A team that formed to pursue a $20 million prize from Google is learning the hard way that all businesses – even small ones whose members believe their interests are aligned at the outset – neglect at their peril the necessity of addressing legal formation, operating agreements and property management at the earliest possible opportunity.

In January 2008, four individuals, including Peter Bitar, a businessman, and Mary Cafasso, a former NASA employee, formed a team to pursue a $20 million prize from the Google Lunar X Prize competition to be awarded for successfully landing a robotic rover on the moon. By the end of the year, Bitar had secured a 3-year, $1 million corporate sponsorship. However, shortly thereafter, a rift formed between Bitar and Cafasso and each subsequently attempted to take control over the team’s operations and trademark rights in the name the team had selected at its formation – LunaTrex. Cafasso filed corporate formation paperwork in Nevada and a trademark application (U.S. Patent & Trademark Office Serial Number 77761707). Bitar filed corporate formation paperwork in Indiana and his own trademark application 8 days before Cafasso’s (U.S. Patent & Trademark Office Serial Number 77754594). The team then lost its corporate sponsorship and was suspended from the X Prize competition before Bitar filed a lawsuit in the U.S. District Court for the Southern District of Indiana seeking an injunction against Cafasso and a declaratory judgment that he and his Indiana company owned the trademark. Cafasso moved to dismiss and for injunctive relief against Bitar.

On December 1, 2009, the court issued its order refusing to grant the declaratory relief sought, holding that “[a]warding control of the mark to the plaintiffs alone would ignore the contributions that the rest of the team made to the value of the LunaTrex name” and that “[n]one of the four members of the leadership team…is entitled to use the mark to the exclusion of any of the others.” The court then granted each side’s request for injunctive relief to prevent the other from using the LunaTrex mark without consent, requiring each to post a $10,000 bond to secure compliance with the injunction.

Thus, Bitar, Cafasso and the other LunaTrex team members ended up in materially worse positions than those they held prior to formation of the team, a situation that likely could have been mitigated had the team memorialized its formation at the outset, reduced the rights and duties of each team member to a written operating agreement, and sought registrations for its intellectual property rights. (Under U.S. law, a trademark application may be filed on an intent-to-use basis, as long as the mark is actually used in commerce within 36 months after the allowance is granted by the Patent & Trademark Office.) To be sure, these formalities would not necessarily have prevented the falling-out among the team’s principals, but, properly drafted, they certainly would have given the courts a firmer basis upon which to fix rights going forward, thereby preventing the judicially-imposed gridlock in which the parties now find themselves.

All small business owners and principals owe it to themselves and to their team members to consult with counsel as soon as possible to ensure that corporate and property rights are properly memorialized or registered.