Intellectual property is exactly that — property — and it can be bought, sold, transferred, assigned, licensed, and more. Unlike some other forms of property, however, questions as to ownership and value can linger long after a business deal is complete. Enter the San Diego Gulls.

In 2015, ECHL Inc. (a mid-level professional hockey league) assigned two trademarks and a Gulls logo to San Diego Gulls Hockey Club LLC. This assignment included the following language:

(1) Assignor has the right, power and authority to enter into this Agreement;
(2) The [Trademark] is freely assignable and not subject to liens, security interests, licenses or encumbrances of any kind;
(3) The Assignor is not subject to any agreement, judgment, or other order inconsistent with the terms of this Agreement; and
(4) The Assignor will never challenge, or participate in a challenge against, Assignee’s or any of Assignee’s successors’ or assigns’ exclusive right, title or interest in or to the Intellectual Property.

After this assignment, the Gulls faced a third-party trademark infringement claim resulting in $757,000 in legal fees and $330,000 in settlement costs. To recoup its losses, in September 2019 the Gulls sued the ECHL in the Central District of California, alleging that the ECHL had breached the assignment contract and had intentionally misrepresented that this intellectual property was unencumbered and freely assignable.

In response, the ECHL filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), claiming that the intentional misrepresentation claim was deficient in that it failed to meet the heightened pleading standard for fraud under Federal Rule of Civil procedure 9(b). The court, however, did not agree.

First, the court noted that the Rule 9(b) standard is not as high as the ECHL suggested:

To satisfy Rule 9(b)’s higher pleading standard, plaintiffs bringing claims sounding in fraud must sufficiently allege “the who, what, when, where, and how’ of the misconduct charged[.]” However, “[w]hile the factual circumstances of the fraud itself must be alleged with particularity, the state of mind—or scienter—of the defendants may be alleged generally.’ [Internal citations omitted.]

Second, the court pointed to the underlying intent of Rule 9(b), and concluded that the complaint complied with both the letter and the spirit of the rule:

The rule serves three purposes: “(1) to provide defendants with adequate notice to allow them to defend the charge and deter plaintiffs from the filing of complaints ‘as a pretext for the discovery of unknown wrongs’; (2) to protect those whose reputation would be harmed as a result of being subject to fraud charges; and (3) to ‘prohibit [ ] plaintiff[s] from unilaterally imposing upon the court, the parties and society enormous social and economic costs absent some factual basis.’” . . . The allegations set forth in Gulls’ Complaint comply with both the letter and spirit of Rule 9(b). [Internal citations omitted.]

Third, the court found that the complaint sufficiently alleged the scienter (intent or knowledge) required for a pleading of fraud:

Finally, Gulls has sufficiently alleged the scienter with which ECHL, through its agents, made the averred misrepresentations. Gulls clearly alleges that the representations present in the Assignment Agreement were made with either knowledge of falsity or reckless disregard as to their truth or falsity. This is sufficient to satisfy Rule 9(b), which permits general allegations of “conditions of a person’s mind.” [Internal citations omitted.]

For these reasons, the court denied the ECHL motion to dismiss and both claims are proceeding forward. Notably, after the parties failed to submit an agreed proposed scheduling order, the court issued its own — trial is calendared for February 2021, with the parties ordered to conduct private mediation by December 4, 2020. 

The takeaway? Trademark assignments commonly contain representations and warranties which may come back to haunt the assignor if the assignee’s use of the mark is later challenged. Due diligence on the front end, and careful drafting of assignments, may go a long way toward preventing an expensive and time-consuming litigation.

For more information on this article and this topic, contact James Creedon.