Use It or Lose It: Can Residual Goodwill Avert Abandonment?

The notorious legal battle over the right to use the MUSTANG RANCH trademark for legal brothel services illustrates the 'use it or lose it' adage as applied to trademark rights and the difficulty of establishing an excuse for nonuse. Burgess v. Gilman, 78 U.S.P.Q.2d 1773 (D. Nev. 2006). Because U.S. law does not permit the warehousing of trademarks, the owner of a trademark typically must use the mark in commerce or lose the ability to prevent others from using it. For this reason, '8 of the Lanham Act requires trademark owners to file a declaration of use between the fifth and sixth year after registration and with renewals. 15 U.S.C. '1058.

Under '8, if the owner of a registration has temporarily ceased use of the mark due to circumstances beyond the owner's control, the owner 'must file an affidavit setting forth those goods or services in connection with which the mark is not in use in commerce and showing that any such nonuse is due to special circumstances which excuse such nonuse and is not due to any intention to abandon the mark.' 15 U.S.C. '1058(b) (emphasis added). 'Excusable nonuse' of a mark is difficult to prove. The owner of the mark must 'set forth the date when use of the mark in commerce stopped and the approximate date when use is expected to resume; and recite facts to show that nonuse as to those goods and services is due to special circumstances.' 37 C.F.R. '2.161(e)(2) (emphasis added). The owner must also 'specify the reason for nonuse, the specific steps being taken to put the mark back in use and any other relevant facts.' Trademark Manual of Examining Procedures '1604.11.

Circumstances that may excuse nonuse include a trade embargo, sale of a business, retooling of a plant or equipment essential to the production of the goods if no alternative equipment is available, intermittent production of large-ticket items such as airplanes that have been ordered but cannot be produced quickly or in large numbers, or fire or other catastrophe affecting the owner.

Abandonment of a mark occurs if use of the mark in the ordinary course of trade has been discontinued with intent not to resume use. Nonuse of the mark for 3 consecutive years is prima facie evidence of abandonment. 15 U.S.C. '1127. The ability of a trademark to signify the source of goods or services, however, may continue to exist even after a mark has been technically abandoned under the legal standards for use. The continuing popularity of an abandoned mark is known as 'residual goodwill.'

The Burgess case exemplifies how courts balance the principles of excusable nonuse, abandonment, and residual goodwill. In the case of the 'World Famous Mustang Ranch,' the government's claim of excusable nonuse of the mark and the mark's alleged residual goodwill have so far prevailed over the plaintiff's claim that the government abandoned the mark and had no intent to resume use.

Residual goodwill is an attractive concept for trademark owners. A trademark owner accused of abandonment can defend the mark by showing actual use, excusable nonuse, and/or an intent to resume use. These can be difficult arguments to support when a competitor adopts a mark after the trademark owner has ceased using it. Residual goodwill provides the former owner of a trademark with an argument that, despite lack of use or plans to resume use of a trademark, others should not be able to use the mark because considerable goodwill remains with the original owner of the mark. Use of an abandoned mark by a third party may create a likelihood of confusion between the old and new owners of the mark because the public will continue to associate the mark with its original, rather than new, owner. Residual goodwill, without more, however, cannot save a trademark from abandonment.

In the Burgess case, several parties are contesting use and registration rights to the MUSTANG RANCH mark. The mark fell out of use for brothel services in 1999, when the federal government shut down the operation after convicting the owners of racketeering and other crimes. From 1999 until 2003, various governmental agencies controlled the Mustang Ranch, including the Inter-nal Revenue Service and the Bureau of Land Management ('BLM'), and examined options for the real and personal property. The government could not fully control the assets until 2001, when its forfeiture order became final. The BLM held two eBay auctions, one explicitly including the mark. Lance Gilman, the successful eBay bidder for the MUSTANG RANCH trademark, began using the mark for a brothel at the same time that the Burgesses (who believed it to be abandoned) were also using it. If the government had indeed abandoned the mark, the Burgesses may have had a legitimate right to adopt and use Mustang Ranch for their brothel.

The government cited lack of expertise and political considerations as excuses for nonuse of the mark in connection with operating the Mustang Ranch as a brothel. The government also contended that its intent to resume use was demonstrated because it always intended to sell the mark and other property to a third party who, unlike the BLM, could operate a brothel. The court gave significant weight to these contentions and to the government's residual goodwill argument. The court noted that the 'exceptional goodwill associated with the Mus-tang Ranch brothel' was shown by the fact that in the eBay auction, 'seemingly valueless items, such as the inspection certificate for the brothel's hot tub, sold for hundreds of dollars.' Burgess, 78 U.S.P.Q.2d at 1779 n.7. Moreover, the numerous parties attempting to claim rights in and use the MUSTANG RANCH trade-mark provided evidence of the continuing value of that mark. The Burgess court denied summary judgment to the plaintiffs because the combination of excusable nonuse, intent to resume use, and residual goodwill raised genuine issues of material fact regarding whether the trademark had been abandoned.

As the courts sort out who owns the Mustang Ranch trademark, the mark's residual goodwill will probably continue to weigh against abandonment. Residual goodwill can lessen the burden of establishing excusable nonuse or an intent to resume use. For example, after 8 years of nonuse, the COOKE'S GOLDBLUME mark for beer was deemed not abandoned because a third party offered to pay a substantial sum for the mark, which was 'persuasive evidence' that the 'mark still had significance as an indication of origin and a symbol of goodwill.' Sterling Brewers, Inc. v. Schenley Industries, Inc., 441 F.2d 675, 679 (C.C.P.A. 1971).

The owners of discontinued trademarks for automobiles have also been able to successfully prevent the registration of or use of similar marks by others. See, e.g., American Motors Corp. v. Action-Age, Inc., 178 U.S.P.Q. 377, 378-79 (T.T.A.B. 1973) (refusing registration for SCRAMBLER based on opposer's previous use of RAMBLER, when nearly 250 dealers still displayed the mark, 2 million automobiles bearing the mark remained on the road, and opposer continued to distribute accessories and replacement parts); Ferrari S.p.A. Esercizio Fabbriche Auto-mobile e Corse v. McBurnie, 11 U.S.P.Q.2d 1843, 1849 (S.D. Cal. 1989) (no abandonment because of existing and residual goodwill in unique design of car where plaintiff continued to manufacture original replacement parts for cars that continued to be owned and driven.) A trademark examiner even cited residual goodwill in the discontinued Alpine Sunbeam automobile as a bar to registration of the Sunbeam mark for a toy car.

Courts may also require the new user of a well-known abandoned mark to 'take reasonable precautions to prevent confusion.' Indianapolis Colts, Inc. v. Metropolitan Football Club L.P., 34 F.3d 410 (7th Cir. 1994) (Canadian Football League could use CFL BALTIMORE COLTS after National Football League moved its team and changed name to Indianapolis Colts).

Courts focus on residual goodwill because the greater the amount of goodwill remaining in a mark, the more likely that consumers will be confused if a new party begins using the mark. However, too much weight given to the factor of residual goodwill could encourage hoarding of trademarks that are no longer in use. This is why inquiries into abandonment often focus on the intent to resume commercial use of the mark. 'Trademark rights flow from use, not from an intent to protect rights. Were the rule otherwise, a party could hold trademarks that it never intended to use but did not want to allow others to use. The Lanham Act does not permit such warehousing of marks.' Ambrit, Inc. v. Kraft, Inc., 812 F.2d 1531, 1550 (11th Cir. 1983).

The only sure way to prevent a mark from going abandoned is to continue using the mark in commerce. Burgess indicates that courts recognize the impact of residual goodwill and its importance in preventing confusion. However, unless a mark has as much fame or notoriety as the Mustang Ranch mark, and evidence exists of excusable nonuse and/or intent to resume use, the 'use it or lose it' standard will likely continue to govern trademark rights.

Judith L. Grubner is a partner in Chicago and Katrina G. Hull is an associate in Milwaukee with Michael Best & Friedrich LLP. The authors can be reached at [email protected] and [email protected].

The notorious legal battle over the right to use the MUSTANG RANCH trademark for legal brothel services illustrates the 'use it or lose it' adage as applied to trademark rights and the difficulty of establishing an excuse for nonuse. Burgess v. Gilman , 78 U.S.P.Q.2d 1773 (D. Nev. 2006). Because U.S. law does not permit the warehousing of trademarks, the owner of a trademark typically must use the mark in commerce or lose the ability to prevent others from using it. For this reason, '8 of the Lanham Act requires trademark owners to file a declaration of use between the fifth and sixth year after registration and with renewals. 15 U.S.C. '1058.

Under '8, if the owner of a registration has temporarily ceased use of the mark due to circumstances beyond the owner's control, the owner 'must file an affidavit setting forth those goods or services in connection with which the mark is not in use in commerce and showing that any such nonuse is due to special circumstances which excuse such nonuse and is not due to any intention to abandon the mark.' 15 U.S.C. '1058(b) (emphasis added). 'Excusable nonuse' of a mark is difficult to prove. The owner of the mark must 'set forth the date when use of the mark in commerce stopped and the approximate date when use is expected to resume; and recite facts to show that nonuse as to those goods and services is due to special circumstances.' 37 C.F.R. '2.161(e)(2) (emphasis added). The owner must also 'specify the reason for nonuse, the specific steps being taken to put the mark back in use and any other relevant facts.' Trademark Manual of Examining Procedures '1604.11.

Circumstances that may excuse nonuse include a trade embargo, sale of a business, retooling of a plant or equipment essential to the production of the goods if no alternative equipment is available, intermittent production of large-ticket items such as airplanes that have been ordered but cannot be produced quickly or in large numbers, or fire or other catastrophe affecting the owner.

Abandonment of a mark occurs if use of the mark in the ordinary course of trade has been discontinued with intent not to resume use. Nonuse of the mark for 3 consecutive years is prima facie evidence of abandonment. 15 U.S.C. '1127. The ability of a trademark to signify the source of goods or services, however, may continue to exist even after a mark has been technically abandoned under the legal standards for use. The continuing popularity of an abandoned mark is known as 'residual goodwill.'

The Burgess case exemplifies how courts balance the principles of excusable nonuse, abandonment, and residual goodwill. In the case of the 'World Famous Mustang Ranch,' the government's claim of excusable nonuse of the mark and the mark's alleged residual goodwill have so far prevailed over the plaintiff's claim that the government abandoned the mark and had no intent to resume use.

Residual goodwill is an attractive concept for trademark owners. A trademark owner accused of abandonment can defend the mark by showing actual use, excusable nonuse, and/or an intent to resume use. These can be difficult arguments to support when a competitor adopts a mark after the trademark owner has ceased using it. Residual goodwill provides the former owner of a trademark with an argument that, despite lack of use or plans to resume use of a trademark, others should not be able to use the mark because considerable goodwill remains with the original owner of the mark. Use of an abandoned mark by a third party may create a likelihood of confusion between the old and new owners of the mark because the public will continue to associate the mark with its original, rather than new, owner. Residual goodwill, without more, however, cannot save a trademark from abandonment.

In the Burgess case, several parties are contesting use and registration rights to the MUSTANG RANCH mark. The mark fell out of use for brothel services in 1999, when the federal government shut down the operation after convicting the owners of racketeering and other crimes. From 1999 until 2003, various governmental agencies controlled the Mustang Ranch, including the Inter-nal Revenue Service and the Bureau of Land Management ('BLM'), and examined options for the real and personal property. The government could not fully control the assets until 2001, when its forfeiture order became final. The BLM held two eBay auctions, one explicitly including the mark. Lance Gilman, the successful eBay bidder for the MUSTANG RANCH trademark, began using the mark for a brothel at the same time that the Burgesses (who believed it to be abandoned) were also using it. If the government had indeed abandoned the mark, the Burgesses may have had a legitimate right to adopt and use Mustang Ranch for their brothel.

The government cited lack of expertise and political considerations as excuses for nonuse of the mark in connection with operating the Mustang Ranch as a brothel. The government also contended that its intent to resume use was demonstrated because it always intended to sell the mark and other property to a third party who, unlike the BLM, could operate a brothel. The court gave significant weight to these contentions and to the government's residual goodwill argument. The court noted that the 'exceptional goodwill associated with the Mus-tang Ranch brothel' was shown by the fact that in the eBay auction, 'seemingly valueless items, such as the inspection certificate for the brothel's hot tub, sold for hundreds of dollars.' Burgess, 78 U.S.P.Q.2d at 1779 n.7. Moreover, the numerous parties attempting to claim rights in and use the MUSTANG RANCH trade-mark provided evidence of the continuing value of that mark. The Burgess court denied summary judgment to the plaintiffs because the combination of excusable nonuse, intent to resume use, and residual goodwill raised genuine issues of material fact regarding whether the trademark had been abandoned.

As the courts sort out who owns the Mustang Ranch trademark, the mark's residual goodwill will probably continue to weigh against abandonment. Residual goodwill can lessen the burden of establishing excusable nonuse or an intent to resume use. For example, after 8 years of nonuse, the COOKE'S GOLDBLUME mark for beer was deemed not abandoned because a third party offered to pay a substantial sum for the mark, which was 'persuasive evidence' that the 'mark still had significance as an indication of origin and a symbol of goodwill.' Sterling Brewers, Inc. v. Schenley Industries, Inc. , 441 F.2d 675, 679 (C.C.P.A. 1971).

The owners of discontinued trademarks for automobiles have also been able to successfully prevent the registration of or use of similar marks by others. See, e.g. , American Motors Corp. v. Action-Age, Inc. , 178 U.S.P.Q. 377, 378-79 (T.T.A.B. 1973) (refusing registration for SCRAMBLER based on opposer's previous use of RAMBLER, when nearly 250 dealers still displayed the mark, 2 million automobiles bearing the mark remained on the road, and opposer continued to distribute accessories and replacement parts); Ferrari S.p.A. Esercizio Fabbriche Auto-mobile e Corse v. McBurnie , 11 U.S.P.Q.2d 1843, 1849 (S.D. Cal. 1989) (no abandonment because of existing and residual goodwill in unique design of car where plaintiff continued to manufacture original replacement parts for cars that continued to be owned and driven.) A trademark examiner even cited residual goodwill in the discontinued Alpine Sunbeam automobile as a bar to registration of the Sunbeam mark for a toy car.

Courts may also require the new user of a well-known abandoned mark to 'take reasonable precautions to prevent confusion.' Indianapolis Colts, Inc. v. Metropolitan Football Club L.P. , 34 F.3d 410 (7th Cir. 1994) (Canadian Football League could use CFL BALTIMORE COLTS after National Football League moved its team and changed name to Indianapolis Colts).

Courts focus on residual goodwill because the greater the amount of goodwill remaining in a mark, the more likely that consumers will be confused if a new party begins using the mark. However, too much weight given to the factor of residual goodwill could encourage hoarding of trademarks that are no longer in use. This is why inquiries into abandonment often focus on the intent to resume commercial use of the mark. 'Trademark rights flow from use, not from an intent to protect rights. Were the rule otherwise, a party could hold trademarks that it never intended to use but did not want to allow others to use. The Lanham Act does not permit such warehousing of marks.' Ambrit, Inc. v. Kraft, Inc. , 812 F.2d 1531, 1550 (11th Cir. 1983).

The only sure way to prevent a mark from going abandoned is to continue using the mark in commerce. Burgess indicates that courts recognize the impact of residual goodwill and its importance in preventing confusion. However, unless a mark has as much fame or notoriety as the Mustang Ranch mark, and evidence exists of excusable nonuse and/or intent to resume use, the 'use it or lose it' standard will likely continue to govern trademark rights.

Judith L. Grubner is a partner in Chicago and Katrina G. Hull is an associate in Milwaukee with Michael Best & Friedrich LLP. The authors can be reached at [email protected] and [email protected].