Starting a business is an exciting venture, but also quite the undertaking. Anyone who has braved the entrepreneurial path knows all too well just how much time, energy, and money is required to get a young company off the ground, not to mention the further investment required to sustain and grow it.
Before a new business evens get out of the starting gate, its commercial viability is vulnerable to a number of challenges beyond its control, including a moody and depressed economy, among others. Avoiding the creation of new vulnerabilities must be at the top of the list!
Naming Your Business
One of the most important early decisions you – the entrepreneur — will make is naming your business. And one of the most costly early mistakes you — the entrepreneur — can make is failing to clear that name for use as a trademark as well as a trade name.
A trade name is the official name under which your business is “doing business,” or trading goods and services in the marketplace. A trademark, on the other hand, identifies your business’ product or service and functions as an indicator of origin – in short, it’s a brand name. Frequently, one’s trade name and trademark are one in the same (think The Hershey Company and HERSHEY’S® or Harley-Davidson Motor Company and HARLEY-DAVIDSON®), but their function in the marketplace is not the same. Moreover, they are governed by very different laws.
The Trade Name
Your business’s legal name, or trade name, is the name identified on official corporate documents, bank accounts, tax filings, and the like. Trade names are approved and regulated at the state level. In Pennsylvania (my home state), a trade name must be deemed a valid business name by the Department of State Bureau of Corporations and Charitable Organizations before a business can be registered under the proposed name. Once your business name is approved and registered (in your state), you have the exclusive right to use that name as a trade name (not trademark) and only in the state where your name is registered.
A trademark is different from a trade name in both its role and function. A trademark represents your business’ product or service and serves an indicator of origin. Consumers expect products and services bearing the same or similar trademark to emanate from a common source, even if the identity of that source is unknown and they make purchasing decisions based on their recognition of and trust (or distrust) in the brand.
For example, many purchase TYLENOL® acetaminophen products because they trust the brand, but are unfamiliar with their manufacturer, McNeil Consumer Healthcare. Consumer confidence rests squarely on the brand name, not the identity of the manufacturer. Furthermore, when these same purchasers learn that ZYRTEC®, SUDAFED®, and BENADRYL®, among others, come from the makers of TYLENOL, they unhesitatingly extend their trust to those products as well. Knowing they emanate from the same source as the TYLENOL line of products is sufficient to inform their purchasing decision.
Unlike a trade name, the value and marketplace validity or acceptance of a trademark is neither created nor built by registering it with a government agency, but rather through actual use of the mark in commerce. Federal registration of the mark provides for meaningful protection and enforcement of those rights nationwide. Moreover, whether a trademark is available for a new business to use and register is largely determined by federal, not state, law.
New business owners routinely assume that clearing a business name at the state level is sufficient, especially when their target market is the local community. But this assumption can be a costly one!
An owner of a previously used trademark that is the same or confusingly similar to your newly adopted trade name and that is used in connection with the same or similar products and/or services is free to assert those rights against you. Enforcement action may start with a gentle “cease and desist” letter on the one hand, or a federal lawsuit for trademark infringement seeking an injunction and a big money payout on the other, or a number of options in between. Regardless, being on the receiving end of any enforcement action is unnerving, expensive, and disruptive.
Fixing (Better yet, avoiding) the Problem
If you intend to promote your products or services under the same name as your business name, you must pursue the clearance process on both fronts. Business names are always cleared at the state level and the process is relatively straight forward. Trademarks, however, should be cleared at both the state and federal levels and the process is much more complicated. (I write “should” because you are not legally required to conduct trademark searches before using a trademark, but you move forward on pain of being slapped with an infringement claim.)
When your business name will also be used as a brand name, you should at a minimum search the records at the U.S. Patent and Trademark Office. As indicated above, federal trademark registration (and to some extent even a pending application) provides the owner of the mark with nationwide protection, even if the mark is only actually used in a particular region. Therefore, determining whether there is a prior pending or registered mark that may block your new business name in the marketplace before you invest in the name can save you much heartache and hard coin.
But there is more. As explained above, trademark rights are not created through registering the name with a government agency, but through actual use in commerce. Many trademark owners use their marks without ever registering them. Although it is a harder fight, they too may choose to assert their rights accrued through their use in commerce and enforce them against you. Discovering these unregistered uses that may also block your new business name in the marketplace is equally important as identifying registered ones.
Before you choose a new business name and start investing in it, avoid making a foolish mistake by answering these two questions:
- Is my business name available for use as a trade name?
- Is my business name available for use as a trademark?
As the saying goes, a fool and [her] money will soon be parted.