Due Diligence on Brand Protection for Investors
By Evoke Law, PC, Mary Shapiro and Nicole Katsin

If you're delving into startup investments as a VC, there's a world of data to sift through. Beyond performing due diligence on the financials and operations of each company you invest in, there's a crucial aspect that can't be overlooked: the company's brand.

When a company's brand is a key driver of its success – that is, when customers recognize it, trust it, and associate positive feelings with it – it's paramount to ensure it's adequately protected. Whether you're eyeing a seed-stage or growth-stage investment, understanding the strength of the brand is fundamental. After all, it's far more cost-effective to sort out any branding issues sooner rather than later.

So, as a VC, What Brand Due Diligence Do You Need To Do?
This article will dive into the legal aspects of brand evaluation and protection. Is the brand name – aka trademark, or “mark” – registrable and protectable? Are there any potential trademark infringement pitfalls waiting to trip you up? For instance, if the founders didn't do comprehensive due diligence and missed confusingly similar marks that could spell trouble for your investment down the road.

Let's explore the five key questions you and your legal team need to answer before investing in any company:

1. Is the current brand name registrable and protectable? In order for a brand name to be registrable, legally it needs to be considered both distinctive and exclusive. Let’s break down what each of these terms means:

Distinctiveness exists on a spectrum, ranging from marks that are inherently unique to terms that simply describe an ingredient, quality, characteristic, function, feature, or purpose of the product or service. Inherently distinctive marks fall into three categories: (1) fanciful or made-up, like TRAVELOCITY, ROLEX, or EXXON; (2) arbitrary, such as APPLE, AMAZON, or GREYHOUND; or (3) suggestive, like TESLA, NIKE, or MUSTANG. Marks on the descriptive end of the spectrum are often appealing from a commercial standpoint because they can help communicate to potential consumers. Unfortunately, descriptive terms are more difficult to protect as they are hard to register and even harder to enforce. Descriptive marks that have gained distinctiveness over time through continuous exclusive use include: COCA-COLA, PIZZA HUT, and AMERICAN AIRLINES. However, generic terms, which simply describe the product itself, like "computer" for computers, are unable to identify a specific source. Therefore, conducting a distinctiveness review is crucial in evaluating the legal strength of a name.

Exclusivity. Even if a name is distinctive, if others are using it too, the company might not be able to register or may be limited in protecting its trademark rights. Exclusivity indicates whether other brands in a similar field use the same name, or if it is used by other big-name brands. If a brand is famous, it's better protected. Famous brands can stop others from using the same name for their products or services even in unrelated fields. 

If different brands use the same or very similar names at the same time, it could lead to confusion, which is how we can determine if there's trademark infringement.

2. Has the company registered or applied to register its brand name in the US? If the company’s brand is not yet registered, you’ll want to conduct some additional diligence. How well did the company do its homework before settling on a name? Founders will sometimes search the United States Patent and Trademark Office (USPTO) database for marks that are exactly the same, and don’t consider that there might be similar marks that aren't registered, like ones with small spelling changes or sound-alike words. Thorough trademark clearance involves more than just a quick search on the USPTO website. It's a job for experienced trademark attorneys.

Here’s an example:

Company A chooses a name, "REVEL," for its products. They check the USPTO database and don't find the exact name. So, they start using the name without officially registering it. When they launch their products, Company B, which has been selling similar stuff for a while, sends a letter demanding that Company A change its name. Company B's name is "REVELOCITY," made by adding a suffix to "revel." They've filed for a trademark for this name. The main part of both names, "revel," means the same thing. Company B might have a strong case against Company A, who might have to change its name. Changing the brand name can be expensive and cause lots of problems, like disrupting the business, distracting important people, taking products off the market, confusing customers, needing new marketing, and changing product packaging.

3. Has the company taken steps to register their brand names internationally? Trademark rights are territorial and there are advantages to filing sooner rather than later. Some countries and regions recognize priority based on which party was the first to file, not first to use a brand name. If the company does not register early, depending on the industry, there may be copycats in other countries that appropriate the brand and file a trademark application first.

4. Are there any outside rights to the company’s intellectual property? It may sound obvious, but make sure to check if anyone else has legal rights to the company's intellectual property. If there are any agreements, transfers of ownership, or security interests for trademarks, they should be recorded with the USPTO, and you can find this information easily on the USPTO website.

5. Is the company following SOPs for selecting and protecting their product names? Look into the company’s branding practices. Once a company settles on a company brand, they are more than likely to be looking at product names.

• Is it considering the distinctiveness and exclusivity factors during the name selection process?
• Are they conducting even a bare minimum of due diligence, such as looking on the USPTO database and searching the internet? If not, this is a red flag.
• Are they using their brand names correctly? If not, they could be impacting the brand value by failing to provide an alternative generic name for their product or using the trademark in similar fashion to generic terms. In a well-known example, the Otis Elevator Company's registration for the "ESCALATOR" mark was canceled following a recognition that the company's own use of the term in multiple advertisements was used generically without any trademark significance.
• What are their enforcement policies & procedures? It is a trademark owner’s duty to enforce exclusive rights in a mark or jeopardize the enforceability of the mark in the future. Unchallenged third-party uses of a trademark weaken the strength of a company’s mark as a source identifier. As an investor, you will want to confirm that the target company is monitoring third-party uses and taking necessary action. There are a range of watch services that fit various business needs. For example, a Domain Watch focuses only on domain name registrations, and purchasing a domain is typically one of the first actions a business takes when it decides to proceed with a brand name. This type of watch service provides somewhat of an “early warning system.” Other watch options monitor registrations, applications, state trademarks, domain names, and common law references for potential infringement.

Quick Summary of How to Avoid Trademark Confusion Issues:

Key Takeaway

Conducting due diligence on intellectual property is critical when assessing a target company. You should always insist that the firm handling your due diligence look closely at any sort of customer-facing brand identity, and it is often worth bringing in some specialized help in the form of an intellectual property attorney. After all, nobody wants to get caught up in a messy branding dispute down the line. So, when you're digging into a company's brand, make sure you're getting the full scoop – it could save you a lot of headaches later on.