Trademarks and the boundaries of the firm.

• Author: Burk, Dan L.
• Position: Boundaries of Intellectual Property Symposium

ABSTRACT

Coase's theory of the firm has become a familiar tool to analyze the structure and organization of businesses. Such analyses have increasingly focused on property-based theories of the firm, including intellectual property. In previous work we have discussed the application of this model to patents, copyrights, and trade secrets. Here we take up the theory of the firm with regard to trademarks, which act as signals of firm reputation, and so have application and effects that differ substantially from other forms of intellectual property. Using the framework from our previous analyses, we examine the propensity of trademarks to lower transaction costs between firms, as well as within firms, suggesting that such doctrines will have significant effects on the size and structure of the firm.

INTRODUCTION

Modern commerce functions in a sea of trademarks. Consumers depend upon such marks to identify goods and services and increasingly adopt the marks to communicate loyalty or allegiance to preferred brands of goods. (1) Consequently, firms spend billions of dollars each year in developing, establishing, promoting, and maintaining their trademarks in the marketplace. (2) A recognized trademark is frequently the most valuable asset held by the modern firm. (3)

In this paper we consider certain aspects of this latter dimension of trademarks: their value as assets and their place in the firm. Although trademark law traditionally contemplates the welfare and perceptions of consumers, (4) we will be largely unconcerned about the benefits or effects of trademark law on consumers, except as an indirect factor in our primary analysis. Instead, we will focus on the manner in which the legal existence of such assets, and by which the legal regime for control of such assets, may affect the size and structure of economic firms. We will argue that the law allocating the use of trademarks has an important effect, and sometimes a profound effect, on the contours and organization of firms.

In previous work we have considered how other forms of intellectual property, particularly patents, copyrights, and trade secrets, might influence the size and structure of firms, and ultimately of entire industrial sectors. (5) Our earlier analysis assessed these types of intellectual property using the theory of the firm, particularly property-based theories of the firm. (6) However, we purposely set aside trademark law due to its differences from other forms of intellectual property, intending to take trademarks up separately. We take up that delayed inquiry here, applying to trademarks the analytical framework that we previously developed, while taking into account the unusual aspects of trademark law that differentiate them from other forms of intellectual property. We suggest here that trademarks may have purposes, and certainly have effects, not only as a signal to consumers, but also as a set of exclusive rights around which organizations will be structured. Our discussion in this Article is primarily directed to the standard law of trademark confusion, while recognizing that trademark has in the last decade begun to incorporate other theories of infringement. (7)

In following the framework we have previously employed for considering the effects that exclusive rights have upon the size and structure of firms, we consider the differential between transaction costs inside and outside the firm, recognizing that it is possible to have exclusive rights that are too strong or too weak in either dimension. (8) We briefly review this approach, as well as some salient features of trademarks, in the first section. Using this background, we then look at trademarks, first as an asset allocation mechanism that may lower the transaction costs within a firm, and then as an asset allocation mechanism that may lower transaction costs between firms. We emphasize that the asset being allocated in the case of trademarks is the reputational capital of the firm, more than the trademark itself. Under this approach we identify a variety of trademark doctrines that we believe will affect the boundaries of the firm in positive or negative ways.

1. TRADEMARKS AND THE FIRM

   In order to consider the effects of trademarks on the size and structure of firms, we must first consider the points at which an analysis of trademarks might depart from our previous analyses of other forms of intellectual property. We therefore begin our discussion in this section with a brief overview of certain idiosyncratic aspects of trademark law. We then review our earlier arguments regarding intellectual property and the theory of the firm, particularly the framework we have developed for considering the effects of intellectual property on transaction costs within firms and between firms. We note several peculiarities of trademarks when analyzed under the theory of the firm; these idiosyncracies will be key to our discussion of trademarks and transaction costs.

   1. Characteristics of Trademarks

      Trademarks may constitute any type of word, symbol, logo, design, or even color or smell, that evokes an association with the source of goods or services. (9) The public reputation and goodwill of the source are important components of such an association. (10) Trademark rights accrue as the mark is used in commerce affixed to goods or associated with services. The mark accrues protection as consumers grow to recognize the mark and associate it with the source of goods or services. (11) The core legal regime for trademark protection is state law; (12) however, federal recognition and augmentation of these rights has become increasingly important with the development of a national and international economy. Since the early twentieth century, federal law has provided for registration of trademarks in the United States Trademark Office. Federal registration confers a number of legal advantages on the trademark holder, most especially nationwide constructive notice of the registrant's priority of use. (13)

      Technically, marks that identify products come in different categories; trademarks designate goods whereas service marks designate services. (14) While trademarks and service marks are distinguishable in some respects, such as the practical requirements for legal recognition, (15) their status is for the most part legally equivalent, (16) and we will treat them as largely indistinguishable in our analysis here. Federal law also covers some other types of specialized marks, such as certification marks that are used by certifying entities to indicate goods and services meeting a particular standard. (17) For the most part we will not deal with such specialized marks here, although we will make some comments about certification marks. (18)

      In order to function as a trademark, a source indicator must be distinctive; distinction is sometimes presumed and sometimes acquired via what is termed "secondary meaning." (19) Secondary meaning is the association in the minds of consumers between the mark and the source of the product. (20) Marks that are assumed to carry distinction inherently, say "Viagra" or "Sunkist," have no meaning other than to identify their associated goods. (21) Other marks, with potential for multiple associations, must earn secondary meaning from association with products in the marketplace over time. (22) This is the case for marks that describe the goods; (23) in the beginning, they may describe many goods in a given class, such as "Holsum" (a homonym for "wholesome") bread. But over time they gain secondary meaning as being associated with only a particular brand of bread from a particular source.

      Some commentators have pointed out that the term "secondary meaning" is often a misnomer; frequently the primary or cardinal meaning of the mark in the minds of consumers is its association with the source of the products accompanying the mark. (24) But the designation may be ordinal more than cardinal. Certainly for fanciful marks, such as "Exxon," which have no meaning in any language other than to indicate the source of goods and services, that meaning is the first, last, and only meaning associated with the mark. (25) But in the case of descriptive marks, the term first indicates the type of goods and only later is associated with the source. (26) The same is true for arbitrary marks in a contextual sense; "apple" was first the name of a fruit, until it was later placed into the context of computer equipment, where it became associated with a particular brand of computer.

      Thus, trademarks connect products to source, but it is worth noting that "source" is a somewhat circular term of art in trademark law, indicating the originator of marked goods and services to which consumers would attribute the marked products. (27) Consumers need not know the identity or location of a source to know that there is a source from which marked goods originate and to expect particular characteristics and quality of goods from that source. (28) The source of goods or services could constitute an individual, a single firm, a collection of firms, or a particular chain of supply. A source need not even be a manufacturer; it may be a distributor. Black letter trademark law is insistent that a trademark be associated with only a single source, not multiple sources. (29) This association with a unitary legal fiction has more to do with consistency and control of supply than with the organizational or legal form of a producer, but the requirement will be critical to our discussion here.

      The reputational signaling function of trademarks entails something of a paradox: although rights are secured to the trademark owner, they are ostensibly directed toward benefitting the public. This may not seem unusual in itself; other forms of intellectual property certainly have a public interest component. Patents and copyrights are specifically directed to promote the progress of science and the useful...