The modern Lanham Act and the death of common sense.

• Author: Lemley, Mark A.
• Position: Ralph Sharp Brown, Intellectual Property, and the Public Interest

[W]hat appear to be private disputes among hucksters almost invariably touch the public welfare. We shall therefore be concerned to ask, when courts protect trade symbols, whether their decisions further public as well as private goals.(1) When Ralph Brown wrote his seminal article on trademark law fifty years ago, the modern era of trademark law had just begun. The Lanham Act, the foundation of trademark law today, was only two years old,(2) and the nature of modern commerce was only just beginning to take shape.

Quite a lot has changed in fifty years. More and more of the currency of commerce is not goods, but information and even brand-loyalty itself. The economics of trademarks and advertising has grown increasingly sophisticated over this period. Most economists today view trademarks as valuable aids to efficient markets. Contemporaneous with this economic development, there has been a gradual but fundamental shift in trademark law. Commentators and even courts increasingly talk about trademarks(3) as property rights; as things valuable in and of themselves, rather than for the product goodwill they embody. Courts protect trademark owners against uses that would not have been infringements even a few years ago and protect as trademarks things that would not have received such protection in the past. And they are well on their way to divorcing trademarks entirely from the goods they are supposed to represent.

Unfortunately, the changes in trademark doctrine over the last fifty years are not supported by the new economic learning. Rather, these changes have loosed trademark law from its traditional economic moorings and have offered little of substance to replace them.

Brown's doctrinal approach offers a healthy dose of common sense in thinking about trademark law. While some of his observations about the economics of advertising should be read in light of more recent economic work, his philosophical and doctrinal observations about trademark doctrine and its fit with economic theory are worth reconsidering in light of the trends in trademark doctrine. In Part I of this Essay, I provide a brief sketch of the economic foundations of trademark law, considering both Brown's article and some of the new learning on the economics of advertising. I argue that the new economic learning, while useful, does not fundamentally change the nature of trademarks. In Part II, I argue that recent developments threaten to stretch the rationale of trademark law beyond all limits, and in Part III, I offer some preliminary thoughts on how we might restore common sense to the Lanham Act. Though space constraints prevent a full exposition of these ideas, I will offer some general ways in which courts and commentators might better align the goals and outcomes of trademark law.

1. RALPH BROWN AND THE ECONOMICS OF ADVERTISING

   Brown's approach to trademark doctrine is to determine the goals of trademark law and then to determine how well the doctrine comports with these goals. For Brown, the goals of trademark law are bound up with the "informative function" of trademarks. Trademarks are a compact and efficient means of communicating information to consumers. By granting ownership rights over trademarks, we serve the twin goals of encouraging investment in product quality and preventing consumer deception.(4) Brown quotes Learned Hand's useful admonition that "[w]e are nearly sure to go astray in [trademark law] as soon as we lose sight of the underlying principle that the wrong involved is diverting trade from the first user by misleading customers who mean to deal with him."(5) For Brown, the wisdom of trademark doctrine can be measured by how well it hews to that purpose.

   In particular, Brown was at pains to reject arguments that the law should protect trademarks either because of the perceived unfairness of competition by others,(6) or as property in and of themselves.(7) He also expressed great concern with what he saw as the risks advertising posed for competition, in particular its capacity for artificial brand differentiation and a consequent stifling of competition even in largely homogenous product markets.(8) He was particularly concerned about advertising that sought to persuade rather than to inform. He described the theoretical case for the benefits of advertising as dubious and the empirical case as nonexistent.(9) Brown was by no means alone in raising these challenges; opposition to advertising was perhaps a product of the times.(10)

   The field of economics has responded well to some of Brown's challenges. In particular, while economists have by no means reached a consensus regarding the economic function of trademarks, they have offered considerable empirical evidence--both positive and negative--regarding the actual effects of trademarks and advertising.(11) Whatever the empirical case, economists have offered at least three positive justifications for both trademarks and advertising.

   First, they have emphasized the efficiency by which trademarks and advertising communicate useful information to consumers, and thereby reduce consumer search costs.(12) This communication function is particularly important with respect to what might be called "experience" characteristics of goods: those characteristics (such as taste, or perhaps durability) that consumers cannot readily verify except by buying the product. Advertising communicates these characteristics directly, and trademarks ensure that consumers associate the characteristics with the right product. It may also be important with respect to a class of goods called "reliance" goods, whose quality the consumer has little way of judging at all.(13)

   Economists have also identified a second, "signaling" function of advertising. On this theory, advertising sends a self-referential message: In effect, "we advertise, and therefore we must sell a good of sufficiently high quality that we can afford this high-cost expenditure."(14)

   Finally, economists have pointed to the role of trademarks in allowing the growth of complex, long-term organizations spread over a wide geographic area. The ability to connote a variety of things by the use of a set of trademarks permits nationwide sales by a single entity, or alternatively the "franchising" of a trademark to independent producers overseen by the trademark owner.(15) McDonald's would never have achieved national prominence to travelers without strong trademarks and advertising. Similarly, the general acceptance today of the principle that trademarks can be licensed to others, at least under some circumstances, reflects a world in which the production of goods is less tied to a particular corporate structure than ever before.(16)

   Many economists and lawyers in the past fifty years have challenged the "monopoly phobia" allegedly exhibited by Brown, Edward Chamberlain,(17) and their contemporaries.(18) These scholars start from the presumption that brand names and advertising perform useful social functions and contribute to the economy.(19) This difference in approach surely cannot be attributed to any decline in the significance of "persuasive" as opposed to "informative" advertising; indeed, persuasive advertising has grown beyond what anyone studying the field in 1948 could have imagined.(20) It might be attributed to the new economic learning, at least in part. Certainly, the work of Nelson and others has given us a greater appreciation for the positive benefits of brand identification--benefits that Brown seemed to doubt.(21) To give just one example, Brown asserts that bread "is in fact pretty much standardized," so that there is no reason for advertising to differentiate bread products.(22) In fact, however, the modern world features an enormous diversity not only of kinds of bread, but also of qualities of bread. Thus, this example might suggest that the product differentiation facilitated by trademarks is helping consumers choose the optimal bread for them.

   But surely this cannot be the whole explanation. There seems no question that advertising contributes to product differentiation not only on the basis of quality, but also among goods of demonstrably identical quality, such as pharmaceuticals.(23) It is hard to construct a plausible case for product differentiation in such a circumstance. By contrast, the costs of artificial brand differentiation in terms of power over price are quite clear.(24) While advertising may still lower search costs, the participation of government and private agencies that provide consumer information--the Federal Drag Administration (FDA), Consumer Reports, the Better Business Bureau, and even supermarkets and other stores that stock multiple brands--can sometimes be just as effective as advertising.

   So why is there no serious hostility to advertising and trademark law among economists today? There are several reasons, some good and some bad. First, economists today are much more reluctant to second-guess the workings of the market than they were fifty years ago. Brown's distinction between informational and persuasive advertising(25) is troubling because it impels him to conclude that an enormous number of consumers do not really want what they think they want; they have been duped by unscrupulous marketers. Perhaps I am a product of my own generation, but I am loath to jump to such a conclusion. My preference for Diet Coke over Diet Pepsi or any other cola drink may be an irrational one, induced by childhood memories of teaching the world to sing or some similar promotional effort. But in a free market economy, perhaps the choice should be mine to make, for good or ill.(26)

   Second, the economy of 1998 is very different from the economy of 1948. Transactions in services, information, and intellectual property are a growing percentage of the economy.(27) It may be that advertising and brand loyalty are more important in such transactions than they are in the relatively homogenous...