Notes & Comment
Vol. 2006, No. 4
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Business Entities
Playing Chicken with the Family Business
Many years ago, Vartkes and Markrid Iskenderian founded a restaurant in Beirut, Lebanon called "Zankou Chicken". They immigrated to the United States in the early 1980s and established a second "Zankou Chicken" restaurant in Hollywood, California. The family business soon expanded throughout southern California -- until a family murder-suicide in 2003 pushed the survivors into a messy court fight about ownership of the business's valuable trademark.
Iskenderian v. Iskenderian (California Court of Appeal, Second District, No. B183419 (November 17, 2006)), a new California state court decision at the junction of intellectual property, business, family and estate planning law, is an unfortunate case study about infighting and turmoil that can arise when a prosperous and growing family business is run informally, without proper documentation and clear succession planning.
Facts
Vartkes (Dad) and Markrid (Mom) had three children, son Mardiros (Son) and daughters Dzovig and Haygan (Daughters). After emigrating from Lebanon, Mom and Dad founded their Zankou Chicken restaurant in Hollywood (Restaurant No. 1) with Son. They apparently ran Restaurant No. 1 as a general partnership between 1984-1991 with Dad owning 60% and Son owning 40%. There was no written agreement about ownership of Restaurant No. 1. In 1984, the family partnership registered "Zankou Chicken" as a California trademark. Thereafter, Son wanted to expand the business but Mom and Dad did not, so Dad bought out Son's interest in the partnership that owned Restaurant No. 1 for $40,000. With his parents' blessing, Son established (and ran as his own) four new Zankou Chicken restaurants throughout Southern California.
Dad died in 1992 and Mom continued to run Restaurant No. 1 while Son continued to run the four other restaurants, but all five Zankou Chicken outlets operated cooperatively and in an interconnected manner. Unbeknownst to Mom, however, Son registered "Zankou Chicken" in his name alone with the U.S. Patent and Trademark Office in 1993, but the registration was cancelled in 2000.
In 1992, after Dad died, Mom created a family living trust (1992 Trust) and conveyed her entire interest in Restaurant No. 1 to the 1992 Trust. She named Daughters as the sole beneficiaries, but in 1993 added Son as a third beneficiary and in 2000 dropped Son as a beneficiary. In 2002, Mom created a second trust (2002 Trust), and the trustees of the 1992 Trust conveyed to the 2002 Trust "all of her [presumably Mom's] right, title and interest in the restaurant business, the trade name, service mark, or trademark commonly known as ZANKOU CHICKEN." Daughters were the beneficiaries of the 2002 Trust with respect to Restaurant No. 1, but all three children were equal beneficiaries with respect to ownership of the "Zankou Chicken" trademark.
Tragedy struck the family in 2003 when Son, having been diagnosed with cancer two years earlier, murdered Mom and his sister Dzovig before killing himself.
The underlying litigation arose when Son's wife (Rita), the daughter-in-law, sought a court order that Son (whose interest she now succeeded to) was exclusive owner of the "Zankou Chicken" trademark, and that Mom's transfer of the trademark to the 1992 Trust and 2002 Trust was not valid. The trial court rejected Rita's arguments, and the Court of Appeals affirmed.
Legal Analysis
Rita had argued, among other things, that the 1991 dissolution of the Dad-Son partnership in connection with Restaurant No. 1 resulted in a transfer of the trademark solely to Son. The trial court held that the 1991 dissolution was some form of "realignment" of the family business which created a "generally unified and cooperative family enterprise that operated cooperatively for decades". Unfortunately -- it would have aided the analysis -- the case did not decide who owned the "Zankou Chicken" trademark. Instead, the court concluded that the trial court correctly held Son was not the exclusive owner of the mark, and that Mom had the right to transfer her interest in the trademark to the 1992 and 2002 Trusts.
Did Mom alone own 100% of the trademark, as the court suggested? Did Son separately own any portion of the trademark by virtue of his ownership of four restaurants forming the bulk of the "cooperative family enterprise"? Did Mom transfer 100% ownership of the trademark to the two trusts, or just that part which she owned? Son did not own 100% of the trademark, but what was Son's interest in the trademark apart from his interest as a beneficiary under the 2002 Trust? We don't know any of this from the opinion.
The court affirmed the trial court's "implicit conclusion", based on substantial evidence, that "all parties had a joint interest in and joint control of the Zankou Chicken enterprise as a whole…" Following that logic, did Rita have some outright interest in the trademark by virtue of succeeding to Son's share of the "joint interest" business? What did the 1984 state trademark registration tell us about Dad's and Son's long-ago intentions with respect to ownership of the trademark? Again, we don't know.
The court found that there could be joint ownership of a trademark, but here, joint ownership by whom? In short, the appellate court never went back to the beginning, never traced the origin of the trademark rights to the original owner. Nor did it require such an inquiry by the trial court on remand. This shortcoming hobbled and confused the court's analysis.
Summary and Conclusion
For growing businesses (family and otherwise) and their advisors, Iskenderian v. Iskenderian perhaps suggests many important lessons. If there are multiple owners, the form of business entity should be clearly documented, and the rights and privileges of the owners spelled out in that documentation. Upon dissolution of the entity, a written division of assets should be provided for. Intellectual property rights of the business should be identified, particularly when valuable branding is involved, and rights and ownership should be documented, including the use of written license agreements between related companies, if appropriate. Estate planning that provides for identification of business assets and clear succession is not to be delayed.
© Matthew Joseph 2006. Law Offices of Matthew Joseph, San Mateo, California, practices in the areas of intellectual property licensing, commercial real estate leasing, and corporate and business transactions. No legal advice is intended by the information provided herein and recipients should independently consult counsel before taking any action related to this subject matter.