July 01, 2014

Advance Sheet: Trademarks: Whose Harm Is It Anyway?

A company may own a trademark, but to win in court, it must argue that a rival's infringement harms consumers.

Robert E. Shapiro

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If you are an unsuspecting litigator wandering into trademark law for the first time, you may be in for a rude awakening. Trademark law seems so simple and straightforward, but exactly the reverse is true. Here’s the ordinary situation: Your client owns a trademark—a name, perhaps, like Louis Vuitton or Crest or Cheerios. Or it has a distinctive pattern or mark it uses to sell its goods. Think Burberry or Starbucks. It has poured enormous resources into promoting its trademark in the marketplace, and that mark now has enormous value to it. Everyone thinks of your client when the trademark appears, just as everyone thinks of an oil company when a certain yellow shell pops up or hamburgers when there are golden arches. The company has much of its goodwill tied up in its trademark and guards it preciously as the valuable intangible asset it surely is.

Then, suddenly, along comes another company with designs on that goodwill. It launches its competing products with a name or a pattern or a mark substantially similar to your client’s own. You are called upon to protect your client’s investment in its asset, and you can see a clear case of infringement, which seems to amount to a kind of theft. So you sit down to write your complaint about your client’s rights. You intone seriously at the outset: “The trademark laws exist to protect the trademark holder’s rights in its valuable mark.”

Stop! You are making a mistake. What you said would seem to make perfect sense. After all, why else would there be a law against copying a trademark, if not to protect the company or person who developed it, used it, sank oodles of hard-earned cash into promoting it, and has the best reason to protect it? But the trademark laws are peculiar. However counterintuitive it may seem, it is a settled principle of trademark law that trademarks do not, for the most part, exist to protect the trademark holder at all. No, trademarks are valuable identifiers of source, and the laws bar infringement to protect the consumer.

Strange, right? Your client owns the trademark, after all, and its hard work and money are what made the mark valuable. And surely it helps to get the consumer to buy your client’s products. But whereas a trademark user gets a benefit from the mark it has provided, it is not the benefit the law is primarily concerned with. Under the Lanham Act, the harm that results from infringement is not primarily the diminution in value of your client’s investment. It is the buying public’s potential confusion about whose goods are whose. Clarity on this subject helps your client, to be sure. It wants the public to buy its goods, rather than those of others. But the trademark laws are not, or at least not directly, concerned with this at all. It is the consumer, not your client, they seek to protect.

This principle distinguishes a trademark from other forms of intellectual property, like copyrights or patents. The copyright and patent laws mostly protect an originator’s creativity, originality. The law seeks to stimulate that creativity by giving the inventor a monopoly on the particular expression of an idea (copyrights) or invention or process (patents). The law protects that inventor from others using the formulation or invention without the inventor’s permission. But with trademarks, creativity counts for very little, except to the extent it may help harden in the public’s mind who you are. To say it again, the focus of concern is that the consumer might be harmed. And that harm is the confusion a consumer might suffer when he or she goes to buy what he or she wants.

So fixed is this principle that seasoned intellectual property lawyers sometimes forget how unusual and unexpected it is. Of course, other areas of the law have their specialized rules, too. Real estate’s rules on valuation, or how damages are calculated in personal injury matters, or the way insurance policies work are arcane enough to trip up the unwary. The kind of analogical reasoning that dominates tax law takes a great deal of getting used to. But rare is it the case in the law, as it is in the law of trademarks, that the bedrock principle is just the opposite of what logic might tell you or what you would expect.

Fortunately, most federal judges of any years have learned this counterintuitive trademark lesson fairly well. Sometimes too well. Proud of their specialized understanding, they are quick to apply it, lecturing the new intellectual property advocate in the principle or conferring with conspiratorial fervor with the seasoned trademark litigator. And, in trademark cases, there is a kind of standard drill. Once the similarity of the marks is established, there needs to be an inquiry into the “likelihood of confusion” among the consuming public. Customarily, this is not done through a side-by-side comparison of the marks, but by the analysis of 8 to 10 factors developed by the courts, varying slightly circuit to circuit, all providing reasons to believe that a prospective purchaser is likely to be misled. Significantly, actual cases of customer confusion are powerful evidence of a “likelihood” of confusion, but such evidence is not required because it is so hard to come by. The consumer seldom admits to being confused. Instead, the courts know to look for a survey that seeks to duplicate market conditions, with willing test subjects, and that shows that in such circumstances the ersatz customers tended to mistake one brand for another.

Exceptions to “Consumer Harm”

There is one salient exception to this approach. This is the case of “dilution,” which applies only to truly famous marks. The brainchild of a law school professor, this lesser branch of trademark law focuses not on customer confusion but on the possibility that someone might “free ride” on your client’s investment in its mark. In this case, consumers are not confused about the trademarks themselves in the sense of buying or seeking to buy the product of one company thinking they are getting the products of another. Instead, there is an “association” assumed or created between the two companies. The customer thinks (because of the similarity of the marks) that the companies are related or that one endorses the other.

Here at last we have a rule that makes intuitive sense. You created the mark and made the investment, and the law protects you and your efforts. But cases of dilution are rare. And so adamantine is the reverse principle in the courts’ heads—that trademark law involves customer confusion about products—they have repeatedly made mistakes about dilution, so much so that Congress has had to “fix” dilution law more than once to make it clearer how different it is from the typical infringement case. And the courts still get it wrong.

A second “exception,” if that is what it is, concerns harm or damages. Here’s the problem: If trademark law concerns the harm to the consuming public, as the almost-backward logic of trademark law would have it, why and in what way should the trademark owner itself be compensated at all? We can understand that it makes sense for the trademark owner to be reimbursed for any lost sales owing to the customers’ confusion, where the consumer bought its rival’s product(s) instead of its own. But why anything beyond? Trademark law, to say it again, protects the customer from confusion, not the trademark owner or the trademark owner’s investment. Why, then, should it concern itself unnecessarily with the trademark owner’s damages? The statute provides for statutory damages, so the problem is often presented in only muted form. It does not tell us why damages are being awarded in the first place, if it was the consumer that suffered the harm, as the trademark law constantly insists.

But the problem never completely goes away. To see how perplexing it remains, one need only turn to the Ninth Circuit’s recent decision in Herb Reed Enterprises, LLC v. Florida Entertainment Management, Inc.,736 F.3d 1239 (9th Cir. 2013). Herb Reed Enterprises concerned the trademark rights to the name “the Platters,” a musical group that originally made its name in the 1950s but still has some selling power today. The case was, procedurally, a nightmare, but what is most interesting about it concerns less how it got to the Ninth Circuit than what happened when it got there.

Herb Reed Enterprises wanted a preliminary injunction against a party making an unwarranted use of its trademark in a bold case of infringement. As is standard in preliminary injunction cases, it needed to show not only a likelihood of success on the merits of its case of infringement but also irreparable harm, along with some other requirements arising from the case’s unusual procedural history. After it satisfied itself that the plaintiff had a decent shot at proving liability, as preliminary injunctions require, the district court focused on the harm issue. Traditionally, it stressed, trademark harm is presumed, and presumed irreparable, given how hard a “likelihood of confusion” is to spot and how sometimes intangible it feels and probably is. This seems, among other things, to make it not reducible to money damages. The lower court entered the requested injunction.

Presumption of Irreparable Harm

Not so fast, insisted the Ninth Circuit. Citing a trend in other courts away from a presumption of irreparable harm in trademark cases, it found further examination necessary. But then it seemed to lose its bearings altogether. In a peculiar choice, it turned to two recent Supreme Court decisions in copyright law, eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006), and Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7 (2008), where the high court ruled out a presumption of irreparable harm. It thereupon concluded Herb Reed Enterprises actually had to demonstrate it had suffered the required harm. The Ninth Circuit remanded the case to the lower court for further consideration of the irreparable harm issues.

Do you see the problem? To prove a likelihood of success on the merits, the plaintiff had to show two things. First, it needed to demonstrate that the defendant’s mark was substantially similar. Next, employing the particular multi- part test favored by the Ninth Circuit, Herb Reed Enterprises also had to show a likelihood of confusion by the consuming public. The district court was satisfied on both scores, and it demanded very little on the issue of irreparable harm. But why should it ask for more? In fact, why was there any need for a separate showing of irreparable harm? It is not so much that it was presumed; it was proved. If the trademark laws are designed to protect against the harm of customer confusion and the plaintiff had proved a likelihood that would happen, what more should be required?

The problem was not one of showing actual confusion. The statute itself views the problem as that confusion is “likely,” not actual. And the case law is replete with decisions emphasizing that a likelihood of confusion requires no demonstrated case of actual confusion. The district court was right to presume harm, if for the wrong or a poorly understood reason. It makes no sense to find liability on the basis of a likelihood of confusion, where nothing actual is required, only to deny relief because it has not been shown that that confusion has not actually happened irreparably. Even if it would make sense to deny damages to the plaintiff on this basis—and damages are provided by statute—it would make no sense to deny an injunction for this reason.

The result obtains not just in spite of, but actually consistent with, the Supreme Court’s copyright decisions in eBay and Winter. Remember, trademarks and copyrights are different. Trademarks principally protect the consumer. Copyrights protect the author. In the case of the latter, irreparable harm to the author from misuse of an original work cannot be presumed. There may not have been any real harm at all, and what harm there has been may perhaps be compensated by money damages. But trademark law is different. In a trademark case, the court will not even get to harm unless the trademark holder will necessarily have already proved, because of the special features of trademark law, a likelihood of confusion by the consuming public. That is the harm that by itself seems irreparable.

The Ninth Circuit in Herb Reed Enterprises had learned well enough the counterintuitive principle that trademark law protects consumers, but it failed to take the message really to heart. If a likelihood of confusion had been shown, why wasn’t that harm enough, and irreparable harm at that? The best proof of its confusion is in the opinion itself. Not only did the court rely on copyright law for the determination of harm in the very different trademark context, but it repeatedly considered exactly the wrong kind of evidence of irreparable harm. Thus, it focused on and rejected evidence of actual confusion by customers as relating only to proof of confusion, not irreparable harm. Instead, it demanded evidence that the plaintiff itself had suffered irreparable harm. But consumer confusion, not harm to the trademark holder, is the harm the trademark laws are designed to prevent, isn’t it? So evidence of that confusion was of that harm. And how could one remedy it? And how could it be compensated for? In effect, at that very moment the court needed most to recognize and apply the very different rules of trademark law, it fell off the sled altogether.

In the end, the old rule seems to make the most sense. If the harm the trademark laws are trying to prevent is really customer confusion, it is not so much presumed as proved, once liability is shown. Indeed, there can be no liability in a trademark case unless the plaintiff proves the very harm that should entitle it to an injunction. But intuition dies hard. We expect trademark laws to protect the trademark owner, even if the law prescribes otherwise. And while the courts have been taught the principle, their natural instincts lead them elsewhere. Will they ever get it right?

Robert E. Shapiro

The author, an associate editor of Litigation, is with Barack Ferrazzano Kirschbaum & Nagelberg LLP, Chicago.