Intellectual Property Issues In Global Transactions Involving Luxury Goods

In many ways, global transactions involving luxury goods, and their associated services, are intellectual property transactions. You are buying or selling a portfolio of intellectual property and must address not only the different types of intellectual property but also the different jurisdictions where the company operates or intends to operate.

While management will retain intellectual property counsel to handle these issues, a fundamental understanding of intellectual property and the types of issues that arise will assist management in knowing the questions to ask and the risks that are present. By understanding the types of issues that arise, management is in a far better position to assess risk and make appropriate business decisions while working with counsel.

Recently, there has been an upswing in transactions involving celebrities, social media influencers, and well-known designers, which creates additional issues and potential pitfalls. We expect to see this trend continue, given the ease by which celebrities and influencers can reach millions of potential consumers through social media. The rise of designers as celebrities has added a level of concern because many of these designers have eponymous brands. The acquiror’s needs to obtain the right to use their name as a trademark and to license their rights of publicity create additional issues in these types of transactions.

This chapter provides a primer on the types of intellectual property that are usually involved in global transactions involving luxury goods and/or services, the issues that arise in global transactions, and a summary of the key issues of concern relating to each type of intellectual property that should be considered and addressed in the transaction documents.

In general, the following types of intellectual property are potentially involved in global luxury goods transactions:

• Trademarks;
• Rights of Publicity;
• Copyrights;
• Design Patents/ Industrial Designs;^[1]
• Trade Secrets;
• Domain Names; and
• Social Media Platforms

Each of these categories of intellectual property presents different issues. Nevertheless, the overall considerations for global transactions involving luxury goods involve the following questions:

• What intellectual property assets are being acquired?
• What intellectual property issues are disclosed in due diligence?
• Can these issues be resolved, and if so, how?
• How will the risk be allocated between the acquiror and the target company?

These issues are discussed below.

Trademarks

What is a Trademark?

A trademark is a word, name, symbol, slogan and/ or device that is used to identify the source of products or services, telling consumers that the products sold or services rendered under that trademark emanate from a single source. Trademarks include not just the brand name, but also other source identifiers, such as logos, product names (such as shade names for cosmetics), distinctive packaging, and even, under some circumstances, the shape of the product itself, marketing slogans, color, and even sounds. The Lanham Act, 15 United States, Chapter 22, is the United States federal statute governing trademark rights. There are also state law trademark and unfair competition laws that may be relevant as well.

Trademark rights develop from using the trademark for specified products or services in interstate commerce for federally protectable marks.^[2] This means if a company owns a trademark for clothing, it does not own that trademark for other products, such as jewelry, handbags, or cosmetics.

Trademark registration is not required for the protection of a trademark; however, trademark registration confers many benefits to the trademark owner. A registration permits the trademark owner to use the ® symbol, which puts the public on notice that the trademark is registered. There are other significant benefits as well.

Trademark rights in the United States are based on priority of use. The first to use (or file a valid intent to use an application to register) a trademark is the senior user of that trademark for the specified goods or services and can exclude junior users for using the same (or confusingly similar) trademark for the same or closely related goods.

In the United States, one can secure provisional rights of priority by filing an intent-to-use application, which requires that the applicant have a bona fide intent to use the trademark in interstate commerce. The rights of priority are perfected once the applicant uses the mark and files an acceptable statement of use. Thus, the filing of an intent to use application will create an earlier priority date than actual use after the filing date of that application.

Not every word or design can be protected. Certain types of trademarks – fanciful marks, arbitrary marks, and suggestive marks – are strong and readily protected. Other categories of trademarks are weak and may be protectable only if the trademark owner can show that the relevant market of consumers associates the word or name with a single source, which is generally referred to as “secondary meaning” or “acquired distinctiveness.” Secondary meaning is developed and shown by a variety of factors, including advertising, publicity, sales success, length of use, and exclusivity of use.

Word trademarks can consist of a single word, several words (known as composite trademarks), or slogans. For example, single-word marks include NIKE and TARGET; composite marks are marks like DUNKIN’ DONUTS and CHRISTIAN DIOR, and slogans are phrases used in the marketing of the brand’s products, such as JUST DO IT for Nike products, or AMERICA RUNS ON DUNKIN for Dunkin’ Donuts.

In the United States (and in some other jurisdictions), word trademarks are classified by how “strong” they are and are categorized as follows:

• Fanciful marks are coined words that have no purpose other than to serve as a designation of the source of the products or services, such as KODAK for cameras and film, or XEROX for copiers. These trademarks can be registered without the requirement of providing evidence of secondary meaning and are considered very strong trademarks. A danger with fanciful trademarks is that they can become the generic name of the product itself and will therefore cease to operate as an identification of the source of the product. For example, this occurred with “Aspirin,” which was at one time the brand name for acetylsalicylic acid. If this occurs, the trademark owner loses its rights to that trademark.
• Arbitrary marks are real words that have nothing to do with the goods or services for which the trademark is used, such as APPLE for computers or THE GAP for clothing. These trademarks, like fanciful trademarks, can be registered without the requirement of providing evidence of secondary meaning and are considered strong trademarks.
• Suggestive marks are words that hint at the quality of the goods or services but require imagination to make the connection, such as ROACH MOTEL for an insect trap. Suggestive trademarks can be registered without the requirement of providing evidence of secondary meaning; however, they are not considered to be as strong as fanciful or arbitrary trademarks.
• Descriptive marks describe the product, service, packaging, or ingredient, such as BROWN SUGAR BODY POLISH for a body scrub with brown sugar as an ingredient. They also include all but very uncommon surnames and trademarks that are geographically descriptive, such as WOODINVILLE for a whiskey brewed in Woodinville, Washington. Descriptive trademarks cannot be registered without proof of secondary meaning and are not considered to be strong trademarks unless they have acquired very strong secondary meaning, such as American Airlines.
• Generic terms are words that identify the product or service itself, such as “white gold” for the gold alloy that looks white. Generic terms cannot be protected as a trademark. In our “white gold” example, “white gold” cannot be protected for jewelry or a metal alloy; however, if the term “White Gold” were used for perfume, the mark would be arbitrary and therefore protectable.

A trademark is not limited to words. A logo design, such as the Nike Swish, the Target “target,” and the Adidas three stripe design can serve as a trademark because consumers identify that design or logo with a single source.

The configuration of a product or its packaging can be protected as “trade dress.” Product packaging trade dress, such as the unique shape of a perfume bottle, can be protected without the requirement of providing evidence of secondary meaning. However, the configuration of a product, such as the design of a chair, cannot be protected as a trademark without proof of secondary meaning.

There are also non-conventional trademarks, such as color (the UPS Brown) or musical sounds (the NBC chime sound) that can function as an identification of the source. Such non-conventional trademarks require proof of secondary meaning to be protectable.

One of the benefits of trademark protection is that trademark rights last indefinitely, as long as the trademark is used by the trademark owner of its licensee in interstate commerce to denote the source of the product or service.

So far, this discussion has focused on trademarks in the United States. However, in global transactions, the transaction will include jurisdictions outside the United States, and this raises additional issues to consider. Trademark protection is jurisdictional. This means that owning a trademark, whether registered or common law, in the United States, does not confer trademark rights in any other jurisdiction.

What is descriptive in the United States may not be descriptive in other countries. Similarly, marks that are protectable in the United States may not be protectable in other jurisdictions. Often a trademark that is available in the United States is not available in other jurisdictions because it is owned by a third party. In some countries, trademarks must be registered to be protected. Some countries require evidence of use to support registration, while others do not. These are just a few of the issues presented in jurisdictions outside the United States.

Trademark Issues in Global Transactions

With these general principles in mind, it is time to turn to the key trademark issues that arise in global transactions. Among the most important considerations are the following:

• Does the target company own the trademarks it needs to operate? Are the trademarks registered or common law?
• Because trademarks are limited to the specific types of products or services for which they are used, the acquirer should determine whether there are conflicting trademarks owned by third parties that create an impediment to the ability of the target to expand its business into different lines of products or services.
• Are any of the target company’s trademarks subject to a license, and, if so, what are the terms that might impact the transaction?
• Because trademark rights are jurisdictional, does the target company own trademarks in all countries where the acquiror hopes to operate? If not, are there conflicting trademarks that present an impediment to using the target’s trademarks in these jurisdictions?
• Do any of the target company’s trademarks infringe third-party rights?
• Are there any third parties who are infringing the target company’s rights?
• Are there counterfeiting issues?
• How does one document this transaction and allocate risk so that the acquiror is protected without being so overly aggressive that the deal falls through?

The key to determining assets, liabilities, risk, and structure starts with conducting appropriate due diligence.

The Target’s Trademark Portfolio

The starting point is to have the target company provide a trademark portfolio report and to have your counsel conduct a portfolio search in the United States and internationally to obtain the portfolio of trademark registrations and applications owned by the target company.

This portfolio search of the trademark registries in the United States and other international jurisdictions will identify only the registrations and applications owned by the target. The target’s website and promotional/ marketing materials must also be reviewed to determine if there are any other trademarks that are part of the portfolio but were not disclosed in the portfolio report and trademark searches, including, for example, common law (unregistered) trademarks.

The acquirer’s counsel can thus confirm whether the target company owns the trademarks it needs to operate in the jurisdictions of importance to the acquiror.

Once the trademark portfolio has been identified, there must be a second layer of analysis to determine:

• Ownership: Does the target own, in its corporate name, all the trademarks necessary for the operation of the company?
  • Are any of the trademarks owned by the founder individually or by an affiliate?
  • Are any of the trademarks owned by a licensor and used under a license?
• Scope of protection: How strong are the trademarks, and are there several similar trademarks that co-exist, which could reduce the value of the trademark?
• Registration: Are the trademark registrations in full force and effect? Have any lapsed because the target has failed to pay the required maintenance fees and file the required documentation? Are there common law marks for which applications for registration should be filed?
• Restrictions: Are there settlement agreements or other agreements that restrict the target company’s rights in its trademark or the right to expand the use of the trademark for other goods or services or in other jurisdictions?
• Security interests: Are there security interests filed against any registrations?
• Infringement risk: Are there senior users who have objected or may object on the grounds that any of the target’s trademarks are infringing their rights?
• Policing the trademarks against infringement: Are there infringing uses that we need to enforce against, and how do we do that in an effective and cost-effective manner that will not backfire from a social media/ public relations perspective?
• Counterfeiting: Have the target’s products been the subject of counterfeiting, and if so, what if any steps are in place to address this problem?

To determine whether there are potential problems relating to the above issues, the acquiror should ensure that each trademark identified as important to the business of the acquiror is searched to determine whether it is owned by another individual or entity and whether there are impediments to use, to expansion into other product lines, and/ or if expansion into other jurisdictions.

If a trademark is owned by any person or entity other than the target, then the question is whether that mark is being used under license or whether it can be contributed to the target as a condition of closing.

In global luxury transactions, we often encounter targets involving eponymous brands (such as DONNA KARAN), where the brand name is also the personal name of the celebrity or designer. Such transactions can create specific pitfalls.

Personal Name Trademarks. Personal name trademarks create special issues. A personal name trademark cannot be registered without the consent of the living person. Therefore, the transaction documents must contain a further assurance provision to ensure that the individual will provide their written consent to file to register their full name as a trademark for all the classes of products that are covered by the agreement. It is important that the further assurance provision is broad to allow for flexibility for the brand to expand. For example, the personal name trademark may be used currently only for cosmetics, but there may be an intent to expand the brand into other products, such as clothing and jewelry. It is important to ensure that the transaction documents obligate the individual to consent to the registration of products and services that may be developed in the future.

It is good practice to have signed blanket consent as part of the transaction documents with a further assurances provision requiring the individual to sign additional consents for each new application. In some transactions, the parties will allow the celebrity/designer to consent to all uses other than specific categories of reserved uses, or conversely, the parties will agree that the acquiror has the right to use the personal name trademark only for specified products or services so that all other uses are reserved by the celebrity. In these circumstances, it is crucial that the transaction documents are detailed and clear to identify what products and services will belong to the acquiror and what will be reserved.

Surname Marks. Often there is a desire to register the celebrity/designer’s last name as a trademark, such as FENTY BEAUTY for Rihanna’s cosmetics brand. As discussed above, under United States law, for all but very uncommon last names, a surname cannot be registered as a trademark without presenting adequate evidence of secondary meaning. Because it takes time to develop secondary meaning, there almost always will be a gap between using the surname mark and developing the exclusive right to use the surname mark.

Such surname trademarks, once they are in use, can be registered in the United States on the Supplemental Register.^[3] The Supplemental Register is a special register for descriptive marks that confers more limited rights than registration on Principal Register, but it does confer some benefits. The registrant can use the “R in a circle” symbol (®) for registered marks and will get priority over junior users if the registrant can develop the secondary meaning necessary to obtain full federal trademark rights. However, the registrant will not have exclusive rights in the trademark at this point because a trademark owner can obtain the exclusivity of a descriptive trademark only if that mark develops a secondary meaning.

Once the trademark has developed secondary meaning, or after the five-year anniversary date of the Supplemental Register registration (whichever is sooner), the registrant can apply to register the trademark on Principal Register, which will confer then all the benefits of full trademark registration.

It is important to note that trademarks that consist of surnames in the United States may not be considered surnames or be unregistrable in other countries. Thus, the acquiror may be able to register surname marks in other jurisdictions while it undertakes to develop secondary meaning in the surname mark in the United States.

Scope of Protection. As discussed above, some trademarks are considered strong trademarks, either because they are inherently strong (e.g., fanciful, or arbitrary) or because they have developed a strong degree of secondary meaning and consumer recognition. These marks are easier to police and to stop use by third parties of similar marks.

Other marks are weak, either because they are descriptive or because there is widespread third-party use and/or registration of similar marks, which creates a crowded field limiting the scope of protection for each of the marks. For composite marks, the trademark can be weak if there is widespread use or registration of one word of the composite mark.

In addition, it is important to evaluate whether trademarks are available to use for products or services that are in the line of potential expansion, as well as their availability in all jurisdictions of existing use or contemplated expansion.

Third-Party Agreements. In due diligence, it is important to obtain all third-party license agreements for each trademark. This includes both licenses to use the trademark as well as licenses allowing third parties to use the trademark. Important issues relating to license agreements include the following:

• What is the term of the license, and can it be terminated?
• What is the jurisdictional scope of the license?
• What is the license fee/ royalty?
• Is the license assignable without consent of the licensor or licensee?
• Is the license exclusive or non-exclusive?
• What goods or services are the subject of the license?
• Is either party in breach of the license?

In addition to license agreements, there are other agreements that may impact the target company’s trademark rights. For example, the acquiror should determine whether the target has entered into any settlement agreements, which may restrict the target’s ability to use or expand the use of its trademarks. Some settlement agreements may not be assignable or may require consent for an assignment.

Infringement Issues

Trademark infringement occurs when third-party use of a trademark creates a likelihood of confusion among the relevant market of consumers as to the source of the products or services. This is true for both registered and common law trademarks.

i. United States Infringement Issues.

In the United States, each Federal Circuit has its own articulation of the factors considered to determine whether there is a likelihood of confusion as to source, sponsorship, or approval by the trademark owner.^[4] Although there is some variation, the factors generally include:

• The similarity of the two trademarks.
• Strength of the plaintiff’s trademark.
• The similarity of the products or services or whether they are sufficiently connected that there is a likelihood that one party would bridge the gap.
• The quality of the products.
• The degree of care the consumers use in making a purchase; generally, consumers exercise less care if the product is inexpensive or an impulse purchase, and they exercise more care for expensive products or services, or personal care products or services.
• The overlap in marketing channels and target market of consumers.
• The existence of actual confusion or a properly conducted survey that presents evidence of a likelihood of confusion; and
• The intent of the junior user, particularly if there is an intent to create confusion as to source, sponsorship, or affiliation.

The fact finder (a jury, court, or the Trademark Trial and Appeal Board (“TTAB”) in the case of opposition to registration or a petition to cancel a registration) looks at the evidence on each factor and then weighs them to determine whether there is infringement.

In due diligence, it is important to obtain all cease-and-desist letters (both those sent by the target and those received). Due diligence should also determine whether there have been any trademark infringement lawsuits or proceedings before the TTAB, as well as any settlement agreements, as discussed above. This will enable the acquiror to evaluate the risk of trademark infringement liability, and the risk and cost of potential litigation.

Where due diligence discloses that the target may face infringement risk, it is important to review the company’s insurance policies to determine whether the company has advertising injury insurance, which may provide coverage not only for the claim itself but also for legal fees under a “duty to defend.” If there is a possibility of such coverage, the acquiror should determine if notice was given in a timely fashion.

In addition, the transaction documents could include a holdback and special indemnity so that the target and not the acquiror bears the risk associated with any such litigation.

Due diligence may also reveal that there are third parties who are infringing trademarks owned by the target. A trademark owner has an obligation to enforce its trademark rights against infringers. Therefore, the acquiror may either seek to have the target take action to stop the infringing uses before the transaction closes, or it may instead choose to take action after it acquires the target.

Under either circumstance, there is a balance between the obligation to protect trademarks against infringement and the potential negative public relations impact if the target is deemed to be overly aggressive and risk being labeled as a “trademark bully.”

While some brand owners overreach and are bullies, most trademark owners are legitimately protecting their brand, and infringers counter by trying to impugn the reputation and good will of the brand owner by calling it a “trademark bully.”

There are ways to enforce trademark rights while taking take steps to minimize the risk of bad publicity:

• The social media test. The acquiror should ensure that it does not send cease and desist letters that would hurt the brand’s reputation if the recipient posted it on social media.
• Know the limits of trademark rights. Third parties have free speech rights in the United States to use trademarks in certain ways, including to criticize or parody the trademark owner, or to use the trademark in a “fair use” way to identify the trademark owner or to use a descriptive trademark in its dictionary meaning.

Bearing these principles in mind, the acquiror should engage in a policing program to stop truly infringing uses and to prevent future infringements. To prevent future infringements, the acquiror should be sure to implement an appropriate trademark-watching service that will, on a global basis, disclose newly filed applications and new domain names using the target’s trademarks.

ii. International Infringement Issues

The test for trademark infringement may be different in other countries. Therefore, it is important to work with foreign counsel to evaluate the risk of foreign infringement actions.

One recurring trademark issue in global transactions is the problem of Chinese bad-faith filings. It is common to learn through due diligence that a Chinese company owns a pending application or registration in China for some of the target’s trademarks, even for the celebrity/designer’s personal name. These applications or registration are often bad faith filing rather than legitimate conflicting registration. There has been an unfortunate proliferation of bad-faith trademark filings in China, whereby Chinese individuals or entities file to register trademarks that are being used and/or are getting a fair amount of publicity in other countries.

There are several feasible options to address Chinese bad faith filings, all of which require hiring Chinese counsel, including the following.

Cancellation. The target company can file a cancellation of the infringing trademark claiming that it is an improper registration under Articles 13 and 31 of China Trademark Law. This option is available where the target’s trademark is well-known or has been extensively used in China. Under these circumstances, it is possible to prove that the registration is a preemptive registration and will do harm to the client’s prior fame and mislead relevant customers.

To be successful, the target will need evidence that its trademark was used and promoted before the infringer filed its application, preferably for the preceding 3 years. The Chinese Trademark Office has adopted strict criteria in judging whether a mark has acquired certain influence or great fame via practical use; the burden of adducing evidence is therefore heavy.

Personal Name Marks. For personal name trademarks, there is another potential avenue to cancel an infringing Chinese trademark. The celebrity/ designer can claim that the registration infringes on their name right, based on Article 31 of the China Trademark Law. To be successful, the individual submits proof of the following facts:

• The trademark is identical with the celebrity’s name.
• The registration will cause damage to the right of that name.
• The owner of the name right enjoys certain fame in society and relevant customers will exclusively associate the name with that person; and
• The use of the registered mark will have negative effects to society.

Purchase of the Infringing Mark. In those circumstances where there is a Chinese application or registration for the target’s trademark(s) that are neither used in China nor a personal name, it is unlikely that there will be a legal basis to cancel this registration or oppose the registration of the pending application. Under these circumstances, it is advisable to hire Chinese counsel to investigate the purchase of this mark.

Defensive Filings. If there are no Chinese applications or registrations for the key trademarks of the target, it is a good strategy to file applications for registration in China as a defensive tactic. This is likely to pre-empt a third-party filing in China.

iii. Other Issues of Potential Trademark Liability.

While there are a number of other potential claims that may face the acquiror, one area of recent legal activity, particularly for cosmetic companies and food/beverage companies, is false advertising claims, including claims under the California Consumer Legal Remedies Act (CLRA), which permit class action lawsuits and provide for not only damages but also the successful plaintiff(s)’ attorneys’ fees. While these claims are generally limited to transactions in California, damages may still be large. In addition, other states have similar laws.

iv. Counterfeiting Issues

Successful brands are often the target of counterfeiters. Under the Lanham Act, counterfeiting refers to the situation where an established trademark is placed on a product or service that is not one of the legitimate products or services offered by the trademark owner. If the target has not had the resources or sophistication to combat counterfeiting, the acquiror should promptly do so after the transaction has closed.

One inexpensive and effective weapon is to register the target’s registered trademarks with Customs and Border Patrol, which will seize any suspected counterfeit goods being imported. This is particularly useful where the target’s products are manufactured in the United States and imports from any other country are likely to be counterfeit.

In addition, brands find the sale of counterfeits on websites and auction platforms such as eBay. There are procedures available through the domain registry and eBay to notify counterfeit products and to request a takedown. Due diligence should disclose whether the target has an anti-counterfeiting strategy.

Summary of Key Trademark Issues in Global Transactions

In sum, the key trademark issues in global transactions include:

• Does the target company own or have the right to the trademarks it needs to operate in all jurisdictions of interest?
• Are there any impediments to the target’s ability to expand the use of its trademarks into other types of products and services?
• Are there any impediments to the target’s ability to expand the use of its trademarks into other jurisdictions?
• Do any of the target company’s trademarks infringe third-party rights?
• Are there any third parties who are infringing the target company’s rights?
• How is risk allocated in the transaction documents? Among other things:

§ The target should represent and warrant that it owns all rights, titles, and interests in all trademarks scheduled.

§ The target should represent and warrant that its use of its scheduled trademarks in all jurisdictions where its products are sold and/ or its services are offered do not infringe the rights of any third party, and it should agree to indemnify the acquiror for any breach of this representation and warranty.

§ The target should represent and warrant that it has no knowledge that any third parties are infringing its rights.

Right of Publicity

What are Publicity Rights?

Publicity rights are different than, and separate from, trademark rights. Publicity rights are the commercialization of someone’s persona, which includes name, likeness, voice, signature, and other personal characteristics. In the United States, the right of publicity is based on the law of each individual state and differs/ varies greatly from state to state.

A person’s publicity rights are determined by where the celebrity is domiciled. This is the case for both living and deceased celebrities. In some states and in some countries, publicity rights are not extinguished with the person’s death, and the heirs of the deceased person own post-mortem rights of publicity. In other states, and in some countries, there are no post-mortem publicity rights. Even in states that do not recognize post-mortem publicity rights, the deceased celebrity’s estate may be able to prevent the use of their person under a false endorsement theory.

Publicity Rights in Global Transactions

It is important to understand the difference between trademark rights and publicity rights, particularly in transactions involving eponymous brands. While the celebrity/ designer will not be able to use their name as a trademark if the trademark is conveyed to the acquiror as part of the transaction, this does not mean that the designer cannot commercially publicize their name unless the transaction contains appropriate restrictions.

For example, what happens if the designer leaves the target after the acquisition and is then named as the designer for a competitor, appears publicly and announces that they are the true designer of the competitor, thereby undercutting the value of the acquiror’s investment.

To protect against this and other scenarios where the celebrity or designer can exploit their publicity rights in a way that is contrary to the intent of the transaction, the acquiror should require that the celebrity/ designer enters into a Persona License Agreement with the entity to be created after the acquisition.

The important issues to consider in a Persona License include the following.

Definition of Persona. It is in the acquiror’s interest to push for a broad definition of “Persona”, such as the following:

Persona means, in respect of any individual, such individual’s picture, portrait, photograph, image, name, nickname, signature, likeness, professional biographical details, characteristics, voice, or any other indicia of identity recognized by any applicable federal, state, foreign, local, municipal or other law, statute, constitution, and all ownership and exploitation rights in such Persona.

Scope of License Grant: It is in the acquiror’s interest to seek a broad grant of persona rights, such as the following:

Licensor hereby grants to Licensee during the Term a royalty-free, fully paid-up right and license to record, photograph, videotape, film, and otherwise capture, use, copy, reproduce, distribute, transmit, broadcast, display, perform, exhibit, and project Licensor’s Persona, alone or, provided it does not change the context or manner in which the Licensor’s Persona is used, in composite and/ or conjunction with other materials, including animation, text, video, sounds, and graphics, in any and all media, markets, territories, jurisdictions, and languages and in any medium now known or hereafter devised all solely in connection with the Acquired Brand.

Term of exclusivity of License Grant. The scope and duration of the exclusivity period is the subject of intense negotiations. The acquiror will want an exclusivity period to cover not only the time that the individual is at the company but also either permanently or at least for some period thereafter if the individual leaves the company. The individual will want any exclusivity period to terminate if they leave the company. If there is an end term to the exclusivity period, there will be a term of a non-exclusive license grant. The parties will therefore negotiate the length of time for a non-exclusive grant of publicity rights.

Control. The Persona License must also address the degree of control the individual will have over the use of their persona, which is in the form of approval rights. Approval rights can be very hard to implement as a practical matter, but it is certainly something a celebrity/ designer will want.

Approval rights raise issues of timing and responsiveness. From the perspective of the licensor, it is preferable to require written disapproval within a specified time and absent such disapproval, the use of the persona will be deemed to be approved. The celebrity/ designer will prefer to shift the burden so that their persona cannot be used without their written approval.

Most licenses also identify prohibited uses of a persona, such as where the use would reflect badly on the individual. The celebrity/ designer will identify those uses for which their brand will want to be prohibited.

Morals Clauses. Many licenses will contain a “Morals Clause” regarding the conduct of the celebrity/ designer, protecting the company from conduct that would harm the reputation of the business.

It is also crucial to determine whether the celebrity/ designer has licensed their persona to any other company. Existing licenses may be limited to product lines that are not at issue in the transaction; however, it is nevertheless possible that such licenses may restrict the acquiror’s ability to use the celebrity/ designer’s persona for products or services within an intended zone of expansion, or in certain countries.

There is also an infringement risk, such as when a company has used a photograph of a model or celebrity without their approval. Damages for a violation of the right of publicity will vary, based on the applicable governing law.

Summary of Key Publicity Right Issues in Global Transactions

For most global transactions, the following issues are the most important to consider:

• The acquiror will need a Persona License with the individual for use of her/ his publicity rights. For such licenses, the acquiror should consider the following questions:
  • Will the license be exclusive?
  • What will be the duration? Will it continue even if the individual leaves the company, and if so, for how long?
  • What are the products and services subject to the license?
  • Are there any existing licenses that might conflict with the Persona License?
  • How is risk allocated in the transaction documents?

Copyright

What are copyrights?

Copyrights protect expression, but not the underlying ideas. Under the Copyright Act (Title 17 of the United States Code), copyrights protect original works of authorship fixed in a medium of expression from which they can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine.

Copyright protection does not extend to public domain works or functional items.

Works of authorship include the following categories:

• Literary works.
• Musical works, including accompanying words.
• Dramatic works, including accompanying words.
• Pantomimes and choreographic works.
• Pictorial, graphic, and sculptural works.
• Motion pictures and other audiovisual works.
• Sound recordings; and
• Architectural works.

The owner of a copyright has six exclusive rights:

• The right to reproduce the copyrighted work in copies.
• The right to prepare derivative works based on the copyrighted work.
• The right to distribute the copyrighted work to the public by sale, rental, lease, or lending;^[5]
• In the case of literary, musical, dramatic, choreographic works, pantomimes, motion pictures and other audiovisual works, to perform the copyrighted work publicly.
• In the case of literary, musical, dramatic, choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly; and
• In the case of sound recordings, to perform the copyrighted work publicly by means of digital audio transmission.

While copyrights may be registered, they do not need to be unless the copyright owner is filing an infringement lawsuit; copyright registration is a precondition to filing a lawsuit unless the copyright owner is a resident of a country outside the United States. However, there are good reasons to register a copyright. Among other things, timely registration will allow the copyright owner to seek statutory damages and attorneys’ fees in an infringement lawsuit.

The duration of copyright for works created after January 1, 1978, is generally the life of the author and 70 years after the author’s death, although under some circumstances it can be as long as 95 years from first publication or 120 years from creation, whichever is shorter.^[6]

Obtaining copyright in one country will often provide rights in other countries under certain treaties that allow for the recognition of copyright rights. Under the Berne Convention for the Protection of Literary and Artistic Works, a work originating in a country that is a signatory of the Berne Convention receives the same copyright protection afforded in the country of origin in all Convention member states. There is no need to affix a copyright notice or to have the copyright registered to have copyright protection under the Berne Convention.^[7]

Copyright Issues in Global Transactions

As with trademarks, the starting point in a global transaction is to identify the target company’s copyright portfolio. While it is possible to conduct searches of registered copyrights by the owner, the searches will not disclose unregistered copyrights. Therefore, it is prudent to have the target company supply a schedule of its copyrights.

In luxury transactions, there may be copyright protection for items such as perfume or alcohol bottles (as sculptural works), websites, label designs, fabric patterns, advertising text, photographs, videos, and non-functional product design.

In the United States, copyrights do not currently protect functional items, such as the design of a shoe, or the design of a dress or other item of clothing, except if it meets the Star Athletica standard. In Star Athletica, the Supreme Court announced a two-part test for when a design feature of a useful article is eligible for copyright protection: (1) the feature can be perceived as a two or three-dimensional work of art separate from the useful article and (2) the feature would qualify as a protectable pictorial, graphic or sculptural work separately from the useful article. Star Athletica, L.L.C. v. Varsity Brands, Inc., 137 S. Ct. 1002 (2017).

Ownership Issues

The general rule is that a copyright is owned by the author or creator. Where the copyrighted work was designed by an employee of the target company within the scope of their employment, the copyright is owned by the target company. Under United States law, the copyright in works created by an employee within the scope of his or her employment duties is owned by the employer.

However, it is not unusual to learn through due diligence that there are copyrighted works created by an independent contractor. This means that this copyright is owned by the independent contractor, not the target company. By requesting all written agreements relating to copyrights as part of the due diligence, the acquiror can determine whether the copyright in works created by an independent contractor is owned by the target company.

It is commonly misunderstood that copyrighted works prepared by an independent contractor are owned by the company because they are “Work Made for Hire” under the Copyright Act. Work Made For Hire applies in only nine categories that are enumerated in the Copyright Act, none of which generally apply in any luxury transaction: (1) Contribution to a collective work, (2) a part of a motion picture or audiovisual work, (3) a translation, (4) a supplementary work, (5) a compilation, (6) an instructional text, (7) a test, (8) answer material for a test, and (9) an atlas.

Therefore, an assignment agreement, and not a Work Made for Hire agreement, is the proper way to transfer copyright ownership to the target company. If there are no assignment agreements in place, the acquiror may, as a condition to closing, require the target to enter into proper written assignment agreement(s), under which the independent contractor(s) assign(s) the copyright rights to the target company. Where the assignment agreement is entered into after the creation of the copyrighted work, the agreement must be supported by an additional payment to ensure there is a consideration for this agreement.

To avoid this problem in the future, the acquiror should have all independent contractors sign assignment agreements before they begin the design work.^[8]

A second common ownership issue is that some purportedly copyrighted materials, such as fabric patterns, are not in fact protectable by copyright because they are public domain materials to which no one has exclusive rights. Therefore, after the acquisition, it is prudent to educate designers that they cannot simply copy pre-existing designs, even if they believe consumers may not be aware of them.

A third ownership issue relates to whether the target company has licensed the right to use copyrighted works. As with trademark licenses, important issues relating to copyright license agreements include the following:

• What is the term of the license, and can it be terminated?
• What is the jurisdictional scope of the license?
• What is the license fee/royalty?
• Is the license assignable without the consent of the licensor or licensee?
• Is the license exclusive or non-exclusive?
• What goods or services are the subject of the license?
• Is either party in breach of the license?

Infringement Issues

For a risk assessment, it is important to determine whether the target company has infringed the copyright of a third party, or conversely, whether any of the target’s copyrights are being infringed. Therefore, as part of due diligence, the acquiror should request all cease and desist letters, litigation, and settlement agreements, in addition to conducting a litigation search.

Copyright infringement requires the plaintiff to prove that it is the owner of a valid copyright and that the defendant copied constituent elements of the work that are original. Copyright registration constitutes prima facie evidence of ownership. Unauthorized copying requires a showing that the defendant actually copied the work (which can be proved by direct or circumstantial evidence) and that the copying is illegal because a substantial similarity exists between the defendant’s work and the protectable elements of the plaintiff’s work.

In luxury transactions, there are certain areas where copyright infringement liability tends to appear, such as in the unauthorized use of photographs and other copyrighted material found on the internet in advertisements, the unauthorized use of photographs reposted on social media sites (discussed below), and in the unauthorized use of fabric patterns or copyrighted designs copied from third parties. Because one cannot conduct copyright searches in the same way one can search for trademarks, it is often difficult, if not impossible, to determine whether there are unasserted claims or potential infringement liability.

Under the Copyright Act, damages for copyright infringement can be substantial. An infringer is liable for either the copyright owner’s actual damages arising from the infringement or, if the copyright was registered in a timely manner, statutory damages.^[9] Statutory damages range from a sum of not less than $750 to a maximum of $30,000 for each copyright infringed. If the infringement is willful, then the statutory damages can increase to a sum not less than $150,000 per copyright infringed. If the copyright was registered in a timely manner, the plaintiff may also recover their attorneys’ fees.

In addition to litigation risk, a copyright infringement claim can create a public relations problem if the company’s creativity and independent development are being called into question. To minimize the risk of a copyright infringement claim, designers should be required to maintain files documenting, with dates, the independent design process.

Another potential copyright infringement risk arises out of the use of photographs. Such use can arise from the unauthorized use of a photograph in a social media post or for advertising purposes. In addition, luxury companies often enter licenses with photographers and releases from models to use photographs for limited marketing campaigns but continue to use the photographs after the license has expired. It is therefore prudent to determine whether any such photographs were used for any other campaign or other purpose.

Summary of Key Copyright Issues in Global Transactions

For most global transactions, the following issues are the most important to consider:

• What is copyrightable that the target company owns or is using?
• Does the target company own or have the right to use all of its copyrightable works?
• Are any copyrights registered?
• Is the target company infringing any third parties’ rights?
• Are any third parties infringing the target companies’ rights?
• Is the target company doing something that is going to cause backlash or cultural appropriation?
• How is risk allocated in the transaction documents? Among other things:

§ The target should represent and warrant that it owns all rights, titles, and interests in all copyrights scheduled.

§ The target should represent and warrant that its scheduled copyrights in all jurisdictions where its products are sold and/or its services are offered do not infringe the rights of any third party, and it should agree to indemnify the acquiror for any breach of this representation and warranty.

§ The target should represent and warrant that it has no knowledge that any third parties are infringing its copyright rights.

Design Patents/Industrial Designs

What are Design Patents and Industrial Design?

Design patents (known in certain non-United States jurisdictions as Industrial Designs) protect the design of an article of manufacture, but not its function. In order to qualify for design patent protection under United States law five criteria must be met: an article of manufacture must be ornamental, novel, and non-obvious. 35 United StatesC. §171.

• An “article of manufacture” means any tangible article that is man-made. It does not include a design or picture standing alone, but many embrace a tangible article that includes the design or picture.
• Although the meaning of “ornamental” has been the subject of debate, in general, it requires that the design is not dictated by function alone. Therefore, if the design is based on the necessity of function or mechanical requirements, then it is not ornamental and cannot be protected by a design patent.
• “Originality” means that the design is original to the inventor, although originality can consist of the rearranging or regrouping of familiar forms and decorations.
• “Novelty” means that, in the eyes of an “ordinary observer,” the overall appearance of the design is different from the appearance of any prior design.
• To determine if a design is “non-obvious,” the courts will evaluate whether a designer of ordinary skill of the articles involved or a closely related object would find that design as a whole was obvious at the time it was created, as compared to articles in existence at the time the design was created.

Design patent protection requires registration. The drawings in the design patent application define the scope of the design patent protection.

In the United States, the design patent application must be filed within one year of the first public display of the product. 35 United States Code. §102. Other countries have a stricter requirement; any disclosure at all, even one day, before the patent/ industrial design application is filed will invalidate the patent or industrial design.

In the United States, the duration of the design patent is fifteen years from the date of the filing of the design patent application. The duration may differ in other countries.

Design patents, copyrights, and trade dress protection are not mutually exclusive. Some items, like a perfume bottle, can be protected by all three types of intellectual property.

Design patents are an excellent form of protection for product designs that may ultimately be protectable as trade dress. As discussed above, trade dress protection for the shape or configuration of a product is available only upon proof that the product design has achieved secondary meaning. Design patent protection, in contrast, does not require secondary meaning. This means that a product design can be protected from third-party use under a design patent while the design is acquiring secondary meaning to support the protection of that design under the Lanham Act.

Design patents are ways to protect luxury items such as shoe designs, handbag designs, perfume and alcohol bottles, jewelry designs, eyeglasses, and even features of articles of clothing.

Design Patent/Industrial Design Issues in Global Transactions

Ownership Issues

As with trademarks and copyrights, the first step in a global transaction is to verify whether the target company owns any design patents and whether there are any articles of manufacture that could be protected by design patents. This requires both a request that the target identifies its design patent portfolio as well as confirmation of that portfolio through searching the records of the United States Patent and Trademark Office.

It is important to determine who is the inventor of the design and to make sure that the design patent is owned by the target company and is not in the name of the individual inventor. The “inventor” of the design in luxury goods companies is often the designer who created the design. Therefore, the acquiror must determine whether the designer or employee(s) who conceived the design have employment agreements that provide that all designs created by the designer during their employment are assigned to the company and that the designer will cooperate in applying for any intellectual property protection in the company’s name.

If the target does not have such agreements, it is often advisable, as a condition of clothing, to require the target to enter into such employment agreements and to have the designer(s) assign to the company any design patent in their own name.

As with other types of intellectual property, the acquiror should determine whether the target has any license agreements for the use of design patents. As with other types of intellectual property, the licenses should be evaluated with these issues in mind:

• What is the term of the license, and can it be terminated?
• What is the jurisdictional scope of the license?
• What is the license fee/royalty?
• Is the license assignable without the consent of the licensor or licensee?
• Is the license exclusive or non-exclusive?
• What goods or services are the subject of the license?
• Is either party in breach of the license?

Infringement Issues

The test for design patent infringement is whether in the eye of an ordinary observer, giving such attention as a purchaser usually gives, two designs are substantially the same, and the resemblance is such as to deceive such an observer, inducing him to purchase one supposing it to be the other. In addition, the accused device must appropriate the novelty of the patented device which distinguished it from the prior art.

Design patents are subject to “the doctrine of equivalents,” which means that there is infringement even if there are variances in the ornamentation as long as the effect of the whole design is substantially the same.

Damages from design patent infringement can be substantial. The owner of a design patent is entitled to damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use that the infringer made of the invention. However, if the patent owner can prove that the defendant would not have made the sales but for the infringement, the patent owner will be entitled to recover their lost profits.

As with trademarks and copyrights, due diligence for design patents should include all cease-and-desist letters, litigation, and settlement agreements that relate to any design patents. It is also prudent to determine whether the target did a design patent search or obtained a freedom to operate opinion before filing the design patent application or creating a new design.

Summary of Key Patent/Industrial Design Issues in Global Transactions

For most global transactions the following issues are the most important to consider:

• What designs does the target company own or is using?
• Does the target company own or have the right to use all of its designs?
• Does the target company own any design patents, or do any of its employees own design patents?
• Are there potentially registerable designs which are still within the window for the filing of a design patent?
• Is the target company infringing any third parties’ design patent rights?
• Are any third parties infringing the target companies’ design patent rights?
• How is risk allocated in the transaction documents? Among other things:
  • The target should represent and warrant that it owns all rights, titles, and interests in all design patents scheduled.
  • The target should represent and warrant that its design patents in all jurisdictions where its products are sold and/or its services are offered do not infringe the rights of any third party, and it should agree to indemnify the acquiror for any breach of this representation and warranty.
  • The target should represent and warrant that it has no knowledge that any third parties are infringing on its rights.

Trade Secrets

What are Trade Secrets?

Trade secrets protect formulas and other compilations of information with commercial value that are used in a business, where there have been reasonable efforts to keep the information secret, which are not generally known in the industry, and which provide a commercial advantage. Trade secret protection lasts as long as it is maintained as secret and not generally known (that it, they are not in the public domain).

In the context of luxury brands, trade secrets may include product formulas, such as the formula for a perfume, the recipe for a premium liquor, secret manufacturing processes, secret customer lists, or suppliers.

Trade Secret Issues in Global Transactions

The threshold due diligence question is to determine what, if any information, the target company holds as a trade secret. This requires that the target company identify the information it considers to be a trade secret and the measures in place to maintain the secrecy of the trade secret.

It is important to determine who owns the trade secret. In some circumstances, the trade secret is owned by the company founder. To ensure that the trade secret is owned by the target company, the founder (or another inventor) should sign a Confidentiality and Invention Assignment Agreement that requires the inventor to maintain the confidentiality of the secret and assign all rights, title, and interest in the trade secret to the target company. Such an agreement must be supported by payment so that there is adequate consideration.

All employees who have access to trade secret information should have signed a Confidentiality Agreement that requires them to maintain the confidentiality of all trade secrets.

Another concern with trade secret formulas is to determine whether any of the ingredients are subject to a single supplier, creating a risk that the target will not be able to manufacture the formula if the supplier becomes unavailable, terminates the supply agreement, or stops manufacturing the ingredient. During due diligence, the acquiror must obtain all supply agreements to evaluate this risk.

To evaluate infringement risk, during due diligence, the acquiror should request all cease and desist letters, litigation, and settlement agreements that relate to trade secrets. Under the Defend Trade Secrets Act, there is a nationwide trade secrets law, which gives litigants easier access to federal court, and gives companies the right to file private civil lawsuits under the federal Economic Espionage Act. Before the enactment of the Defend Trade Secrets Act, trade secrets were exclusively handled under each individual state’s law.

Summary of Key Trade Secret Issues in Global Transactions

For most global transactions, the following issues are the most important to consider:

• Is the trade secret actually owned by the company and not an employee or the founder?
• Has it been kept secret?
• Is it generally known and therefore of little value?
• How is risk allocated in the transaction documents? Among other things:

§ The target should represent and warrant in the transaction documents that it is the sole owner of the formula and ensures that this representation and warranty survive until the expiration of the statute of limitations for the claims of adverse interest.

§ The target should represent and warrant that its use of its scheduled trade secrets in all jurisdictions where its products are sold and/or its services are offered do not infringe the rights of any third party, and it should agree to indemnify the acquiror for any breach of this representation and warranty.

§ The target should represent and warrant that it has no knowledge that any third parties are infringing on its rights.

Domain Name Issues in Global Transactions

Ownership Issues

The starting point in due diligence is to obtain the portfolio of domain names owned by the company and the domain names that the company uses. It is important to confirm that the domain names are owned by the company and not by the founder or any other employee or domain name administrator.

In addition, the acquiror should conduct a search to determine whether potentially important domain names are owned by third parties. If so, the target company should be required to have the domain names transferred to it before closing.

Infringement Issues

Domain names are not trademarks. They are not infringing if they do not post infringing content. Often, in the course of due diligence, the acquiror will find that there are domain names including the target’s trademark that are owned by third parties.

Where the domain name has no content, it is economically prudent simply to monitor them quarterly for content. If, however, there is content posted, the target has several options to stop the infringement, starting with sending a cease-and-desist letter if the domain is selling infringing content. Other possible actions include:

• Contacting the domain host using their take-down procedure where there is infringing content. This is often the quickest and least expensive way to stop a domain name infringement.
• Filing a Uniform Domain Name Dispute Resolution Policy (“UDRP”) complaint seeking to have the infringing domain name transferred to the trademark owner. This is a relatively inexpensive and expedited procedure, and cyber-squatters are often simply default.
• Filing an in-rem lawsuit in federal court, where the trademark owner has a substantive case and a lack of jurisdiction over the cyber-squatter. This procedure addresses the situation where the cyber-squatter is unknown and/or outside the United States. The only remedy is the cancellation of the domain name or a transfer of the domain name to the trademark owner.
• Filing a federal court trademark infringement action.

A trademark owner cannot stop the use of a trademark in critical and fan sites, such as WalmartSucks.com. Such use is protected under the First Amendment.

Summary of Key Domain Name Issues in Global Transactions

For most global transactions the following issues are the most important to consider:

• Are potentially important domain names owned by third parties?
• Is the third party legitimate or cybersquatting or infringing use?

Social Media

Social Media Issues in Global Transactions

Because of the crucial role of social media, particularly for luxury brands, it is important to understand the target company’s social media presence.

Among other issues, due diligence should determine who keeps the followers of the target company’s social media sites, and what the impact would be if that individual left the company.

The acquiror should also confirm that the company has access to the passwords for all the social media sites so that if the employees handling the social media were to leave the company, the target would not be locked out of its sites.

Social media posts are often the source of litigation, particularly where there are posts or reposts of photographs that infringe the copyright rights of photographers and/or the publicity rights of the individuals (often models or celebrities) pictured in the photographs.

Summary of Key Social Media Issues in Global Transactions

• Who keeps the followers of the company’s social media sites?
• Does the company have access to the passwords for the social media sites?
• Content: Are there photos that infringe the copyright rights of a photographer or the publicity rights of a model?

Conclusion

In sum, in evaluating the intellectual property issues in global transactions, the overriding questions will be:

• What assets are being acquired?
• What issues have been disclosed in due diligence?
• Can these issues be addressed and corrected before closing?
• How will the risks be allocated between the acquiror and the target company?