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Splitting trademarks between businesses in a corporatetransaction presents unique challenges for corporate lawyers andtrademark attorneys alike. A recent case on key is Baldwin Piano, Inc. v. Deutsche Wurlitzer GmbH, decided by the 7th U.S. CircuitCourt of Appeals on Dec. 16, 2004. The story goes back to 1985, when the venerableWurlitzer Co., producer of pianos, organs and jukeboxes, was split up. AnAustralian firm, Nelson Group Holdings Pty Ltd., acquired DeutscheWurlitzer GmbH, the business producing Wurlitzer jukeboxes. The Wurlitzerpiano and organ business continued under the same brand under separateownership and control. The risk of splitting rights in a trademark betweenseparate owners is well-known to experienced trademark counsel. Echoingmy experience in major corporate transactions, I previously wrote aboutthese problems in my book, “Guiding Rights: Trademarks, Copyright andthe Internet.” In corporate transactions, the risks of mishandlingtrademarks are high. The consequences range from weakened rights tototal abandonment of valuable trademarks with long-term licensing andlitigation problems in between. These problems can arise when thetransaction involves a part of business operated under a house mark. Assuming,for example, that the goal of the transaction is to sell certainsubsidiaries as they are currently operated while continuing in business withthe other subsidiaries, what happens to the house mark? The most discordant outcome is that ownership of amark by unrelated companies for similar goods may destroy the mark. Short of that, valuable rights may be weakened, hindering enforcementagainst other parties who adopt the same mark. In my experience, marketing personnel have anintuitive understanding of the problem: Too many products coexisting under thesame brand may damage or destroy the marketing value of the brand. The attorneys for the 1985 Wurlitzer transaction alsorecognized the risk of splitting ownership in the mark, and theyemployed a common solution. The parent company retained ownership of the Wurlitzermark, while the purchasers of the jukebox business received perpetual,royalty-free license. The clear intent was this: to mimic outrightownership to the fullest extent possible without splitting the mark between twoseparate masters. With that legal slight of hand, the lawyers achievedtheir clients’ desired results. Or so they thought. Years later, Baldwin Piano acquired the Wurlitzerpiano and organ business, along with ownership of the Wurlitzer mark.Under Illinois law, as well as the law of some other states, licenses foran indefinite term may be terminated at will, notwithstanding theapparent intent of the parties to create a perpetual license. Keying in onthis technicality, and presumably unhappy being bound to royalty-freeagreement, Baldwin Piano abruptly told Deutsche Wurlitzer its license wascancelled, effective immediately, and Baldwin filed suit fortrademark infringement the same day. When the lower court agreed with Baldwin Piano andenjoined Deutsche Wurlitzer from using the Wurlitzer mark on jukeboxes,wiping away the carefully considered intent of the parties in 1985with a rag of technicality tucked deep in Illinois law, my partnersSanjiv Sarwate and Brett August sought relief from the Court of Appeals. Writing for a unanimous panel, Judge Easterbrookreversed the lower court, in a decision that challenges courts torecognize the realities of the market. Judges need not hold an MBA, he wrote,but they should be “alert citizens of a market-oriented society so thatthey can recognize absurdity in a business context” (quoting BeanstalkGroup, Inc. v. AM General Corp., 283 F.3d 856, 860 (7th Cir.2002)). Judge Easterbrook’s decision probes deeper than merelegal interpretation of the Wurlitzer license:
[T]he 1985 transaction as a whole is hard tounderstand unless Deutsche Wurlitzer received an enduring rather than evanescentinterest in using the Wurlitzer mark on jukeboxes … A sale subject toa provision such as “The Wurlitzer Company reserves the right toend your use of the trademark, and thus abrogate all going-concern valueof this product line, at any time and for no reason” would not havebeen commercially viable, unless Deutsche Wurlitzer’s assets were beingsold for scrap value only. The transaction makes economic sense as the saleof a line of business only if Nelson Group (the buyer, recall)enjoys protection against opportunistic behavior by Deutsche Wurlitzer’sformer parent. When there is a choice among plausible interpretations, itis best to choose a reading that makes commercial sense, rather than areading that makes the deal one-sided.

There is much more to the legal analysis of theWurlitzer contract, making the decision a worthy subject of study forcorporate and trademark counsel engaged in similar transactions. In a broadersense, the decision should be reassuring to business clients inits emphasis on the need of courts to focus on the reality of the deal indispute. Whether other courts will play in tune remains to be heard.

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