There are tests that are applied. Also, simply having a similar domain name may not be a problem unless you're directly competing with the guy or you're passing off. There are many limitations to trademark.
One lawyer has said that we are definitely infringing, while another said that there may be some leeway. However, the trademark holder is in the exact same market as us. So many of the limitations you mentioned don't affect his ability to defend against us.
If I were to take on the project myself, I would be willing to put in more cash for that purpose. But I worry about my cofounders claim to half of the business, and risking more of my own money when he technically has the right to half of the reward.
The bright line standard for trademark lawsuits is essentially "would a reasonable person mistake your brand for your competitors?". In this case, based on what you have said here, you have taken your competitors name, and added "my" in front of it. So most reasonable people would conclude that it is highly likely someone will mistake your competitors brand for yours.
If you were in a completely different industry than the similarly named company, then there would be some wiggle room, because you could argue that even if someone was initially confused about the two companies, there is no possibility for them to buy your product thinking it was the competitors. However, you are in the exact same industry, so the likely conclusion is that the customer will be confused and likely to buy your product thinking its your competitors.
Unfortunately, the domain name issue is irrelevant in the face of trademark law. In fact, as has happened with many other infringement suits, it is likely that if you lost the lawsuit, you would be forced to transfer the domain to your competitor.
For the record, we didn't know anything about his business when we chose our name. We merely saw that 'companyname.com' was taken but not used. We assumed (you know what they say about assumptions) that meant we could go with 'mycompanyname.com' and be fine. Had we known about his trademarked business beforehand, we wouldn't have done so.
Thank you for shedding more light on the trademark situation.
This is not legal advice, just common sense: be careful what you admit online! In some cases, willful use of someone's trademark may entitle them to punitive damages or lost profits.
In the future, don't say things like this in writing. Not trying to be hard on you, or to encourage you to be dishonest.
It's just that statements like this can really come back to bite you when they come up out of context in a legal context.
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In deciding whether consumers are likely to be confused, the courts will typically look to a number of factors, including:
(1) the strength of the mark [DCT note: See http://en.wikipedia.org/wiki/Trademark_distinctiveness];
(2) the proximity of the goods;
(3) the similarity of the marks;
(4) evidence of actual confusion; [DCT note: Proof of actual confusion is not required, but can be powerful evidence of a likelihood of confusion]
(5) the similarity of marketing channels used;
(6) the degree of caution exercised by the typical purchaser [DCT note: Confusion is more likely for an impulse purchase than one in which the buyer pays careful attention to what s/he's getting];
(7) the defendant's intent. [DCT note: Willful copying of another's mark is often taken as circumstantial evidence that consumer confusion is indeed likely, otherwise presumably the copier wouldn't have bothered.]
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