Feature

Blockchain Can Change Everything: Even Trademark Transactions

Susan Kayser and Anna Raimer

©2018. Published in Landslide, Vol. 11, No. 1, September/October 2018, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

Key issues for many brand owners are proving use of a trademark in commerce, maintaining the integrity of the brand, and combatting counterfeits. Blockchain—by its very nature—can efficiently provide the secure, reliable, and permanent records necessary to prove up genuine trademark use and genuine products. A secure database, spread across multiple computers, with the same record of all transactions, is ideal for tracking trademark transactions, as well as for eliminating paperwork and speeding up transactions.

A trademark and a blockchain have a complementary nature: a trademark acts as a source identifier, and a blockchain can validate a source. Providing trademark owners with a permanent, time-stamped, and secured record of information that is hosted on a peer-to-peer network, blockchain has the potential to transform trademark transactions. This article explores some of the myriad number of potential uses of blockchain for trademark transactions, including in establishing, licensing, and enforcing trademark rights.

Supporting Trademark Use and Strength with Blockchain

In the United States, trademark rights are established by use of a mark in commerce in connection with specific goods or services. A blockchain can track different items sold with a particular mark from a manufacturer, through customs, if applicable, and to a specific store or warehouse location. A blockchain could assist brand owners with documenting their trademark usage, providing a useful tool for prosecution and maintenance purposes. A blockchain’s ability to record the timing and volume of transactions of trademarked goods, secured from alteration by cryptography, also provides a helpful record for proving up valid trademark rights and the strength of a brand.

First, blockchain can be used to ascertain and authenticate the acquisition of trademark rights. Such documentation is possible if a blockchain is established to record every sale of a trademarked good. The date and time of each sale would be recorded, creating an unalterable record of transactions. Additionally, examples of use in commerce, such as photographs of the product or its packaging, could be converted to a digital fingerprint stored on a blockchain. A brand owner could then use the information to prove valid common law trademark rights, as well as the geographic extent of such rights.

Furthermore, an applicant for federal trademark registration typically must show actual use in commerce to obtain a registration, including submission of a specimen of use and date of first use in commerce. Evidence of continuing use must also be presented to renew a trademark registration. If this information is documented through a blockchain, it can be easily pulled for use in prosecution and maintenance of trademarks.

Information regarding the use of the mark can also be used to demonstrate strength of a trademark. In particular, evidence that a mark has acquired distinctiveness could be tracked on a blockchain, such as length of use and amount of sales and advertising. The ability to readily demonstrate strength of the mark can assist with both prosecution and enforcement efforts for a brand.

By the same token, blockchain could be used to defend against any attack of nonuse or abandonment. If trademark rights are challenged on the basis that a trademark owner failed to use its mark in commerce or ceased such use, a secured, unalterable blockchain record to the contrary could easily defeat such a challenge.

Blockchain Benefits for Trademark Licenses

Blockchain allows for a licensor and licensee to share an electronic ledger to track the distribution and sale of licensed products. A blockchain could track these products throughout the distribution channels: from manufacturer to distributor to consumer. Thus, by entering the branded products into a blockchain, the distribution channels can be monitored and authenticated.

By tracking the sales of branded products in real time, the blockchain can also provide a verifiable and up-to-date record of sales and revenue. If the terms of a license establish royalty payments to the licensor based on number of sales or amount of revenue, this royalty payment can be easily calculated and made through a blockchain. Blockchain thus eliminates the need for a licensee to provide a separate accounting to the licensor, or for such accounting to be subject to audits. It also provides a mechanism for facilitating payment of royalties, potentially decreasing transaction costs of the license.

Consider a fictitious brand owner, Company X, which licenses its ABC trademark to Company Y. Under the terms of the parties’ license agreement, Company Y is limited to selling products bearing the ABC trademark in its stores. Company Y is also required to make royalty payments of 5 percent of net revenue from sales of ABC-branded products on a quarterly basis. If the entire distribution and transaction history for ABC-branded products is on a blockchain accessible to both parties, then Company X can ensure that Company Y is only selling ABC-branded products in its authorized distribution channels. In addition, the 5 percent royalty payments due to Company X may be made each quarter based on the verified blockchain record.

Moreover, the entire transaction can take place on a blockchain via a “smart contract,” eliminating the need for a bank to facilitate the payment. A smart contract is a computer code that runs on a blockchain and specifies consequences once certain conditions are met. It does more than simply reflect the nature of the agreement between the licensor and licensee—it includes “smart agents” that can autonomously manipulate the blockchain’s assets.1 The licensor and licensee could code their licensing agreement into the blockchain with these smart agents. When the license’s specified conditions are met, for instance, by a sale of a licensed product, it would trigger a cryptocurrency payment from the licensee to the licensor. In Company X’s case, every time an ABC-branded product was sold by Company Y, the transaction would be entered onto the blockchain. This would satisfy the conditions of the smart contract, which would trigger an automatic cryptocurrency quarterly payment to Company X. Additionally, both parties could access the blockchain at any time and monitor activity.

The blockchain could also be used to monitor and verify other aspects of license agreements. For example, it could be used to ensure that products are only manufactured by an approved source, that products undergo required levels of inspections, and that products are only distributed by the licensee in authorized territories. Therefore, from tracking distribution to making royalty payments to monitoring compliance terms, use of a blockchain could provide many benefits to parties to trademark licenses.

Enforcing Trademark Rights through Blockchain and Fighting Counterfeits

One of the biggest threats to a brand—and to a brand owner’s bottom line—is a counterfeit product. The billion-dollar counterfeiting industry also has a larger economic impact resulting from lost GDP, uncollected tax losses, and lost employment.2 Counterfeiting poses serious social harms as well, including impacts on health resulting from dangerous counterfeit products, unsafe labor conditions for those producing counterfeits, and harm to the environment.3 Use of blockchain to reduce the number of counterfeits benefits more than just brand owners.

A brand owner can record the entire journey of genuine product from manufacturer to purchase by a consumer and include authorized manufacturers, distributors, and sellers as members to the database. Each member adds its asset as a data “block” (once confirmed) to its copy of the database. A blockchain provides a highly secure means of sharing end-to-end supply chain data between authorized participants. By providing a secure and verifiable way to track legitimate products, blockchain can assist in detection of counterfeit products. For example, in conjunction with registration of trademarks with U.S. Customs and Border Protection, customs officials could be provided with a copy of the database providing details on authorized shipments of products into the United States. For a suspected shipment of counterfeit goods, a customs agent could view the blockchain for those trademarked products to determine whether the shipment was authorized. A blockchain could reduce uncertainty, time, and investigation costs associated with identifying counterfeits and preventing them from entering the United States.

Similarly, e-commerce platforms could be provided with a copy of the database for specific brands to verify the legitimacy of products sold on their websites. A blockchain provides another tool for e-commerce platforms and brands to work together to verify legitimate products and reduce potential liability for contributory infringement.

Building on the prior example, suppose that products bearing the ABC trademark are manufactured in a factory in China. Once complete, the goods are transported from the factory to the Port of Shanghai. The goods are loaded onto a ship that carries them to the Port of Los Angeles for further distribution by truck and rail. If details on ABC-branded products (e.g., stock keeping units, or SKUs) are stored on a blockchain before the products leave the factory, there is a permanent, time-stamped record of the products’ origin. The progress of the products through the supply chain may then be tracked through the blockchain, and relevant documents to ensure such progress (e.g., customs clearance documentation) may be added to the blockchain. On inspection, customs agents could use the blockchain to confirm the origination and legitimacy of the ABC-branded products. The blockchain can similarly be used to identify ABC-branded products that are not authorized to enter the United States because they do not match identifying information for authorized products or have not followed the distribution channels specified in the blockchain. Use of the blockchain makes detecting counterfeit goods more efficient and accurate. It also has the potential to reduce import and distribution costs.

Applying the same principles, blockchain can also be used to detect gray market goods, i.e., goods bearing a valid trademark but specifically manufactured for sale outside the United States that are then imported into the United States without the consent of the U.S. trademark holder. If a trademark owner records where goods are initially placed on the market using a blockchain, the owner can easily distinguish gray market goods from goods that were meant for a particular market.

Consider in our example above, Company X also authorizes Company Z to sell ABC-branded products only in Australia. However, these products do not have the same warranty as the ABC-branded products sold by Company Y to the U.S. market. If the goods intended for the Australia market are then imported into the United States, the products would be considered gray market goods. Despite restrictions in the license agreement between Company X and Company Z, Company Z starts distributing ABC-branded products in the United States at a discounted price to those products sold by Company Y. If the distribution of such products is on a blockchain accessible to at least the trademark owner, Company X, then it can identify the source of the gray market goods into the United States. This traceability would allow Company X to pinpoint and control leaks from its licensees and distribution channels. Not only does this application of blockchain provide benefits to authorized licensees like Company Y, but it also stands to generally reduce enforcement costs as well as increase compliance with license agreements.

Tracking Certifications with Blockchain

Blockchain could also be employed to verify compliance in use of certification marks. A certification mark is used by a party other than the owner to demonstrate to consumers that certain standards have been met by the provider using the mark. For example, certifications may indicate to consumers that products originated in a specific geographic location, that products were made according to specific standards, or that the work performed to make the products met certain standards. Because consumers often pay a premium for certified products, it is important that standards can be monitored and verified.

With respect to geographic certifications, these signs identify a product as originating in a specific location, which results in certain qualities or reputation of the product. For example, TEQUILA identifies a type of distilled spirit manufactured in Mexico from a blue agave plant, and ROQUEFORT indicates a type of cheese made from sheep’s milk from a region in France. The user of a certification mark can document the origination of products on a blockchain. If given access to the blockchain, the owner of the relevant certification mark can then verify that products bearing the certification mark accurately indicate the geographic region.

Certification marks may also indicate that the product meets specific standards in terms of quality, materials, or manufacturing. For example, a VERIFIED NON-GMO logo indicates that goods do not contain genetically modified components, and an ENERGY STAR logo identifies products that are more energy efficient. Such standards can similarly be verified through a blockchain through digital uploads of reports or other quality control documentation. The owner of the certification mark can then ensure that products bearing the certification mark meet the standards for certification.

Finally, a certification mark can identify the labor in producing the goods met certain requirements; for example, a FAIR TRADE CERTIFIED logo to indicate that certain goods are manufactured under fair working conditions and environmentally responsible production methods, or a MADE/PRODUCED BY AMERICAN INDIANS logo for goods produced by members of federally recognized Native American tribes. Again, blockchain can document that goods are manufactured by the specific group certified, or that the labor practices met certain parameters.

Not only could a blockchain be accessible by the owner of a certification mark, but portions could also be publicly accessible. A public blockchain ensures that users of certification marks comply with the standards required for use of the marks. It also allows consumers to track the distribution channels for their goods, which may be important to consumers focused on issues such as the quality of their food products, social responsibility, and environmental impact. By authenticating the qualities, materials, or labor standards to consumers in this manner, producers could also command a higher price for products.

Conclusion

Blockchain has the potential to positively impact a brand owner’s business. Tracking trademark licenses, detecting counterfeit goods, documenting trademark usage, and verifying certifications are just some of the ways that the blockchain stands to impact trademark transactions. Whether used to protect or enforce a brand, the blockchain can act as a complement to all trademark transactions by serving as a reliable and efficient authentication tool of these important source identifiers.

Endnotes

1. Mark W. Rasmussen et al., Blockchain and Smart Contracts, Tex. Lawbook (Sept. 25, 2017), http://www.jonesday.com/Blockchain-and-Smart-Contract-The-Texas-Lawbook-09-25-2017/?RSS=true.

2. Frontier Econ., The Economic Impact of Counterfeits and Piracy (2016), https://cdn.iccwbo.org/content/uploads/sites/3/2017/02/ICC-BASCAP-Frontier-report-2016.pdf.

3. Id.

Susan Kayser is a partner in the Intellectual Property group of K&L Gates and is based in the firm’s Washington, D.C., office. She is a leading trademark litigator for well-known brands, with significant experience in intellectual property litigation and counseling.

Anna Raimer is a partner in Jones Day’s Trademarks, Unfair Competition & Copyrights practice, based in the firm’s Houston office, and focuses her practice on brand protection and enforcement. She is chair of the ABA-IPL’s Trademark Transactions Committee.

 

The views and opinions set forth herein are the personal views or opinions of the author; they do not necessarily reflect views or opinions of the law firm with which she is associated.

Entity:
Topic: