by Howie Cockrill, Esq.
After spending a few weeks entrenched in copyright law, I thought I’d switch things up and take a look at trademark theory.
In this article, I want to explore some of the theories behind how consumers and companies are harmed by trademark infringement.
But first, as always – the basics:
Trademarks are a form of intellectual property that consist essentially of 2 things:
- text (words, names and short phrases)
- images (logos, symbols and designs)
Though you may not have ever explained the purpose of trademarks to someone, you probably have a gut-level understanding of what they do.
A trademark tells you where a good or service comes from or who is providing it.
A pair of shoes with a “swoosh” symbol indicates that that product comes from Nike.
A red can with the words “Coca-Cola” in fancy cursive indicates that that product comes from Coke.
Why is this important? Because in a world brimming with goods and services to be bought and sold, being a consumer can be a little overwhelming.
Imagine a world where there was no way to determine who made a good or who provided a service.
Cars, food, drinks, clothing, just to name a few – all without text or an image to give a hint about who makes or provides them.
That would make the process of buying anything completely baffling.
There would be no way to continue buying products and services you like, and no way to avoid those you don’t like.
You couldn’t pass the word about amazing and horrible products and services.
You also couldn’t do research before buying.
This is why we have trademarks.
In order to have an efficient marketplace based on competition among service providers and goods manufacturers, it is in everyone’s best interest for those providers and manufacturers to be able to distinguish their offerings from those of their competitors AND for consumers to be informed and clear-headed in their decisions.
So you might say that the overarching purpose of trademarks is to prevent consumers from being confused.
In fact, “likelihood of consumer confusion” is THE big test in determining whether a trademark has been infringed.
After protecting consumers, a sub-purpose of trademarks is to protect those providing the goods and services.
For instance, we instinctively feel that its “not fair” for Party A to sell their goods/services by free-riding on Party B’s reputation.
In many cases, Party B spent a lot of time and money to research, design, create and distribute their product. With a little luck, this effort will be rewarded in the form of repeat customers and a positive reputation.
In trademark terminology, this expectation of repeat patronage based on a company’s reputation as solidified through a trademark is called “goodwill.”
Essentially, the trademark becomes the symbol of a company’s reputation – it is a symbol of consumer experience.
If the consumer experience varies from purchase to purchase, the trademark loses its ability to symbolize the consistency of the company’s product.
However, a company that offers a consistent product or experience every time can leverage that consistency into their reputation, and their trademark is the symbol of that reputation.
This is the “quality assurance” theory of trademark. Trademarks assure consumers of having a certain consistent quality of experience – bad or good.
LIKELIHOOD OF CONSUMER CONFUSION
As I mentioned, the primary purpose of trademarks is to protect consumers from being confused about who is offering goods or services in the marketplace.
The likelihood that consumers will be confused as to the source, sponsorship or affiliation of goods or services is how a court often decides whether a trademark has been infringed.
You should note a couple of things about the “likelihood of consumer confusion” test.
First, the party bringing the lawsuit only has to prove that it is LIKELY that consumer’s will be confused. They don’t have to prove actual confusion. “Likelihood” means that it is more likely than not – i.e., a 51% chance.
Second, the party bringing the lawsuit does not have to prove that they have suffered any measurable harm from this confusion. They just have to prove that it is likely that consumers are or will be confused.
Even though they don’t have to prove harm, companies suing over trademark infringement will usually offer detailed explanations of how the defendant’s behavior is harming them.
We understand instinctively as consumers why we don’t want to be confused when we buy goods or services.
But what is the harm to the providers of those goods or services when consumers are confused?
Goods manufacturers and service providers commonly cite the following harms as resulting from consumer confusion:
This theory simply states that if it weren’t for the existence of a fraudulent or infringing trademark, the consumer would have bought the original good or service.
This assumes that the trademark owner for the original good/service has enough market saturation to cover all markets where the counterfeit good/service sells as well.
In most cases, this is difficult to swallow – and the company providing the “original” may have trouble proving that if it weren’t for the “fake”, consumers would have bought the original.
The counterfeiter may be fulfilling a demand that the original company could/would not have filled. In other words, a counterfeit sale may not be a supplanting sale.
LOST SALES FROM LOST GOODWILL
If you take the Supplanting Sales theory one step further – you get to the Lost Sales from Lost Goodwill theory.
I stated earlier that “goodwill” is a company's expectation of repeat patronage based on their reputation.
Trademarks are the link between this consumer goodwill, the product or service being offered, and the company offering it.
When someone infringes a trademark, they are potentially affecting the consistency of the consumer experience.
If the counterfeiter’s product is worse than the original, consumer’s will no longer hold the original in high esteem and are less likely to buy the original based on their bad experience with the counterfeit.
This results in a loss of goodwill for the original.
Thus, the result in “Lost Sales from Lost Goodwill” theory is the same as in Supplanting Sales theory – lost sales for the company providing the original.
However, Supplanting Sales refers to trademark harm on the basis of an individual purchase of a counterfeit good.
Lost Goodwill harm refers to the loss of repeat patronage, which is much more dangerous.
Another harm often cited by trademark owners in infringement cases is “free-riding.”
This theory strikes at the very essence of what we think of as basic fairness.
It involves a situation in which a counterfeiter is claiming credit for the original product, and is usually only applicable where the trademark is linked to the originator’s identity.
For instance, imagine that Company X sells its hair care products under the name “Paul Mitchell” in an effort to piggy-back their product off that popular name.
If the two hair products (with the same name) are on the shelf next to each other, and a consumer buys the counterfeit and not the original – that’s a lost sale to the original Paul Mitchell. (Supplanting Sales)
If a consumer buys the counterfeit and discovers that its worse than other “Paul Mitchell” products they’ve bought – they might think less of the original “Paul Mitchell” and stop buying its products. (Loss of Sales from Loss of Goodwill)
Regardless of lost sales, however, we feel that there is something morally wrong with this scenario.
If allowed to go on, this free-riding could undermine the basic principles that “you get what you earn” and that labor and investment leads to reward.
Finally, plaintiffs in trademark infringement cases will point to consumer deception as the evil committed by the defendant.
This may arise in a situation where two products are identical, but the counterfeiter sells their product under a different name.
But if the two products are identical, especially in quality, how are consumers are harmed?
Some people say that trademarks act as a type of “warranty” that a particular product comes from a particular source.
Consumers rely on this warranty and assume that buying a particular brand means their money is going to the company associated with that brand.
According to this warranty theory, a healthy economy depends in part on this assumption that truthful information is given via trademarks.
If consumers can no longer trust trademarks to provide accurate information in this regard – the whole economic system is eroded.
Thus, if two products are identical but one is sold under a counterfeit name, the consumer is harmed because he or she can no longer rely on trademarks as a way to support or avoid particular companies.
The consumer’s reasonable expectations (based on the trademark as a warranty) have been breached.
Once again the holiday season is upon us, and once again we are being bombarded with branded products and services, each trying to distinguish itself.
As you go about your day, notice the trademarks around you.
Notice your reactions to the products or services branded by trademarks, and think about how trademarks are symbols of emotions, experiences, ideas and reputations.
Then think about it from the company's perspective. It chose that symbol for you as a shortcut to those emotions and ideas.
Has your experience with that product or service been consistent?
Has your experience been positive?
Ultimately, if a company's trademark represents these things - they have an effective mark.
Finally - think about the ways in which the strength of a trademark can be undermined.
What is the cause and what is the effect of consumer confusion on a trademark, and are these causes and effects harmful?