Sale of a Business, then
License Agreement
Trademark
Goodwill
Geographically Bounded Rights to Trademarks
Trade Dress
Breach of Contract
Louisiana Law
An attempt to simultaneously sell a restaurant
and license associated intellectual property has led to ten years of litigation
in state and federal court.
The Bill of Sale has a choice of law provision stating it is “governed
by and construed in accordance with the laws of the State of Louisiana.”
Michael Shwartz and his family owned and
operated the Camellia Grill restaurant on Carrollton Avenue (the “Carrollton
restaurant”) for decades. He operated the business—the single
restaurant—through a wholly owned corporation, Camellia Grill, Inc. In 1999,
Shwartz formed CGH for the sole purpose of owning federally registered Camellia
Grill trademarks.
(The marks are registered pursuant to the Lanham Act, 15 U.S.C. § 1051 et seq., which provides for federal trademark protection.)
Following state court litigation that ended in the termination of the License Agreement, Khodr filed a declaratory action to determine the parties’ respective rights in the Camellia Grill trademarks within or upon the Carrollton restaurant. Shwartz filed a separate action asserting trademark and trade dress infringement claims and breach of contract claims based on the continued use of Camellia Grill-related intellectual property following the termination of the License Agreement. The cases were consolidated.
(Shwartz and Khodr had previously signed a contract selling the Carrollton restaurant’s immovable property, which is not at issue.)
(The state court found that Khodr had breached the License Agreement and terminated that contract effective June 1, 2011. The Grill Holdings, L.L.C. v. Camellia Grill Holdings, Inc., 120 So. 3d 294 (La. Ct. App. 2013).)
The Bill of Sale conveyed all Shwartz’s “right, title and interest” to the “trademarks, names, logos, likenesses, etc. . . . located within or upon” the Carrollton restaurant. This court previously held that the Bill of Sale clearly “transfers to Uptown Grill the trademarks within or upon the Carrollton Avenue location.” Shwartz, 817 F.3d at 258. The question now is whether Shwartz retained any interest in the trademarks. He did not.
When interpreting a contract, “words of art and technical terms must be given their technical meaning.” LA. CIV. CODE ANN. art. 2047. “Trademark” is a technical term that must be given its technical meaning absent any other definition in the Bill of Sale. A trademark is a designation that identifies the source of goods and services and that has no independent significance separate from the goodwill of the business it symbolizes. As a technical matter, a trademark cannot be separated from the goodwill of a business. So, when an entire business is sold, as here, the goodwill and associated trademarks are necessarily transferred absent certain conditions not present here. Thus, the Bill of Sale unambiguously sold all rights to the Camellia Grill trademarks, and we cannot look to parol evidence to find otherwise.
“A trademark is merely a symbol of goodwill and has no independent significance apart from the goodwill that it symbolizes.” Sugar Busters LLC v. Brennan, 177 F.3d 258, 265 (5th Cir. 1999). A trademark “only gives the right to prohibit the use of it so far as to protect the owner’s good will” and so “cannot be sold or assigned apart from the goodwill it symbolizes.” Id. So, trademarks are “incidents and appurtenances to businesses and trades. They have no independent existence . . . .” Holly Hill Citrus Growers’ Ass’n v. Holly Hill Fruit Prods., 75 F.2d 13, 15 (5th Cir. 1935); see United Drug Co. v. Theodore Rectanus Co., 248 U.S. 90, 97 (1918) (holding that it is a “fundamental error to suppose that a trademark right is a right in gross or at large” and that there is “no such thing as property in a trademark except as a right appurtenant to an established business or trade in connection with which the mark is employed”). Put another way, “trademark rights do not exist in the abstract, to be bought and sold as a distinct asset.” Berni v. Int’l Gourmet Rest. of Am., Inc., 838 F.2d 642, 646 (2d Cir. 1988); see also Mister Donut of Am., Inc. v. Mr. Donut, Inc., 418 F.2d 838, 842 (9th Cir. 1969) (“The law is well settled that there are no rights in a trademark alone and that no rights can be transferred apart from the business with which the mark has been associated.”). “If an assignee of a trademark also buys the total associated business, including physical assets and such intangibles as trade secrets, formulas and customer lists, then there is no doubt that the assignee has acquired the ‘good will’ associated with the trademark it has purchased.” MCCARTHY ON TRADEMARKS & UNFAIR COMPETITION § 18:23 (5th ed. 2019). When a business is sold as a “going concern, trademarks and the good will of the business . . . are presumed to pass with the sale of the business.” Id. § 18:37 (calling this an “old and clear rule”).
Thus, trademark ownership and the related goodwill “impliedly pass with ownership of a business, without express language to the contrary.” Yellowbook Inc. v. Brandeberry, 708 F.3d 837, 844 (6th Cir. 2013). Moreover, to retain ownership after the sale of the business associated with the trademark, “the owner’s intent to resume producing substantially the same product or service must be manifest, some portion of the goodwill of the previous business must remain with the owner, and resumption of operations must occur within a reasonable time.” Berni, 838 F.2d at 647. When selling an entire business, the rights to associated trademarks are necessarily sold unless at least two conditions are met: (1) the contract expressly reserves some right and interest in the trademark, and (2) the seller retains some of the business’s goodwill. The latter condition is the most important, as no rights to trademarks can exist without the related goodwill.
No goodwill was expressly retained or remained to which otherwise free-floating trademark rights could attach, and Shwartz has never argued that he retained some part of the business’s goodwill. Without looking outside the four corners of the Bill of Sale, and given the technical understanding of the term “trademark,” the contract unambiguously transfers “all of Shwartz’s right, title, and interest” in the Camellia Grill trademarks.
It is of course possible to assign geographically bounded rights to trademarks. See MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION § 18:21 (5th ed. 2018) (“The sale of a geographically separate portion of a marketing business may be valid as a transfer of a separate and distinct goodwill.”). However, the validity of such an assignment relies on the premise that there exists another portion of the business with separate and distinct goodwill retained by the seller. See id. (citing Ky. Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 268 (5th Cir. 1977); Greenlon, Inc. of Cincinnati v. Greenlawn, Inc., 542 F. Supp. 890 (S.D. Ohio 1982); Cal. Wine & Liquor Corp. v. William Zakon & Sons, 8 N.E.2d 812 (Mass. 1937)). We have not been able to locate a case, and Shwartz points to none, where a trademark owner sells his sole business, assigns a related trademark only as to that single business location, and retains a right to use the trademark when no other business or portion of the business with goodwill symbolized by that trademark exists. The point is not that a geographically bounded right to a trademark can never be assigned. The point is that in the context of this transaction it could not.
Finding Khodr to be the owner of all trademark rights associated with Camellia Grill also comports with the policy of avoiding the fragmentation of trademark ownership. See MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION § 16:40 (5th ed. 2018) (“When there is a dispute over who owns a trademark, the worst possible solution is to allow mark ownership to be shared among the warring parties.”). Finding that Shwartz retained some rights in the Camellia Grill trademarks would be contrary to a fundamental purpose of trademarks: identifying a single source of a product or service. This policy seems particularly applicable given the parties’ acrimonious and litigious history.
Shwartz argues that finding the Bill of Sale to have assigned all trademark rights to Khodr is in direct tension with the License Agreement. If Shwartz sold all trademark rights to Khodr in the Bill of Sale, then Shwartz could not turn around and license these rights in the License Agreement.
(…) Given that all parties have always treated it as valid. The parties appear to have made a mutual mistake as to a material, basic assumption upon which the License Agreement was made: that Shwartz had rights to license. Under Louisiana law, this would render the License Agreement “relatively null.” LA. CIV. CODE ANN. art. 2031. Such a contract may be enforced. And relative nullity “may be invoked only by those persons for whose interest the ground for nullity [such as mutual mistake] was established, and may not be declared by the court on its own initiative.” Because Khodr is not attempting to nullify the License Agreement, we will enforce it as far as possible. However, as this court previously held, the License Agreement does not supersede or modify the Bill of Sale. Shwartz, 817 F.3d at 258 n.2. Therefore, Shwartz cannot sustain his claims of trademark ownership on the basis of the License Agreement.
We affirm the district court’s ruling that the Bill of Sale assigned all Camellia Grill trademark rights to Khodr.
Trade Dress
Trade dress “refers to the total image and overall appearance of a product and may include features such as the size, shape, color, color combinations, textures, graphics, and even sales techniques that characterize a particular product.” Test Masters Educ. Svcs., Inc. v. State Farm Lloyds, 791 F.3d 561, 565 (5th Cir. 2015). It is “distinct from a ‘trademark’ or a ‘service mark,’” and has been extended to the “overall ‘motif’ of a restaurant.” Id. at 564–65. The Bill of Sale unambiguously transferred “all furniture and equipment Shwartz contends constitutes trade dress, . . . trademarks, names, logos, and likenesses, etc.” at the Carrollton restaurant. Shwartz necessarily transferred the right to use any trade dress that existed there.
We affirm the district court’s ruling that the Bill of Sale assigned the trade dress associated with the Carrollton restaurant. Moreover, no abstract rights to trade dress could remain following the sale of the entire business. It follows that the Bill of Sale assigned all Camellia Grill trade dress rights to Khodr, much as all the trademark rights were assigned.
(The district court found that the alleged elements of the trade dress include: (1) the “straw popping” routine, (2) U-shaped counters, (3) audible order calling routine, (4) pink and green wall scheme, (5) separate pie cases on the rear wall at both ends of the cooking line, (6) stainless steel stemmed stools with green cushions, (7) individual counter checks handed to each customer, and (8) fluted metal design under the counters and above the cooking line.)
Even though we find all putative trade dress rights were assigned to Khodr in the Bill of Sale, we must still determine whether the License Agreement afforded Shwartz any enforceable contract rights (question remanded).
Breach of Contract (Louisiana law)
Under Louisiana law, damages for a breach of contract “are measured by the loss sustained by the obligee and the profit of which he has been deprived.” LA. CIV. CODE ANN. art. 1995.
Secondary Sources:
MCCARTHY ON TRADEMARKS & UNFAIR COMPETITION § 18:23 (5th ed. 2019)
(U.S. Court of Appeals for the Fifth Circuit, March 29, 2019, Camellia Grill Holdings, Inc. v. Upton Grill, L.L.C., Docket No. 18-30515)
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