Vondran Legal® Trademark College®
Trademark Attorney Explains Why Corporate Structure Can Put Your Brand at Risk
By Vondran Legal® | Nationwide Trademark and Intellectual Property Counsel
Introduction
Many businesses spend years—and sometimes millions of dollars—building valuable brand recognition. They register trademarks with the United States Patent and Trademark Office (USPTO), expand nationally, and assume their registrations will continue protecting their brands indefinitely.
Unfortunately, one overlooked corporate issue can jeopardize those rights.
What happens when the company that owns the trademark is not the company actually using it?
This situation is surprisingly common. Large corporations, startups, franchise systems, software companies, manufacturing businesses, and family-owned enterprises frequently separate ownership of intellectual property from day-to-day operations. An operating company may manufacture products and interact with customers while a separate holding company owns the trademarks.
Although this structure may provide tax, liability, or organizational benefits, it also creates important trademark issues under the Lanham Act, particularly if the relationship between the companies is not properly documented.
A recent decision from the Trademark Trial and Appeal Board (TTAB) involving the DERMAPEN trademark serves as an important reminder that failing to observe trademark licensing formalities can place valuable registrations at risk.
What Is the Lanham Act?
The Lanham Act (15 U.S.C. §§1051 et seq.) is the federal trademark statute governing trademarks in the United States.
Among many other things, it provides rules regarding:
- federal trademark registration
- ownership of trademarks
- infringement
- false designation of origin
- dilution
- trademark licensing
- abandonment
- cancellation proceedings
- remedies including injunctions, damages, profits, and attorneys' fees in exceptional cases
The Lanham Act exists to accomplish two principal goals:
- Protect consumers from confusion regarding the source of goods and services.
- Protect businesses that invest in developing goodwill associated with their brands.
The entire trademark system depends upon one basic principle:
A trademark identifies a single source of goods or services.
That concept becomes complicated when multiple affiliated companies are involved.
Why Companies Separate Trademark Ownership
Many businesses intentionally separate ownership of intellectual property from operations.
Examples include:
- IP holding companies
- parent/subsidiary structures
- licensing companies
- tax planning entities
- asset protection structures
- private equity portfolio companies
- franchisors
- multinational corporations
Reasons may include:
- limiting liability
- facilitating acquisitions
- simplifying licensing
- protecting valuable intellectual property
- estate planning
- financing transactions
- tax planning (subject to evolving federal and state tax laws)
From a business perspective, these structures often make perfect sense.
From a trademark perspective, however, additional steps become necessary.
Trademark Ownership vs. Trademark Use
Many business owners assume:
"We own the company, so everything is fine."
Not necessarily.
Trademark law distinguishes between:
- who owns the trademark, and
- who actually uses the trademark in commerce.
Those two entities may be different.
If they are, trademark law requires the owner to maintain sufficient control over the trademark's use.
Without that control, problems can arise.
Related Company Use Under the Lanham Act
Section 5 of the Lanham Act recognizes use by a related company.
A "related company" is one whose use of a trademark is controlled by the trademark owner regarding the nature and quality of the goods or services.
This is commonly referred to as quality control.
If adequate quality control exists:
- use by the related company counts as use by the trademark owner;
- trademark rights are preserved; and
- the public continues to perceive a single source.
If quality control is lacking, however, the trademark owner may lose important rights.
Why Quality Control Matters
Trademark law is designed to protect consumers.
Consumers purchase products because they associate trademarks with consistent quality.
Imagine seeing the same trademark on products made by unrelated businesses with completely different standards.
Consumers would no longer know what the trademark represents.
For that reason, trademark owners must maintain meaningful supervision over licensees and affiliated companies.
Parent Owns the Trademark, Subsidiary Uses It
This arrangement is relatively common.
Example:
ABC Holdings, Inc.
owns the trademark.
ABC Manufacturing LLC
manufactures and sells the products.
Generally speaking, courts presume the parent company controls its subsidiary because it owns the subsidiary.
Although written trademark licenses are still recommended, this arrangement often presents fewer legal problems.
Subsidiary Owns the Trademark, Parent Uses It
The reverse arrangement presents greater risk.
Suppose:
ABC IP Holdings LLC
owns the trademark.
Meanwhile,
ABC Manufacturing, Inc.
actually sells every product.
If the subsidiary does nothing more than hold title to the trademark while the parent independently markets products, the trademark owner may not be able to prove legally sufficient trademark use.
This was the issue in the DERMAPEN case.
The DERMAPEN Trademark Dispute
In DP Derm, LLC v. Derma Pen IP Holdings LLC, the Trademark Trial and Appeal Board considered whether use by a parent company counted as use by its subsidiary trademark owner.
The facts were relatively straightforward.
- A holding company owned the DERMAPEN registration.
- The holding company had no operations.
- Its parent company sold all products.
- A competitor argued the trademark had been abandoned because the registered owner had not used the mark for more than three years.
The trademark owner argued that:
- the same individual managed both companies;
- he supervised product quality; and
- therefore the parent's use should count.
The TTAB disagreed.
Why the Trademark Was Cancelled
The Board found several important deficiencies.
Among them:
- no admissible written trademark license
- inadequate evidence of quality-control procedures
- insufficient proof that anyone acted on behalf of the subsidiary
- marketing materials identified the parent—not the subsidiary—as trademark owner
Because the subsidiary could not establish that the parent's use legally inured to its benefit, the Board concluded the registered owner had effectively abandoned the trademark.
The registration was cancelled.
What Is Trademark Abandonment?
Trademark abandonment is one of the fastest ways to lose trademark rights.
Under the Lanham Act, abandonment generally occurs when:
- use has been discontinued, and
- there is no intent to resume use.
Three consecutive years of nonuse creates a rebuttable presumption of abandonment.
If abandonment is established:
- federal registration may be cancelled;
- exclusive rights may be lost;
- competitors may adopt similar marks; and
- years of goodwill can disappear.
Trademark Licensing Requires More Than a Contract
Many companies assume simply signing a license agreement solves everything.
Not necessarily.
Courts often look beyond the paper agreement.
They examine whether the trademark owner actually exercised quality control.
Examples include:
- reviewing products
- approving advertising
- monitoring manufacturing standards
- reviewing customer complaints
- enforcing brand guidelines
- maintaining inspection procedures
- documenting oversight
The more valuable the brand, the more important these records become.
Common Trademark Mistakes Businesses Make
Many companies unintentionally create risk by:
- never executing a trademark license
- assigning trademarks without updating operations
- failing to document quality control
- confusing ownership among multiple LLCs
- allowing affiliates to use marks informally
- identifying the wrong company as trademark owner
- failing to record assignments with the USPTO when appropriate
- assuming common ownership alone solves the problem
These issues often remain hidden until litigation arises.
Practical Steps to Protect Your Trademark Portfolio
Businesses should periodically review their trademark ownership structure.
Best practices include:
- Confirm the correct legal owner of every trademark.
- Ensure the owner matches USPTO records.
- Execute written trademark license agreements where appropriate.
- Include meaningful quality-control provisions.
- Maintain written evidence of quality-control activities.
- Keep corporate minutes reflecting oversight.
- Identify the correct owner on packaging, websites, advertising, and promotional materials where appropriate.
- Review ownership after mergers, acquisitions, reorganizations, or entity conversions.
- Conduct periodic trademark audits with experienced trademark counsel.
Lessons for Growing Businesses
As companies expand, they often create:
- new LLCs
- operating subsidiaries
- holding companies
- licensing affiliates
- international entities
Each restructuring may affect trademark ownership.
What begins as a simple bookkeeping decision can evolve into a significant legal issue years later if no one reviews the trademark implications.
The cost of preventive legal planning is almost always far less than the cost of defending a cancellation proceeding or rebuilding a lost brand.
Frequently Asked Questions
Can my LLC own a trademark while another company uses it?
Yes. However, the trademark owner should maintain sufficient quality control over the user's activities so the use legally benefits the owner.
Is a written trademark license required?
Not in every circumstance. Courts have recognized implied licenses in some cases, but a written agreement is strongly recommended because it provides clear evidence of the parties' relationship and quality-control obligations.
Can I lose a federally registered trademark even if my company is still selling products?
Yes. If the registered owner is different from the operating company and the owner cannot establish legally sufficient control over the use, the registration may become vulnerable to cancellation.
Does having the same owners or officers automatically protect trademark rights?
No. Common ownership alone does not necessarily establish the quality control required under the Lanham Act.
Should trademark ownership be reviewed after corporate restructuring?
Absolutely. Mergers, acquisitions, entity conversions, holding companies, and tax planning strategies frequently create trademark ownership issues that should be evaluated promptly.
How Vondran Legal Can Help
At Vondran Legal, we advise clients nationwide on complex trademark and intellectual property matters, including:
- Trademark registration and prosecution before the USPTO
- Trademark licensing and quality-control agreements
- Trademark portfolio audits
- Corporate trademark ownership reviews
- Trademark assignment agreements
- TTAB cancellation and opposition proceedings
- Trademark infringement litigation
- Brand protection strategies
- Intellectual property due diligence for mergers and acquisitions
- Trademark abandonment and nonuse issues
Whether you are a startup creating an IP holding company, a growing business restructuring its corporate entities, or an established company seeking to strengthen its trademark portfolio, proactive legal planning can help preserve the value of your brand and reduce the risk of costly disputes.
Final Thoughts
The DERMAPEN decision underscores a fundamental principle of U.S. trademark law: ownership and use must remain legally connected. When trademarks are held by one entity and used by another, the Lanham Act requires more than common ownership—it requires demonstrable control over the nature and quality of the goods or services offered under the mark.
For businesses employing holding companies, parent-subsidiary structures, or other affiliated entities, the lesson is clear: document trademark licenses, maintain quality-control procedures, and periodically review corporate ownership of intellectual property. These relatively simple steps can help preserve valuable trademark rights and avoid the risk of abandonment or cancellation in future disputes.
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