Beware of the Name
January 1, 2008
A question that frequently arises after a company has been sold is whether the name of the company sold (“Old Company”) can be used by anyone other than the buyer. In a recent case in Nebraska, the alarm company that purchased the Old Company filed a lawsuit against the “New Corporation” and its shareholder, who were using the name of the Old Company. The stockholder of the Old Company formed the New Corporation using the same trade name used by the Old Company which plaintiff’s predecessor acquired. The action was filed alleging a deceptive trade practice and trade name infringement and seeking injunctive relief.
At the trial, the court enjoined the defendants from using the name until a later date and ordered them to pay damages.
The Old Company, prior to sale, was a closely held corporation with most of its stock owned and held by defendant shareholder and his family.
Prior to the sale of the Old Company by its shareholders, the shareholders entered into employment agreements with the Old Company which contained noncompetition provisions. The defendant shareholder continued to be employed by the Old Company, notwithstanding a series of sales of the company by its shareholders.
Several months after plaintiff took over the company, the defendant’s employment ended. The defendant was offered an agreement with a general release and a noncompetition provision in exchange for financial consideration, which defendant shareholder declined.
The defendant was advised by the Secretary of State that there was no record of the trade name on file with the state and so the defendant formed a New Corporation using the trade name of the Old Company.
The court found that the plaintiffs’ predecessor did not consider the trade name abandoned and that the plaintiff had purchased the trade name. At the trial, the District Court found, among other things that the defendants violated the common law trade name/service mark rights to the name and were in violation of the Uniform Deceptive Trade Practices Act.
On appeal, the court pointed out that although the purchase agreement did not refer specifically to the good will of the trade name, nevertheless, the presumption was that it was the intention of the parties that the good will should pass with the other assets. Therefore, the plaintiff acquired the trade name and the rebranding or changing of the trade name did not constitute an abandonment of the trade name. Further, the court pointed out that even though the plaintiff did not do business under the trade name, they honored the contracts of the old company, maintained the security sign, retained the old telephone number and assumed the lease of the building. The fact that the defendant registered the name with the Secretary of State does not adversely affect the plaintiff’s right acquired in good faith at common law. The court found that the plaintiff met its burden that the name was a valid trade name entitled to protection.