VALUING RESIDUAL GOODWILL AFTER TRADEMARK FORFEITURE.

• Author: Linford, Jake

INTRODUCTION 812 I. TRADEMARK FORFEITURE 818 A. Trademark's Forfeiture Mechanisms 821 1. Statutory Language 822 2. Generislide Through Consumer Use 824 3. Abandonment Through Nonuse 825 4. Assignment in Gross 829 5. Naked Licensing 830 B. Information-Forcing Failures 833 C. Forfeiture's Inconsistent Presumptions 835 II. CONSUMER PERCEPTION AND TRADEMARK MEANING 836 A. Standard Justifications for Forfeiture Mechanisms 836 1. Trademark Warehousing and the Public Domain 837 2. Trademark Forfeiture and Consumer Search Costs 838 B. How Trademarks Add Meaning 840 C. Consumer Perception and Trademark Property 842 III. FORFEITURE, APPROPRIATION, AND HARM TO CONSUMERS AND COMPETITORS 844 A. Residual Goodwill and Harm to Consumers 844 B. Residual Goodwill and Harm to Competitors 846 C. Residual Goodwill and Harm to the Market 848 IV. CHANGING THE FORFEITURE INQUIRY TO ACCOUNT FOR CONSUMER GOODWILL 850 A. Reading Consumer Goodwill Back into the Lanham Act 850 B. Reforming Forfeiture Mechanisms to Account for Residual Goodwill 851 V. USING AUCTIONS TO DISCOVER RESIDUAL GOODWILL 856 A. Why Auctions? 857 1. Acquiring Information About Residual Goodwill 858 2. Meeting Consumer Expectations 860 3. Earlier Assignment of Property Rights 860 B. The Auction Mechanism 861 1. Initiating the Auction 862 2. Administering the Auction 863 3. Structuring the Auction to Limit Arbitrage 864 C. Tailoring the Auction to Benefit Consumers 866 CONCLUSION 868 INTRODUCTION

Coca-Cola Co. sold a fruit-flavored, highly caffeinated soft drink under the Surge trademark from 1996 to 2003. (1) After Coca-Cola discontinued Surge, fans of the beverage bought billboards and started social media campaigns hoping to convince the bottler to bring the beverage back. (2) The campaign worked: following a trial run through Amazon.com, (3) Coca-Cola relaunched Surge in several eastern states on September 7, 2015. (4)

Coca-Cola is lucky, however, that the twelve-year gap in sales was not fatal to its rights. In fact, it was a close call: two different firms filed applications with the U.S. Patent and Trademark Office (USPTO) stating an intent to use Surge as a trademark for beverages. (5) In a hypothetical fight between the soda giant and the upstarts, Coca-Cola's decade of nonuse would provide prima facie evidence that the company abandoned the Surge mark and thus forfeited its trademark rights. (6) Had either firm brought its planned beverage to market prior to 2014, that firm would have secured superior rights in Surge (7) and thus the ability to keep Coca-Cola's relaunch off the market. (8)

Some mark owners are not as lucky as Coca-Cola. Abandonment derailed a relaunch of the Stratotone line of guitars. (9) Stratotone was one of the lines formerly offered by the Harmony Company, which was perhaps the largest musical instrument manufacturer in the United States in the mid-twentieth century. (10) Multitudes of aspiring rockstars in the '50s and '60s played Stratotone guitars, as did a few bona fide legends: Ritchie Valens started out on a Stratotone. (11) But sales of Harmony guitars tailed off in late 2002. (12) Charles Subecz sought to reinvigorate the brand and purchased several marks for guitars once belonging to Harmony. (13) Subecz then set out to relaunch a line of new Harmony guitars with vintage aesthetics, including an updated Stratotone. (14) Subecz's relaunch required an "archaeological dig through company history," as well as painstaking efforts to recreate traditional molds and reproduce classic Stratotone peripherals. (15) The hard work appeared to pay off: fans flocked to Subecz's Stratotone as an authentic take on the original. (16)

In 2009, shordy after Subecz's relaunch of Stratotone, Westheimer Corporation purchased all Harmony assets and goodwill from Subecz, including his interest in any protectable marks. (17) Westheimer also brought Harmony's former international sales manager on board to provide some continuity between the new Harmony and the predecessor in interest. (18)

But, unbeknownst to Westheimer and Subecz, an enterprising luthier shot the gap between the end of licensed Stratotone sales in 2002 and Subecz's 2008 relaunch. In March 2006, Darryl Agler filed an intent-to-use application to register Stratotone as a trademark for guitars. (19) With the sale of his first Stratotone guitar in 2010 and the completion of some paperwork, Agler secured a registration in the mark with an effective priority date of March 7, 20 06. (20) Agler's earlier intent-to-use application, coupled with sales starting after Subecz's first sale, gave Agler prior rights against Westheimer. (21) Subecz's painstaking recreation of the Harmony line, Westheimer's decision to bring a former Harmony employee on board, and consumer interest in the Harmony relaunch were all to no avail.

One might imagine that a court could look at the consumer affection for Coca-Cola's Surge and conclude, in light of that residual consumer goodwill, that a mark like Surge should not be forfeited. Or a court might compare the quality and characteristics of the Subecz and Agler Stratotone offerings against Harmony's original Stratotone line to determine whether consumers are likely to be confused or disappointed. But courts do not ask these questions in abandonment cases.

The standard abandonment inquiry focuses on mark owner behavior while ignoring consumer perception. (22) Courts inquire whether the mark owner has an excuse for suspending performance or a bona fide intent to resume use. (23) But courts discount evidence of residual consumer goodwill--the perception of a substantial number of consumers that the mark still signifies goods and services from the original mark owner. (24)

As with abandonment, (25) other forfeiture mechanisms also use mark owner behavior as the sole factor in determining whether the owner forfeits rights in the mark. (26) But ignoring how consumers perceive and use the ostensibly forfeited mark disconnects the law from how trademark meaning is generated and developed. (27) To the extent they ignore consumer perception, these mechanisms deviate from trademark law's professed goal of preventing consumer confusion and reducing consumer search costs. (28) This is unfortunate, because when a mark is forfeited, the former mark owner is not the only one who loses out. Consumers who use the mark as a signal of consistent source and quality also lose their investment in the mark as a source signifier. (29)

When a new firm appropriates a forfeited mark, it stands to acquire consumer interest and loyalty through behavior that, but for the forfeiture, would constitute confusing and therefore infringing use. Such a windfall to the appropriating firm is not inherently problematic in isolation, but it often comes from the pockets of confused consumers. (30) A consumer exposed to a product offered by a new seller under a forfeited mark may be predisposed to buy the product because of this residual goodwill, and disappointed when the new product fails to meet expectations. (31)

Apologists argue that in the forfeiture context, maximizing competition takes priority over preventing consumer confusion. (32) But allowing a forfeited mark with residual goodwill to be appropriated by a new entrant also imposes costs on competitors who must overcome the advantage that residual goodwill confers on the new entrant. Forfeiture and appropriation of residual consumer goodwill can thus disrupt the information-transmission function of a trademark in ways that increase consumer search costs and intensify consumer confusion, (33) perhaps to the detriment of the trademark ecosystem as a whole.

Previous critiques typically discussed forfeiture mechanisms in isolation and thus failed to fully recognize the conflicting presumptions on which the mechanisms are based. This Article fills that gap by providing a stronger normative account of the importance of consumer perception to the trademark ecosystem, grounded on language-use and property-signaling theories. Trademark meaning may start with the mark owner, but collective use by consumers in context cements source significance in the commercial lexicon. In addition, scholars have recognized the importance of examining property claims in light of how signs of ownership are interpreted and reflected by the interpretive community. Trademark forfeiture mechanisms should likewise reflect the key role of consumers in establishing trademark meaning.

Courts can provide a needed corrective, readjusting trademark forfeiture mechanisms to better protect those consumers who continue to rely on a forfeited mark as a source signifier. While courts often resist the invitation, they can and should read the statutory language governing forfeiture mechanisms to allow inquiry into residual consumer goodwill. Courts can thus ensure that trademark forfeiture mechanisms operate consistent with three key objectives of trademark protection: reducing consumer search costs, encouraging mark owner investment in consistent quality, and maintaining a proper competitive environment. (34) To that end, the Article proposes a comprehensive set of factors to analyze whether a mark retains residual goodwill and whether forfeiture is likely to harm consumers by dissipating consumer investment of goodwill. That framework will not only help judges uncover relevant residual goodwill, but will also cabin the exercise of judicial discretion in cases where the potential for residual goodwill is highly salient, but the real effect of the goodwill is inconsequential.

It is possible, however, that judicial inquiry will unearth evidence of residual goodwill too slowly. An auction mechanism might uncover that information more quickly and more completely. The Article describes an auction devised to improve discovery and valuation of residual goodwill. In addition, the auction is designed to increase the likelihood that the winner will meet consumer expectations about the...