The extended protection of "strong" trademarks.

• Author: Bottero, Nicola

INTRODUCTION I. THE FUNCTION OF TRADEMARKS: A TRADITIONAL LAW AND ECONOMICS APPROACH II. THE LEGAL EVOLUTION AND THE NEW PROTECTED FUNCTION OF TRADEMARKS III. TRADEMARK PROTECTION AND PRODUCT QUALITY IV. TRADEMARK PROTECTION, PRODUCT QUALITY, AND ADVERTISING V. BRAND EXTENSIONS AND PRODUCT QUALITY VI. FREE RIDING AND TRADEMARK DILUTION CONCLUSION APPENDIX INTRODUCTION

Legal evolution evidences that trademarks are currently protected not only to avoid consumer confusion, but also to provide firms with an adequate return on investments made to create and maintain strong brands. However, the rational basis of this development is subject to question and review. While free riding on a famous brand may, indeed, generate negative spillover effects, such as trademark dilution, and this may, in turn, reduce the incentive to invest in trademarks, this Article seeks to illustrate that such investment cannot be seen as indicative of product quality. Indeed, this Article suggests that the existence of trademark protection does not, per se, create an incentive for continuous improvement in product quality. Not even the signalling argument--specifically, in relation to advertising and brand extensions--can, by itself, justify the extended protection of strong trademarks. In fact, the signalling argument may be invoked only when negative spillover effects are proven and are shown to adversely affect both the senior user of the trademark and the profitability of the trademark in all markets, thereby leading to a reduction of "welfare."

Part I of this Article begins by outlining the function of trademarks from a traditional law and economics perspective. The current evolution of trademark protection and the "new" lawyers' interpretation of trademark functions is addressed in Part II, including a discussion of the apparent conflict between this approach and the traditional view of economists. Part III summarizes the standard economic doctrine regarding trademark protection and argues that this doctrine does not completely address new questions raised, for example, by the existence of "strong" brands and their extensions. Accordingly, Parts IV and V briefly review the economic literature regarding advertising, brand extensions, and product quality. Ultimately, as outlined in Part VI, an extended protection of strong trademarks cannot be clearly explained by the desire to protect high product quality. However, assuming the possibility of trademark dilution caused by free riding on strong trademarks, it is evident that an extended protection can prevent welfare losses when product variety is considered as an important argument of the consumers' utility function. The Appendix at the conclusion of this Article includes additional analysis to illustrate that when free riding leads to an increase in the product classes covered by a famous trademark, then the senior user has an incentive to free ride on his or her trademark.

1. THE FUNCTION OF TRADEMARKS: A TRADITIONAL LAW AND ECONOMICS APPROACH

   In the standard literature of law and economics, trademark law is presented as an incentive for business enterprises to invest in the quality of the goods and services with which marks are used and as a remedy to specific market failures. (1) Thus, it is argued that if it were impossible for consumers and for the public-at-large to identify the source of goods, then every business would have an incentive to supply goods at a quality lower than the average prevailing in the industry because the profits generated by the individual transaction would, in fact, be garnered by the individual business entering into it, while the reputational costs derived from the public's disappointment with the quality of goods would be externalized to the entire industry. (2) Accordingly, the adoption of a sign or symbol that consistently links the goods to a source over time is seen as a device to overcome this difficulty. (3)

   In a similar vein, it is often noted that while the presence of a trademark lowers the search costs born by consumers, it also enables the public to repeat purchases that have proven satisfactory and to avoid future purchases of goods that have previously failed to do so. (4) Firms that offer a satisfactory price-quality combination are, thus, rewarded; in contrast, the ones that fail to do so must suffer the consequences. (5)

   From this perspective, the case is often made that while other intellectual property rights--for example, patents and copyrights--provide a mix of static costs and dynamic benefits, in principle, very few costs and no deadweight losses whatsoever are associated with trademark protection.6 This holds true, of course, provided that a few simple legal caveats are put in place. (7)

   Indeed, the legal system adopts the following: (1) rules against appropriating generic names as trademarks in order to avoid the monopolization of current language on behalf of one business to the detriment of others, (8) and (2) rules against the adoption of functional or aesthetic features as trademarks (9) in order to avoid that the same are appropriated by one specific firm to the exclusion of its competitors. Thus, it follows that trademark protection may well be perpetual--in other words, it may be for a limited time (usually ten years) (10) but subject to renewal at the holder's option (11)--considering that in a well- tuned legal system incorporating the rules under (1) and (2) above, (12) such protection does not affect the competitive structure of the market and is not likely to entail any deadweight loss.

   It should be noted that until just a few decades ago, both common and civil law lawyers adopted an approach to explain the rationale for trademark protection that was markedly different from the one suggested by economists, but was altogether compatible with it. According to the standard lawyers' original understanding, the rationale for trademark protection resides in the trademark's function of designating the origin of the goods: the public should be protected against the risk of confusion as to the origin of the goods deriving from the unauthorized use of an identical or similar sign in connection with identical or similar goods. At this stage, lawyers tended, however, to add that this system did create an incentive to encourage firms to invest in the quality of the goods offered to the market; this, thereby, established a clear link to the economists' approach summarized above. (13) However, lawyers were reluctant to assert that the main purpose of trademark law is to guarantee the qualitative level of the goods on which the mark is affixed; they were afraid that this understanding might ultimately fetter the freedom of trademark holders to vary the characteristics of the goods. But they were ready to join their economist brethren in recognizing that the de facto outcome of the operation of trademark law is to keep the qualitative level of the goods on which the mark is affixed constant over time. Still, according to this early approach, protection against infringement could only be granted on the basis of a likelihood of consumer confusion as to the origin of the goods. (14)

2. THE LEGAL EVOLUTION AND THE NEW PROTECTED FUNCTION OF TRADEMARKS

   In the last sixty years, trademark laws have evolved considerably. (15) Since 1947, twenty-five state legislatures in the United States have granted trademark protection even in the absence of any likelihood of confusion as to the origin of the goods and services. (16) The work of Frank Schechter is generally considered to have provided the seminal contribution to the "trademark dilution" doctrine that was largely responsible for underpinning this legislative development. (17) According to the doctrine of trademark dilution, famous trademarks should be granted protection even in the absence of direct competition between the senior and the junior users and in the absence of a risk of confusion as to the origin of the marked goods. (18) Although Schechter did not explicitly refer to the term "dilution," he insisted that the "uniqueness of a mark" is the only rational basis of trademark protection. (19) In fact, even prior to Schechter's contribution, a few courts in the United States (20) and Germany (21) had already granted protection to famous trademarks in the absence of a risk of confusion as to the origin of the marked goods.

   In the last several decades, the trickle has become a flood. Since 1970, antidilution protection has been adopted by the Benelux countries, (22) and the 1988 Directive of the Council of the European Communities has been adopted by all Member States. (23) In this latter case, the antidilution feature was complemented by a prohibition against any form of free riding on the reputation of a senior mark. (24) Protection against both dilution and free riding is also granted by Council Regulation 40/94 on the Community Trade Mark. (25) In both provisions, free riding is considered a prohibited way of taking "unfair advantage of ... the distinctive character or the repute" of the senior mark. (26) In 1994, antidilution prohibitions were, to some extent, generalized by the provisions of the international agreement binding all of the 147 Member States to the World Trade Organization (WTO) via Article 16 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs Agreement). (27) In particular, Article 16(3) states the following:

   Article 6bis of the Paris Convention (1967) shall apply, mutatis mutandis, to goods or services which are not similar to those in respect of which a trademark is registered, provided that use of that trademark in relation to those goods or services would indicate a connection between those goods or services and the owner of the registered trademark and provided that the interests of the owner of the registered trademark are likely to be damaged by such use. (28) Finally, an antidilution rule was also adopted at the...