Among the most important tasks in the founding of a new company are the development and clearance of a company name. There are two very different sets of legal issues, and a host of business issues, involved in the process.
One set of legal issues concerns availability of the name under state law relating to entity names. In the case of corporations or limited partnerships, this involves checking with the Secretary of State of the states where they are formed and where they must “qualify” to do business (usually where they have offices or resident employees or a sales force).
The Secretary of State checks the state records to ensure that there is no other corporation or limited partnership with an identical or closely similar name; if one is found, the new name is generally not permitted. This happens even if the two companies are in vastly different lines of commerce; the sheer similarity of the name bars the second name. (On some occasions, consent of the earlier company or a relatively minor alteration of the name, such as “ULTIGRA, INC.” to “ULTIGRA SOFTWARE, INC.,” may increase the chances that the state will allow the new name.)
The second set of legal issues concerns trademark law. The Secretary of State’s approval of a business name does not grant trademark rights or authorize a company to use a particular business name in commercial activities. (Nor does registration of a corresponding domain name result in any significant legal rights.) A company may have incorporated under a name but find itself liable for trademark infringement or dilution — with potential risks of an injunction, disgorgement of profits, payment of damages, and more — for use of the name.
Trademark infringement occurs when a person or company uses a name or mark in a way that causes a likelihood of confusion with another person or company with respect to source, sponsorship, or affiliation of products, services, or commercial activities. Thus, “McCoffee” may infringe upon the marks of McDonald’s Corporation by leading the public to believe that “McCoffee” is a product or an affiliated company of McDonald’s. A company also may be liable for trademark dilution by using the famous mark of another company even if there is no competitive overlap or likelihood of confusion. For example, the name “Pentium Petroleum Corporation” may well dilute the PENTIUM trademark of Intel Corporation. It therefore is important to assess the potential trademark law risks of a name before adopting it as a company name.
The fact that a company still has a low public profile, or does not yet have products on the market and does not yet have a website, does not immunize it from challenges. Some companies have been sued for allegedly causing confusion through their financing activities or for use of a pre-release code name for a new product.
Some companies, in a rush to form a company, devise names in a hurry and do not clear them for trademark purposes. Often, they consider the name a “place holder” until a later time when they can invest the money and effort to attend to a new name. This creates a number of risks. First, there is the risk of liability. Second, management may “fall in love” with the placeholder name and become unwilling to give it up later. Third, the company may develop goodwill under the placeholder name that will be lost upon a name change. Fourth, the company may incur significant legal and administrative costs when it later undergoes a name change.
Legal assessment of a business name involves several steps.
We check the availability of the name with the Secretary of State for the relevant states; if the name is available with the Secretary of State, we reserve it pending an in-depth search. The Secretary of State availability check and reservation require only nominal fees.
We also perform searches of trademark databases in-house using on-line services or other research materials. The purpose of the searches is to determine whether a name is so likely to be unavailable that a more comprehensive search would be wasteful. A preliminary screening search is not sufficient diligence to assess the real issues in adoption of the name.
After the screening search, we obtain an in-depth trademark search from an outside search company. It examines federal and state trademark registers and a large number of sources of unofficial information about company and product names in relevant fields. We obtain an extra copy of the search report for our client and expect it to review the report carefully for potential conflicts; we then discuss our assessment with the client.
Once a company is comfortable with the level of risk of its chosen name, it is important to find ways to protect the name. If the name will be used on products, or in connection with the advertising or promotion of services, it often is a good idea to file an application for federal registration of the name based on the company’s intent to use the mark. This will help establish rights to the name; more importantly, it gives early notice to others who might otherwise overlook the company’s name when they do searches to develop their own names.