Stacey L. Dogan & Mark A. Lemley, the Merchandising Right: Fragile Theory or Fait Accompli?

• Publication year: 2005

THE MERCHANDISING RIGHT: FRAGILE THEORY OR FAIT ACCOMPLI?^*

Stacey L. Dogan^**

Mark A. Lemley^***

Trademark merchandising is big business. One marketing consultant estimated the global market for licensing and marketing sports-related merchandise at $17 billion in 2001.¹The college-logo retail market was estimated at $3 billion in 2003.²The 2002 Salt Lake Olympics generated $500 million in gross sales-and $34 million in licensing revenues-from sale of "Olympics" attire.³Even municipal police departments want a piece of the action, applying to register their names as trademarks⁴and demanding royalties from television programs designed to evoke their image.⁵Want to wear a hat showing your support for your college or favorite baseball team? Want to wear a t-shirt emblazoned with the word "Barbie" or the "Harley-Davidson" logo? You may have no choice but to get an officially licensed piece of gear, at least if trademark owners have their way.⁶

With this much money at stake, it's no surprise that trademark holders demand royalties for use of "their" marks on shirts, key chains, jewelry, and related consumer products. After all, the value of these products comes largely from the allure of the trademarks, and it seems only fair to reward the party that created that value . . . doesn't it?

It turns out that the answer is more complicated than this intuitive account predicts. Historically, trademark law has existed primarily to protect against consumer deception that occurs when one party attempts to pass off its products as those of another.⁷Trademark law makes sense because it promotes the flow of truthful product information and leads to more efficient and competitive markets. From an economic and policy perspective, it is by no means obvious that trademark holders should have exclusive rights over the sale of products that use marks for their ornamental or "intrinsic" value, rather than as indicators of source or official sponsorship.⁸Trademark law seeks to promote, rather than hinder, truthful competition in markets for products sought by consumers. If a trademark is the product, giving one party exclusive rights over it runs in tension with the law's procompetitive goals-frequently without any deception-related justification.⁹If competition brings the best products to consumers at the lowest prices, departure from the competitive market requires a compelling justification.

On the other hand, there may be circumstances in which consumers expect that trademark holders sponsored or produced the products bearing their mark, in which case use of the mark by others-even as a part of a product-might result in genuine confusion.¹⁰When this happens, the procompetitive goal of promoting marketplace clarity runs in tension with the objective of ensuring competition in product features. At the very least, the fact that the trademark constitutes part of the product, rather than purely an indication of source, complicates the analysis, creating tension between the dual goals of trademark law.¹¹

Given these complexities, together with the economic interests at stake, it would be reasonable to expect the law and practice of merchandising rights to be well-settled and reflect a considered balancing of the interests of trademark holders and their competitors. In reality, however, much of the multi-billion dollar industry of merchandise licensing has grown around a handful of cases from the 1970s and 1980s that established merchandising rights with little regard for the competing legal or policy concerns at stake. Those cases are far from settled law-indeed, many decisions decline to give trademark owners the right to control sales of their trademarks as products. We think it is high time to revisit that case law and to reconsider the theoretical justifications for a merchandising right.

That review provides little support for trademark owners' assumptions about merchandising. Doctrinally, the most broad-reaching merchandising cases-which presumed infringement based on the public recognition of the mark as a trademark¹²-were simply wrong in their analysis of trademark infringement and have been specifically rejected by subsequent decisions.¹³

Philosophically, even a merchandising right that hinges on likelihood of confusion raises competition-related concerns that should affect courts' analysis of both the merits of and the appropriate remedies in merchandising cases. Most importantly, recent Supreme Court case law suggests that, if the Supreme Court had the opportunity to evaluate the merchandising theory (something it has never done), it would deny the existence of such a right. Further, the Court would be right to do so. When a trademark is sold, not as a source indicator, but as a desirable feature of a product, competition suffers- and consumers pay-if other sellers are shut out of the market for that feature.¹⁴Accordingly, there is no reason for Congress to step in and codify a merchandising right.

Part I discusses the historical background and general principles of trademark law and traces the growth of the merchandising right theory from the 1970s through the present, when the assumption of a merchandising right has become a standard part of business practice. Part II explores the legal and theoretical viability of the claim to this merchandising right. We find the basis for an absolute merchandising right quite weak. The justifications offered tend to be circular and assume that because it is possible to capture value by using a brand, the trademark owner must own the right to control that value. Making this assumption relegates competition and consumer search costs to secondary status. While the question is not free from doubt, and there are arguable justifications for limited protection in certain circumstances, the concerns we discuss in this section do not justify a general merchandising right. Finally, Part III considers how the Supreme Court would treat the merchandising theory if it were presented with such a case. Recent Supreme Court trademark cases suggest that the Court is quite concerned about protecting competition against expansive readings of the trademark right, an approach that suggests that it would not look kindly on the merchandising theory.

I. ORIGINS OF THE MERCHANDISING RIGHT: FROM TRADEMARK AS BRAND TO TRADEMARK AS PRODUCT

A. Trademarks, Confusion, and Competition

"Trademarks have existed for almost as long as trade itself."¹⁵From the earliest days in which merchants made and sold goods for consumption by others, sellers have used names and other symbols to indicate the source of their wares.¹⁶These "marks" serve an important economic function: They enable sellers to develop reputations for quality, and they assure customers that products sold under the seller's brand will live up to that reputation. Trademarks, in other words, provide convenient, truthful product information in easily accessible form.¹⁷

To fulfill their informational objectives, trademarks require some form of legal protection. A brand-based assurance of quality would mean nothing if imitators could apply it to their own products and pass them off as having come from the trademark holder. The result would be higher search costs for consumers and a disincentive to firms to invest in goodwill and quality products and services. Trademark law evolved specifically to avoid this result. Doctrinally, trademark law prevents interlopers from appropriating trademark holders' goodwill by using their marks in a way that suggests some association, affiliation, or sponsorship between the parties or their products. Economically, trademark law reduces consumer search costs and facilitates investment in goodwill by protecting the accuracy of trademark-related investments in advertising and product quality.¹⁸

While the reduction of consumer search costs and the encouragement of goodwill investment represent critical intermediate objectives of the trademark system, neither of these goals is an end in itself. The law reduces consumer search costs in order to facilitate the functioning of a competitive marketplace. Informed consumers will make better-informed purchases, which will increase their overall utility and push producers to develop better quality products.¹⁹

Trademark law, then, aims to promote more competitive markets by improving the quality of information in those markets.²⁰

Trademark law therefore represents an affirmation of, rather than a departure from, the competitive model that drives the U.S. economy. Like antitrust laws, false advertising laws, and other consumer protection statutes, trademark law both draws from and reinforces the notion that competitive markets, under ordinary circumstances, will ensure efficient resource allocation and bring consumers the highest quality products at the lowest prices.²¹

The primacy of competition in trademark law stands in stark contrast with other areas of intellectual property law, which insulate creators from competition in order to encourage future acts of creation.²²Copyright and patent law offer creators exclusive economic rights to cure the presumed market failure that would result if copiers could replicate expressive works and inventions without incurring the costs of their development.²³As such, these regimes were created specifically to encourage the creation of intrinsically valuable products. Trademark law quite deliberately does not serve this goal; both its philosophy and its structure reject the notion that trademark rights should serve as either an inducement or a reward for the creation of product features that have inherent-as opposed to source-identifying-value.²⁴

While the reach of trademark law has expanded over the centuries, the law has generally maintained its emphasis on promoting linguistic clarity and preventing confusion and misinformation in the sales process.²⁵Initially, trademark law applied only to word marks, and conferred only the right to prevent competitors...