Starbucks had an identity crisis. Back in the early 2000s, the company was itching to open up some stores in Russia. But it couldn't do so under its famous brand name because Sergei Zuykov, an attorney with no affiliation to Starbucks, had registered the company's trademark in Russia.

Zuykov offered to give up the trademark registration if Starbucks paid him $600,000. Instead, Starbucks took the trademark squatter to court.

It took Starbucks more than three years to cancel the registrations and win back the rights to its trademark. The company incurred significant legal expenses, but the biggest cost for Starbucks was that it had to delay its entry into the Russian market. By the time the company opened its first Russian store in 2007, the price of real estate had shot up, the labor market had tightened and competitors had entrenched themselves across the country.

Many other companies–including Kodak, Forbes and Audi–could tell similar tales of trademark squatting. The practice has become a serious problem for companies seeking to do business in Russia, China, India, Korea and some other nations around the world. Trademark squatting is not, however, supposed to be a problem in the U.S. Attorneys and companies widely believe that trademark squatting doesn't occur in this country. “I don't see it as a problem in the U.S. The law is sophisticated enough to prevent this,” says Philip Jones, a shareholder at Brinks Hofer Gilson & Lione.

Tell that to Geisha LLC. The company has three successful and highly regarded restaurants in Chicago, New York and Las Vegas, all operating under the name “Japonais.” The company recently completed an expensive, four-year legal battle to wrest the federal trademark registration for “Japonais” from a trademark squatter here in the U.S.

Trademark squatting is a relatively new phenomenon in the U.S., but some experts warn it's growing. “This problem is increasing in frequency, and small and major brand owners are equally at risk,” says John Cullis, a partner at Neal Gerber & Eisenberg.

Not in America

Trademark squatting has long been a problem for companies doing business overseas. “It is a well-known foreign practice, a cottage industry,” says Robert Lee, a partner at Alston & Bird.

In most foreign countries, anyone can register a trademark simply by filing a trademark application. And once the mark is registered, the legitimate brand owner is in trouble. The brand owner will have to fight for years and pay some hefty legal bills in order to get the registration canceled, if it does get canceled. The only other alternative is to pay off the trademark squatter.

For many years, however, U.S. law effectively discouraged trademark squatting. Here, unlike overseas, trademark rights arose only from using the mark, not from simply filing a trademark application. One had to sell or ship goods bearing the mark in interstate commerce in the U.S. in order to obtain a federal registration of the mark. Squatters didn't want to go through the time and expense of doing this.

Then Congress changed the law. The Trademark Law Revision Act of 1988 created intent to use (ITU) applications. For the first time, anyone could obtain trademark rights simply by filing an application and paying a modest fee, provided the applicant had a “bona fide” intent to use the mark in commerce. “The PTO has made it incredibly easy to file these applications online at the PTO's Web site,” Cullis says.

Gaming the System

Trademark squatters have found a way to take advantage of the ITU application process.

After an ITU application is filed, an examiner at the PTO reviews it. If the review determines the application satisfies procedural and substantive requirements, the application is published in the agency's weekly Official Gazette. Anyone who believes the registration should not be granted can file an objection within 30 days of the publication. If no objection is filed, the applicant will receive a Notice of Allowance. The applicant then has six months in which to submit a Statement of Use (SOU), evidence that it is using the mark in commerce. After the agency has reviewed the SOU, it will issue a registration of the mark.

That's how it's supposed to work. ITU applications are intended to provide brand owners with a relatively short period of protection, enabling them to use their new marks in interstate commerce and thus complete the criteria for registering those marks.

Trademark squatters, however, have discovered how to game the system. A squatter files an ITU application, receives a Notice of Allowance, but usually does not go on to use the mark in commerce. Instead, the squatter files a simple form, pays $100 and extends by six months the deadline for using the mark in commerce. It is possible to obtain six extensions, each of which grants an additional six months. Thus, without using the mark in commerce, a squatter can hold rights in the mark for up to three and a half years.

In the Geisha case, for instance, New York resident Roy Tuccillo filed an ITU application for “Japonais” as a mark for restaurants, nine months after Geisha opened its “Japonais” restaurant in Chicago to widespread acclaim and coverage by the national media. The PTO approved the ITU application and gave Tuccillo a Notice of Allowance in August 2005. He managed to wait almost three years before filing an SOU. A federal court in New York subsequently found this SOU was fraudulent, holding that “Tuccillo was not in fact operating a bona fide … restaurant under the JAPONAIS mark” for the time periods he had claimed.

Paying Off

During the period after a Notice of Allowance is issued and before an SOU must be filed, a trademark squatter is in a powerful legal position. The Notice of Allowance gives the squatter significant legal rights and casts a shadow over the legitimate brand owner's ability to use the mark. And there's little the brand owner can do to attack the Notice of Allowance, according to Cullis. The brand owner must wait until the squatter either has abandoned its ITU application (by failing to provide evidence of use) or has finally registered the mark. Once the mark is registered, the genuine brand owner can commence a cancellation proceeding.

In short, if the brand owner doesn't notice the squatter's ITU application in the Official Gazette and object within 30 days, the squatter can effectively prevent the brand owner from using its own trademark for more than three years.

There is thus a big incentive for the brand owner to pay off the squatter.

Experts agree that the best defense against trademark squatting, whether in the U.S. or elsewhere, is for brand owners to register their marks before the squatters can. But that's often easier said than done.

“The Internet gives squatters an easy way to monitor a company and read its press releases on plans for new products or expanding into new markets,” says Jennifer Dean, a partner at Drinker Biddle & Reath. “Before the company goes public with such plans, it should make sure to file the appropriate trademark registrations.”