Trademark Considerations
Trademark is typically the first trap for the unwary restaurateur. Many believe that the name chosen for a new restaurant should be indicative of the food and services available - not so! Use of words such as grille, restaurant, tavern, diner, or buffet, for example, should be avoided. EXXON is one of the most powerful trademarks in the US, and one that we frequently hold up as an example when advising clients on selecting a strong trademark. Note that words such as “gasoline” and “petroleum” are not part of the EXXON mark for good reason: trademarks should never be descriptive of the goods and services provided. In addition, trademarks ideally function as adjectives, and so it is unnecessary to include any noun in the trademark itself. Invariably, someone will recount to us the name of a business which appears to be doing well although the name violates all the known rules of trademark (for example, “Fincher’s Bar-B-Q”). The rare success enjoyed by a business owner who gambles with a weak trademark is not a compelling reason to follow suit! Why does the name matter so much? (1) Think ahead 5 years: your restaurant is a smashing success in which you are totally invested. Suddenly, someone observes your success and, more particularly, the name of your thriving business. They sue you for using the name and win (which, given a weak trademark, may be highly likely). You incur untold costs defending the mark in court, none of which are deductible; you may be forced to change the name of your restaurant, making it difficult - or even impossible - for customers to find you; finally, the goodwill dollars you have amassed over the past 5 years will literally dissipate before your eyes.(2) A successful business will generate goodwill, a sellable asset with value beyond that of the land, lease, equipment or other tangible property. If you have been lucky enough to start and franchise your own restaurant, this goodwill value will be reflected in your stock value. If you select a weak trademark, no one will be willing to pay money in an amount significantly inexcess of book value to step into your business shoes and take over your lawsuits! A further consideration is that the sale of your business and the associated goodwill is currently taxed at the federal rate of only 15%, yet another reason to maximize your gain. (3) To the extent that your restaurant name is similar to other restaurant names in your area, your advertising dollars are likely to generate profits for your competitors.(4) Two restaurants fighting over a similar name is a recipe for disaster! For starters, the cost of litigation to preserve the name is a capital item which cannot be deducted. Can you imagine earning a $1 million in profits, getting involved in a trademark fight, and paying the trademark litigation attorneys your hard-earned $1 million? To make matters worse, you won’t be breaking even because you will not be able to deduct the $1 million in legal fees. Assuming your tax rate is 35%, even if you win the trademark suit, you must still pay your attorneys the $1 million, and you must still find a way pay $350,000 in taxes on the $1 million in profits that you made. The bloodiest, costliest trademark fights typically occur over the weakest, most poorly selected trademarks. This trademark warfare can easily avoided by simply selecting a strong trademark at the outset.We have formulated five rules for choosing a strong trademark and avoiding the predictable pitfalls inherent in selecting a weak mark:(1) The name must not be descriptive. A good test to determine the level of descriptiveness is to share the name with someone who does not know its intended use. If the person cannot guess the goods and services, your prospective mark is likely to be a good candidate from a descriptiveness standpoint. Likewise, avoid any mark associated with another users mark. Definitely do not try to pivot off of someone elses name!(2) Stay out of the dictionary. If your prospective mark can be found in a dictionary, it has meaning and will be a poor candidate for a trademark.(3) Stay away from geographical designations, no matter how obscure they may seem. (4) Do not use anyones last name and avoid using first names. Doing otherwise will invite trouble from others with that name. Moreover, your competition may hire someone with that name just to have them use it against you.(5) Do not select anything outrageous or vulgar. Bear in mind that logos should be trademarked separately from any associated word marks. Only as a last resort should you consider trademarking a logo and an associated word mark together; the resulting mark will be extremely narrow and will offer very little protection against infringement. Additionally, the US Trademark Office is notorious for forcing applicants to disclaim words associated with a logo, which further weakens a prospective mark. Where an applicant has selected a strong word mark, tossing the words onto a logo makes the mark so narrow that no additional protection is gained over the strong word mark and the stand-alone logo. Competitors are not usually so uncreative as to simply copy a mark in its entirety; they are more likely to copy a selected feature of the mark or to make small changes in the mark. Trademarking the logo separately from the word mark increases your chance of prevailing against even the most artful infringer.One final consideration for restaurateurs is trademarking unusual menu items. This not only builds your trademark portfolio, but may help win the day in an argument as to why a prospective buyer should pay you $10 million over book value (rather than $5 million) for your restaurant or restaurant chain.Following the five rules for selecting a strong trademark can increase your probability of staying in the clear once you have chosen a mark. Further, because all trademark acquisition costs are capitalized, your goals going forward are (1) minimization of interference by other people, and (2) avoidance of disaster. In the US, a mark is not truly yours until you apply for incontestability status after 5 years of continuous use post-registration. From a tax perspective, trademarks are a one-way street: no write-offs are available until after the business and associated trademark are sold. To that end, if you proceed correctly, a fist full of capital gains dollars should await you as you ride off into the sunset.Patent ConsiderationsBecause restaurants are multi-faceted, patent protection should be both diversified and narrow. Design patents can be used for almost any novel three-dimensional structure or object within the restaurant, including chairs, tables, dinnerware, glasses, bars, shelving units, podiums and displays. Potential difficulties you may face with this approach: (1) suppliers will be pushing pre-fabricated products at you (which are the same as the products they have pushed at everyone else in the industry), and (2) it will be more expensive to design your own accoutrements. Nonetheless, design patents are relatively inexpensive, and they confer a 14-year segue into trademark protection. If the look of your products becomes distinctive of your goods and services after five to ten years, you can apply for a three-dimensional trademark, potentially extending your protection infinitely. In fact, in non-US countries, design patents are even more trademark-like than they are in the US. Patent expenses for design patents can be written off instantly with your first tax return, and, if you sell your patents along with the restaurant, you will qualify for capital gain rates on the proceeds even if you have not held the patents for one year. Further, if your restaurant is a success, the decision to secure trademark protection of your distinctive designs will be far less uncertain.In much the same way you protect art objects (see Copyright Considerations below), you should acquire design patents for utilitarian items which may be logo-related, for example, clocks, condiment holders, beverage pitchers, and anything else you may create that is useful and visible to customers. You should also consider obtaining a utility patent for any original or unusual food items you create. For example, a salsa that contains onions and tomatoes cut in a unique way is not likely to be allowed, but a process patent for an edible concoction with chemically characterizable components has been allowed. Food science is often high-tech, and you should know and be able to convey the reactions taking place in your novel food items to optimize your chances for protection.