In financing transactions, such as loans or securitizations, the lender who provides the financing will typically take a security interest over the assets pledged as collateral against the borrower's compliance with its obligations under the loan and security documentation. The document that provides the lender with the security interest in the specific assets or property that is pledged as collateral is called a security agreement. The security agreement customarily defines with specificity what constitutes "collateral" and also defines which of the borrower's assets constitute "excluded collateral". This posting focuses specifically on intent-to-use trademark applications and why they should be left out of the "collateral" definition and included in the "excluded collateral" definition of a security agreement.
By way of background, the Lanham Act provides for two different types of United States trademark applications. It allows an applicant to file a use-based trademark application pursuant to 15 U.S.C. § 1051(a)(1) and it allows an applicant to file an intent-to-use ("ITU") trademark application pursuant to 15 U.S.C. § 1051(b)(1). A use-based application can be filed if the applicant is using the mark in United States commerce, and an ITU application may be filed if the applicant presently has a genuine intent to use the mark in United States commerce in the future. In other words, ITU applications are for marks for which no "use in commerce" has yet been established. The Lanham Act provides that "[a] person who has a bona fide intention, under circumstances showing the good faith of such person, to use a trademark in commerce may request registration of its trademark."1 The ITU applicant must submit a verified statement that it has a bona fide intent to use the mark.2 The applicant must allege use in commerce prior to the date the application is approved for publication or within six months after the Notice of Allowance is issued, unless a request for an extension of time is granted.3
The Lanham Act prohibits the assignment of an ITU trademark application prior to the filing of an amendment to allege actual use in commerce pursuant to 15 U.S.C. § 1051(c) or prior to the filing of a verified statement of use pursuant to 15 U.S.C. § 1051(d), "except for an assignment to a successor to the business of the applicant, or portion thereof, to which the mark pertains, if that business is ongoing and existing."4 In short, an ITU applicant can only transfer its application to another party if it is transferred with part of the applicant's "ongoing and existing" business to which the mark relates. This prohibition exists to prevent the trafficking or profiting from the sale of an ITU application and ensure that the intention of the "intent to use" applicant is bona fide.5
In Clorox Company v. Chemical Bank, the Trademark Trial and Appeal Board invalidated the assignment of an ITU trademark application and the resulting registered trademark when the underlying security agreement that included the ITU trademark application as collateral contained language that the Board determined was an outright assignment of all right, title and interest in and to the ITU application (and the transfer was not made to a successor of the ongoing and existing business to which the mark pertained).6 The Board made such a determination even though the respondent argued that the parties "merely created a security interest in the [ITU] application as part of the collateral for the simultaneously executed Loan and Security Agreement."7
Although the Board noted that a security interest is not an assignment and does not violate the prohibition on assignment of ITU trademark applications, if there is language indicative of an assignment in the security agreement, then it seems an ITU trademark application can be invalidated under the Clorox analysis. Further, it seems to follow that even in the case of a security interest in an ITU trademark application that is not prohibited, a later assignment pursuant to a foreclosure may violate the prohibition if use in commerce has not been established. Accordingly, lenders and trademark owners should exercise caution in drafting security interest documentation to avoid inadvertent assignment of ITU trademark applications. In order to avoid the potential invalidation of a borrower's ITU trademark applications, it is recommended that such applications be included in the "excluded collateral" definition in a security agreement, until such time the applicant has filed an amendment alleging use pursuant to 15 U.S.C. § 1051(c) or filed a verified statement of use pursuant to 15 U.S.C. § 1051(d). The security documents can include a covenant that then requires the borrower to grant the security interest to the financing party once the appropriate filings have been made and the application is converted to a use-based application.