What is an intellectual property holding company?
A holding company generally houses assets of many types for a business. By separating out your company assets into different entities your organization can lessen the potential for devastating consequences if a problem ever arises.
One of the types of assets an entity can hold is intellectual property. Learn more about why this is an ideal set up for business organization.
Intellectual Property Holding Companies are used by many organizations for a variety of purposes. In simplified terms, the four primary motivations are:
- Asset Protection. Intellectual property assets are placed in a separate entity outside of the reach of claimants and creditors.
- Lower State Taxes. While federal tax law treats trademark license fees as ordinary income, state treats them as recurring intangible income. Recurring intangible income is usually taxed at a lower rate by many states than ordinary income. In fact, Florida repealed the tax on all recurring intangible income earned on or after January 1, 2007.
- Funding Deals. Special purpose vehicles, such as intellectual property asset holding companies, are often used in funding deals as an easy way to maintain control over the asset, collect royalties, and distribute earnings to investors.
- Simplifying Management. It can be confusing to keep track of what trademarks are held by a subsidiary in a multi-entity organization. Especially with trademarks, the failure to maintain marks can lead to disastrous consequences, such as accidental abandonment.
Accordingly, when it comes to trademarks and other intellectual property, one should consider carefully how the ownership and use of those assets are structured and managed.
To put it simply, trademark statutes allow for you to create a holding company to house your intellectual property as long as the property is being used for your operating company in the way it was intended.
Under trademark statutes, an applicant can base its claim of ownership of a mark on its own exclusive use, use by a “related company” that inures to the owner, or by use of the mark by both the owner and the related company. Any person or entity can be a related company so long as its use of the mark is controlled by the owner with respect to the quality and nature of the goods or services.
Companies that are lax in documenting use of a mark by a non-owner have been surprised by the strict application of these statutory definitions. For example, the Trademark Trial and Appeal Board examined whether a parent company’s use of a trademark owned by its subsidiary qualified as a related company in the case, Noble House Home Furnishings, LLC v. Floorco Enterprises, LLC, 118 U.S.P.Q.2d 1413 (T.T.A.B. 2016).
Noble House applied to register “Noble House” as a trademark, also for furniture sales. The examining attorney refused registration because Floorco owned the registered trademark, “Noble House Home Furnishings” for furniture sales. Noble House petitioned the Trademark Trial and Appeal Board to cancel Floorco’s registration on the grounds of abandonment for nonuse over the prior three years.
Despite lack of sales, Floorco argued that it had not abandoned the mark because Floorco’s parent company, Furnco International Corporation, was marketing the furniture for sale. The Board explained that where a parent company controls the affairs of its subsidiary, it is presumed that the parent also exercises control over the nature and quality of goods and services sold by the subsidiary under a mark owned by a parent, thereby relieving the need for a formal intra-company license agreement. But, where a parent company is using and controlling a mark owned by its subsidiary, without a licensing arrangement, the benefits of the mark do not inure to the benefit of the subsidiary.
Accordingly, the Board held that mark had been abandoned because Floorco’s parent company was not a related company under the definition of that term in the trademark act.
License Agreements are Crucial
The lesson to be learned from the Noble House case is that where the entity holding the trademark does not control the nature and quality of the goods or services covered by the mark, the two entities should have a formal written license agreement in place.