Takeaway
In short, this case holds that a forfeited business's trademark can pass through the government and a later auction sale without being abandoned or assigned in gross when the mark's goodwill and the core identity of the business are preserved.
The dispute concerned ownership of the service marks “Mustang Ranch,” “World-Famous Mustang Ranch,” and “World Famous Mustang Ranch Brothel” after the federal government seized and forfeited the former Mustang Ranch brothel in criminal proceedings against its prior owner, A.G.E. The government later transferred control of the property among agencies and sold the brothel-related assets, including the distinctive buildings, at auction to interests associated with L. Lance Gilman and Cash Processing Services (CPS).
David and Ingrid Burgess and Sherwin Fellen sued for a declaration that Fellen owned the Mustang Ranch mark and that the Burgesses had the exclusive right to use it for prostitution services. CPS counterclaimed under the Lanham Act for infringement and unfair competition. Earlier, Judge Hagen had entered a preliminary injunction favoring the plaintiffs, which the Ninth Circuit affirmed in an unpublished memorandum. After a bench trial, however, the court concluded that the government had retained and validly conveyed the marks to CPS's side of the dispute. The court dissolved the preliminary injunction and permanently barred the Burgesses from using the marks.
Issue #1
Whether the Mustang Ranch service marks passed to the federal government when A.G.E.'s brothel business was forfeited and later transferred between federal agencies.
Holding
Yes. The forfeiture and subsequent governmental transfers carried the marks and their associated goodwill with the business.
Reasoning
Trademark rights ordinarily pass when an entire business is transferred, even if the transfer documents do not expressly mention the mark. That presumption applies to involuntary transfers as well as voluntary ones. Thus, if A.G.E. owned the Mustang Ranch marks before forfeiture, the Department of the Treasury acquired them when it received the entire brothel business.
The court likewise saw no sound basis to treat the later interagency transfer as excluding the marks merely because the agreement did not list them specifically. So long as the government had not abandoned the marks, their transfer followed the transfer of the business and its goodwill.
The Burgesses could not establish ownership through a county fictitious-business-name registration. Such a registration does not determine trademark ownership, which depends on use of the mark and the goodwill associated with the business.
Issue #2
Whether the government's auction transfer of the Mustang Ranch marks to Gilman's interests was an invalid assignment in gross.
Holding
No. The auction transfer was accompanied by sufficient goodwill and business assets to preserve continuity with the prior Mustang Ranch business.
Reasoning
A trademark cannot ordinarily be assigned as an isolated word or symbol divorced from the goodwill it represents. Under the Lanham Act and Ninth Circuit precedent, however, an assignment need not include the entire former business or all of its tangible assets; what must pass is the goodwill connected to the mark.
The relevant business remained substantially the same: prostitution services. The Mustang Ranch name had substantial public recognition, and that recognition translated into business goodwill. The purchaser also acquired the unusual Mustang Ranch buildings, including the octagon, parlor, bar, tubs, distinctive pink structures, signs, and related features that created the establishment's recognizable atmosphere.
Those assets enabled the purchaser to continue the former enterprise in a meaningful way and to recreate the distinctive environment associated with the Mustang Ranch name. Because the mark, goodwill, and core physical attributes of the business moved together, the transfer was not a naked assignment and did not cause abandonment.
Issue #3
Whether the government made bona fide use of the Mustang Ranch marks during the period between forfeiture and the auction sale.
Holding
The auction effort itself was not bona fide trademark use, but CPS made bona fide use of the marks after it obtained possession of the property.
Reasoning
The Lanham Act requires bona fide use in the ordinary course of trade, not token activity undertaken merely to reserve rights in a mark. The court adhered to its earlier conclusion that attempting to auction the Mustang Ranch did not itself constitute bona fide use of the service marks.
Once CPS obtained possession and used the marks in operating the business, however, its use was bona fide. The overall period of nonuse therefore ran from August 1999 to October 2003, just short of four years.
Issue #4
Whether the government's nonuse of the Mustang Ranch marks amounted to abandonment under the Lanham Act.
Holding
No. The Burgesses did not prove by clear and convincing evidence that the government discontinued use with an intent not to resume it.
Reasoning
A mark is abandoned only when its use is discontinued with intent not to resume use. Three consecutive years of nonuse creates a rebuttable presumption of abandonment, but in the Ninth Circuit the party alleging abandonment retains the ultimate burden of persuasion. Because abandonment is a forfeiture, it must be strictly proved.
The period between the preliminary forfeiture order in August 1999 and the final forfeiture order in June 2001 was excused. During that period, the government lacked full control of the assets, and the final order had been stayed pending appeal.
The court also found the government's post-forfeiture delay excusable. Federal agencies inherited an unusually controversial and complicated business, confronted possible uses of the property, public and political concerns, flooding and asbestos problems, and land-use obligations. The court regarded deliberation and indecision in those circumstances as materially different from impermissibly warehousing a mark for speculative future use.
The evidence did not clearly and convincingly establish an intent never to resume use. Continued operation of the Mustang Ranch in some form remained under consideration, and the government ultimately transferred the business and its goodwill to an entity that resumed use. The court therefore found no abandonment and did not need to decide whether the plaintiffs were first bona fide users after an alleged abandonment or whether they had waived their claims in a right-of-way agreement.
Issue #5
Whether CPS was entitled to a permanent injunction barring the Burgesses from using the Mustang Ranch marks.
Holding
Yes. CPS satisfied the four equitable requirements for a permanent injunction, and the Burgesses' use of the marks infringed CPS's valid rights.
Reasoning
Under eBay, a permanent injunction requires irreparable injury, inadequate legal remedies, a balance of hardships favoring equitable relief, and consistency with the public interest. In trademark cases, likelihood of confusion ordinarily supports a presumption of irreparable harm.
Confusion was effectively undisputed. Evidence showed actual confusion involving emergency calls, independent contractors, and taxi drivers, and the court emphasized that two nearby brothels using the same name would predictably confuse customers and others.
Money damages could not adequately remedy continuing infringement because denying injunctive relief would require CPS to endure an ongoing wrong and pursue repeated damages suits. The balance of hardships favored CPS because Gilman had invested extraordinary sums in reliance on the planned use of the marks, and an injunction would not disserve the public interest.
The court declared that CPS had the right to use the Mustang Ranch marks, granted the defendants' motion to dissolve the earlier preliminary injunction, and permanently enjoined the Burgesses and those acting with them from using the marks.