to recognize the impending challenge from the competitor. To avoid such pitfalls, it’s advisable to consult with a trademark lawyer who can guide you through the process. If any potential challenges to the trademark arise before the deal closes, it’s wise to reassess the viability of the transaction.
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)
In Summary:
The case serves as a cautionary tale about the repercussions of neglecting trademark concerns in a business acquisition. Buyers must diligently ensure that they secure the rights to crucial trademarks, especially when oppositions or challenges have been raised before the deal’s completion. Seeking legal advice and conducting thorough due diligence can prevent devastating outcomes like bankruptcy due to trademark disputes.
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
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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