Why is it important to consider IP when setting up your LLC?

Why is it important to consider IP when setting up your LLC?


"Hey, we just received a cease and desist letter,” the client says. “There's this company in New Jersey, and they claim they have a trademark registration for the name of our product that we've been using for the last three years. The letter says we need to immediately discontinue our use of our product name. Can they do this? Can we really not continue to use this name?" 

Few things in business are as paralyzing as getting a cease and desist letter in the mail.

You’ve started a business from scratch. You’ve given your business a name. You’ve launched a website, printed business cards. Then you created a unique product or service. You, came up with name for your product or service and found an audience for it. Slowly but surely, you’ve built a business.

Sound familiar? Hopefully, that’s the position you’re in — you’ve built something, and it’s growing.

But here’s the twist: it’s three years down the line, and a cease and desist letter shows up in your mailbox. Turns out, someone else has prior trademark rights to your name. 

You are justifiably freaked out, because you now are confronted with the possibility that you may not be able to use your name anymore. You might have to rebrand — which means all the value you’ve built up in your product, your labeling, your website, your business cards, and all the goodwill you’ve established over the years using your product name and creating an identity for your business will be lost.

You start thinking about the cost of a rebrand, and how long it’s going to take and how much you’re going to have to spend to get back to where you are now.

“Yes, they really can do this,” I say. And then I ask the hard question: "Can you give me an idea of what your sales have been for the last three years?"

I ask this question because typically the measure of potential damages for trademark infringement is whatever profits you’ve derived from sales associated with the infringing trademark. Sometimes that's in the tens of thousands. I’ve worked with some clients where it's been in the hundreds of thousands.

This is usually when there’s a gulp on the other end of the line.

They want to talk about their options.

The client says, "Look, they're saying in this letter that if we don't change the name or immediately cease using it, they're going to file a lawsuit in federal court. What's happens if they do that?"

"You're going to have to defend it,” I tell them.

"How much is that going to cost?"

The answer is that the cost to defend a trademark infringement lawsuit all the way through trial typically is in the $300,000-500,000 range, but could possibly cost even more.

Suddenly changing the name they’ve invested so much into sounds like a bargain.

By now, the moral of the story should be clear: whether you’re facing a trademark infringement liability lawsuit or “just” a rebrand, there's a significant cost that comes with that cease and desist letter. And unfortunately, I've seen that situation play out many, many times over my career, simply because a client didn’t do their due diligence on the front end.

That’s why when we're working with clients early on, especially emerging or startup companies, and they ask, "Is this something that I have to spend money on? Is this something that I really need?" my answer is always, “Yes.” And then I tell them a story like this one.

I get that startup budgets are very limited. But doing your trademark due diligence is a relatively small investment that's going to provide you insurance and protection for the life of your business, so that three or four years down the line, or maybe even a year down the line, you do not receive the dreaded cease and desist letter that potentially exposes you to tens if not hundreds of thousands of dollars of risk.

That’s why every time one of our clients wants to have an LLC set up for a new business, we also have a conversation about trademark clearance.  As the saying goes, an ounce of prevention is worth a pound of cure.

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