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WilliamM.LandesandRichardPosner
"TrademarkLaw:AnEconomicPerspective"*
30JournalofLawandEconomics265(1987)
Thatthelawofintellectualproperty,includingtrademarklaw,canbeanalyzedineconomictermsisnolongeraninsightwithanypowerto
astonishoreventooffend.2Whattheliteraturethusfarhaslacked,however,andthisarticleseekstosupply,isananalysisthatformalizes
theeconomicsoftrademarks,relatestrademarkstootherformsofproperty,bringstobearthenascenteconomicsoflanguageand
communication,anddiscussesandinterrelatestheprincipaldoctrinesoftrademarklaw.3
Thisisanessayinpositiveratherthannormative''lawandeconomics."Weuseeconomicstotrytoexplainthestructureoftrademarklaw
ratherthantochangethatlaw.Ouroverallconclusionisthattrademarklaw,liketortlawingeneral(trademarklawispartofthebranchof
tortlawknownasunfaircompetition),canbestbeexplainedonthehypothesisthatthelawistryingtopromoteeconomicefficiency.4
I.TheEconomicTheoryofProperty
Theeconomicsofpropertyrights,onwhichouranalysisoftrademarklawdrawsheavily,arewellunderstoodandcanbesummarizedquite
briefly.5Apropertyrightisalegallyenforceablepowertoexcludeothersfromusingaresource,withoutneedtocontractwiththem.SoifA
ownsapasture,hecanforbidotherstograzetheircattleonitwithouthavingtonegotiateanagreementforexclusiveuse.Apropertyright
conferstwotypesofeconomicbenefit,staticanddynamic.Theformerisillustratedbyanatural(thatis,uncultivated)pasture.Iftheowner
cannotexcludeothersfromusinghispasture,therewillbeovergrazingbecauseusersofthepasturewillignorethecoststheyimposeon
eachotherinreducingthecattle'sweightbymakingthecattleexpendmoreenergyingrazinginordertofindenoughtoeat.Thedynamic
benefitofapropertyrightistheincentivethattherightimpartstoinvestinthecreationorimprovementofaresourceinperiod1(for
example,plantingacrop),giventhatnooneelsecanappropriatetheresourceinperiod2(harvesttime).Forexample,afirmislesslikelyto
expendresourcesondevelopinganewproductifcompetingfirmsthathavenotbornetheexpenseofdevelopmentcanduplicatetheproduct
andproduceitatthesamemarginalcostastheinnovatorcompetitionwilldrivepricedowntomarginalcost,andthesunkcostsof
inventionwillnotberecouped.6
Thecostsofpropertyrightsarefourfold,thefirstbeingthecostoftransferringsuchrights.Ifthisistoohigh,apropertyrightmayprevent
optimaladjustmentstochangingvalues.Supposeafactoryisassignedapropertyrighttotheuseofariverthatrunsbesideitbecausethe
riverismorevaluableasasewerthanforrecreation,butastheyearsgobytherelativevaluesoftheseusesreverse.Iftherecreationalusers
arenumerous,thetransactioncostsoftheirbuyingtherighttousetheriverfromthefactorymayexceedthevalueoftherighttothem.In
suchacase,aliabilityrulewouldbebetter,wherebythefactorycouldbeinducedtodiscontinueitsuseoftheriverbybeingmadetopay
damagesequaltothecostsofthepollutiontorecreationalusers.Therulewouldreallocatetheuseoftheriverinaccordancewithchanged
values,withoutrequiringatransaction.
Thesecondmajorcostofapropertyrightssystemisrentseekingtoobtainapropertyright.Supposethatashiphassunkandthatithasa
salvagevalueof$1million,whilethecostofsalvageisonly$100,000.Thepotentialgaintothesalvager,aformofeconomicrent,is
$900,000ifapropertyrightinthesunkenshipcanbeacquiredandthecompetitiontoacquireitmayeatupallormostofthepotential
rents,transformingthemintosocialcosts.Thisexampleassumes,ofcourse,thattheoriginalowneroftheshipabandonedit,sothatitis
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unownedifithasnotbeenabandoned,theownercansimplyauctionofftherighttosalvagetheshiptothehighestbidder,andtherewillbe
norentseekingproblem.Intellectualpropertysometimescreatesseriousproblemsofrentseekingbecausetheresourceiscontinuously
createdordiscoveredratherthanbeingalreadyowned.Itiswaitingtobediscoveredorinvented,justlikethesunkenshipwhoseownerhas
abandonedit.
Thethirdcostofpropertyrights,thecostofprotectionandenforcement,includesthecostsincurredbypoliceandcourtsinpreventing
trespassandtheft.Italsoincludesthecostofafenceusedtomarkboundarylinesorthecostofaregistryusedtorecordlandtitles.
Intellectualpropertytendstobeparticularlycostlytoprotect.Anideacannotbeseeninthewayapieceoflandcanbe.Apieceofland
mighthavebeentransferredbyinheritanceformanygenerations,butitisthesamepieceofland,recordedinthesamelandregistry.Itis
hardertotracethedescentofanidea.Moreover,thepublicgoodcharacterofintellectualpropertycanmakeitcostlytoprevent
misappropriationandexcludefreeridersintheabsenceoflegalprotection.
Thefinalcostofpropertyrightsisthecostofrestrictingtheuseofpropertywhenithasapublicgoodcharacter.Inthecaseoffarmland,
whethercultivatedoruncultivated,addingauserwillimposecostsontheexistinguser(s)sothefactthatafencekeepsadditionalusersout
neednotimposeanetcost.Butoften,addinguserswillnotimposecostsonprevioususersofintellectualpropertynotdirectlyanyway(it
mayofcoursediscourageinvestmentbypreventingtheprevioususersfromrecoupingtheirsunkcosts).7Onefarmer'susingtheideaof
croprotationdoesnotprecludeotherfarmersfromusingthesameidea.8Whenthemarginalcostofusingaresourceiszero,excluding
someonefromusingitcreatesadeadweightloss,inadditiontothecostofenforcingexclusion.Thislossisnotsignificantinthecaseof
mostphysicalproperty,whichlacksthepublicgoodcharacterofintellectualproperty.
Sinceintellectualpropertyisaparticularlycostlyformofproperty,wewouldexpect(andwefind)thatitislimitedinwaysthatphysical
propertyisnot.9Forexample,therequirementthataninvention,tobepatentable,shouldnotbeobviousexcludespropertyrightsin
inventionswhereexcessiverentseekingwouldbeaseriousproblemifsuchrightswererecognized."Obviousness"impliesalowcostof
discoveryanddevelopmentandthereforealargepotentialgapbetweenvalueandcostalargeopportunitytoobtaineconomicrents.The
limiteddurationofpatentslimitsrentseekingbyputtingaceilingontheexpectedvalueofthepatent.Italsoreflectsthehighcostoftracing
anideaoveralongperiodoftimeinwhichitmayhavebecomeembodiedinagreatvarietyofinventions.Asweshallsee,propertyrightsin
trademarksarealsolimitedforexample,bygenerallyrefusingtoallowexclusiverightstocommondescriptivetermsandbyrequiringthat
asimilaroridenticalmarktoonealreadyinusebeshowntocreatealikelihoodofconfusionregardingthesourceofthegoodsfor
infringementtobefound.
II.TheEconomicsofTrademarks
A.Introduction
Tooversimplifysomewhat,atrademarkisaword,symbol,orothersignifierusedtodistinguishagoodorserviceproducedbyonefirm
fromthegoodsorservicesofotherfirms.Thus"Sanka"designatesadecaffeinatedcoffeemadebyGeneralFoodsand"Xerox"thedry
copiersmadebyXeroxCorporation."Bib"the"MichelinMan"isthesymboloftiresmadebytheMichelinCompany.Astylizedpenguin
isthesymbolofalineofpaperbackbookspublishedbyPenguinBooksadistinctivelyshapedgreenbottleisatrademarkoftheproducerof
PerrierbottledwaterthecolorpinkisatrademarkforresidentialinsulationmanufacturedbyOwensCorning.
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1.BenefitsofTrademarks
SupposeyoulikedecaffeinatedcoffeemadebyGeneralFoods.IfGeneralFoods'sbrandhadnoname,thentoorderitinarestaurantor
grocerystoreyouwouldhavetoaskfor"thedecaffeinatedcoffeemadebyGeneralFoods."Thistakeslongertosay,requiresyouto
remembermore,andrequiresthewaiterorclerktoreadandremembermorethanifyoucanjustaskfor"Sanka."Theproblemwouldbe
evenmoreseriousifGeneralFoodsmademorethanonebrandofdecaffeinatedcoffee,asinfactitdoes.Thebenefitofthebrandnameis
analogoustothatofdesignatingindividualsbylastaswellasfirstnames,sothat,insteadofhavingtosay"theGeoffreywhoteaches
constitutionallawattheUniversityofChicagoLawSchoolnottheonewhoteachescorporations,"youcansay''GeoffreyStonenot
GeoffreyMiller."
Toperformitseconomizingfunctionatrademarkorbrandname(theseareroughsynonyms)mustnotbeduplicated.Toallowanother
makerofdecaffeinatedcoffeetosellitscoffeeunderthename"Sanka"woulddestroythebenefitofthenameinidentifyingabrandof
decaffeinatedcoffeemadebyGeneralFoods(whethertheremightbeoffsettingbenefitsisconsideredlater).Itwouldbelikeallowinga
secondranchertograzehiscattleonapasturetheoptimaluseofwhichrequiredthatonlyoneherdbeallowedtograze.Thefailureto
enforcetrademarkswouldimposetwodistinctcostsoneinthemarketfortrademarkedgoodsandtheotherinthedistinct(and
unconventional)marketinlanguage.
a)TheMarketforTrademarkedGoods.Thebenefitsoftrademarksinreducingconsumersearchcostsrequirethattheproducerofa
trademarkedgoodmaintainaconsistentqualityovertimeandacrossconsumers.Hencetrademarkprotectionencouragesexpenditureson
quality.Toseethis,supposeaconsumerhasafavorableexperiencewithbrandXandwantstobuyitagain.Orsupposehewantstobuy
brandXbecauseithasbeenrecommendedbyareliablesourceorbecausehehashadafavorableexperiencewithbrandY,anotherbrand
producedbythesameproducer.RatherthaninvestigatingtheattributesofallgoodstodeterminewhichoneisbrandXorisequivalenttoX,
theconsumermayfinditlesscostlytosearchbyidentifyingtherelevanttrademarkandpurchasingthecorrespondingbrand.Forthis
strategytobeefficient,however,notonlymustitbecheapertosearchfortherighttrademarkthanforthedesiredattributesofthegood,but
alsopastexperiencemustbeagoodpredictorofthelikelyoutcomeofcurrentconsumptionchoicesthatis,thebrandmustexhibit
consistentquality.Inshort,atrademarkconveysinformationthatallowstheconsumertosaytohimself,"Ineednotinvestigatethe
attributesofthebrandIamabouttopurchasebecausethetrademarkisashorthandwayoftellingmethattheattributesarethesameasthat
ofthebrandIenjoyedearlier."10
Lessobviously,afirm'sincentivetoinvestresourcesindevelopingandmaintaining(asthroughadvertising)astrongmarkdependsonits
abilitytomaintainconsistentproductquality.Inotherwords,trademarkshaveaselfenforcingfeature.Theyarevaluablebecausethey
denoteconsistentquality,andafirmhasanincentivetodevelopatrademarkonlyifitisabletomaintainconsistentquality.Toseethis,
considerwhathappenswhenabrand'squalityisinconsistent.Becauseconsumerswilllearnthatthetrademarkdoesnotenablethemto
relatetheirpasttofutureconsumptionexperiences,thebrandedproductwillbelikeagoodwithoutatrademark.Thetrademarkwillnot
lowersearchcosts,soconsumerswillbeunwillingtopaymoreforthebrandedthanfortheunbrandedgood.Asaresult,thefirmwillnot
earnasufficientreturnonitstrademarkpromotionalexpenditurestojustifymakingthem.Asimilarargumentshowsthatafirmwitha
valuabletrademarkwouldbereluctanttolowerthequalityofitsbrandbecauseitwouldsufferacapitallossonitsinvestmentinthe
trademark.11
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Itshouldbeapparentthatthebenefitsoftrademarksinloweringconsumersearchcostspresupposelegalprotectionoftrademarks.Thevalue
ofatrademarkisthesavinginsearchcostsmadepossiblebytheinformationorreputationthatthetrademarkconveysorembodiesaboutthe
brand(orthefirmthatproducesthebrand).Creatingsuchareputationrequiresexpendituresonproductquality,service,advertising,andso
on.Oncethereputationiscreated,thefirmwillobtaingreaterprofitsbecauserepeatpurchasesandwordofmouthreferenceswillgenerate
highersalesandbecauseconsumerswillbewillingtopayhigherpricesforlowersearchcostsandgreaterassuranceofconsistentquality.
However,thecostofduplicatingsomeoneelse'strademarkissmallthecostofduplicatingalabel,design,orpackagewheretherequired
inputsarewidelyavailable.Theincentivetoincurthiscost(intheabsenceoflegalregulation)willbegreaterthestrongerthetrademark.
Thefreeridingcompetitorwill,atlittlecost,capturesomeoftheprofitsassociatedwithastrongtrademarkbecausesomeconsumerswill
assume(atleastintheshortrun)thatthefreerider'sandtheoriginaltrademarkholder'sbrandsareidentical.Ifthelawdoesnotpreventit,
freeridingwilleventuallydestroytheinformationcapitalembodiedinatrademark,andtheprospectoffreeridingmaythereforeeliminate
theincentivetodevelopavaluabletrademarkinthefirstplace.
b)TheMarketinLanguages.Anentirelydifferentbenefitoftrademarkprotectionderivesfromtheincentivesthatsuchprotectioncreates
toinvestresourcesnotinmaintainingqualitybutininventingnewwords12(orsymbolsor,lessclearly,designfeaturesusedastrademarks,
suchasthePerrierbottlebutforthemomentweconfineourattentiontowords).Trademarksimprovethelanguageinthreeways.They
increasethestockofnamesofthings,thuseconomizingoncommunicationandinformationcostsinthewaysjustsuggested.Theycreate
newgenericwordswordsthatdenoteentireproducts,notjustindividualbrands("aspirin,""brassiere,""cellophane,""thermos,""yoyo,"
"dryice,"andanumberofothernamesofcommonproductswereoncetrademarksand,whatevercourtsmightsay,"Kleenex"and"Xerox"
arewidelyusedtodenoteentireproductsaswellasparticularbrands).13Andtheyenrichthelanguage,bycreatingwordsorphrasesthat
peoplevaluefortheirintrinsicpleasingnessaswellastheirinformationvalue("Pheremon"perfume,"Swan'sDown"cakemix).
Thesebenefits,however,aresmall.Thispointwilllaterhelpusexplainimportantfeaturesoftrademarklawsuchastheterminationof
trademarkprotectionifthemarkbecomesgenericthatwouldbeinexplicableiftrademarksprovidedthesamesortofintellectual
enrichmentthatpatentsandcopyrightsdo.Toshowthiswillrequireabrieflookattheeconomicsoflanguage.14Thegoal(towhich
languageiscentral)ofacommunicationsystemistominimizethesumofthecostsofavoidingmisunderstandingandthecostsof
communicating.Supposewehaveawordforsnowandawordforfalling,andnowthequestionis,Shouldtherebeanewword,meaning
"fallingsnow"?Infavorofthenewwordisthefactthatunlessitisverylongitwillbeshortertospeak,read,andwriteagainstitisthat
peoplewillhavetolearnandrememberanotherword.Themorecommonatermis,themorethebenefitsofhavingasinglewordarelikely
tooutweighthecosts,notonlybecausethegainsfromshorteningthetermwillbegreater,butalsobecausethecostoflearningand
rememberingawordislessifitisincommonuse.SowearenotsurprisedtofindthatEskimoshaveasinglewordforfallingsnow,though
wedonot.15Theuseofawordratherthanaperiphrasistonameabrandillustratesthesamepoint.
Bothexamplesarecloselyrelatedtoastatisticalobservationmadeyearsago:thelengthofwordsisinversetotheirfrequency.16Itmight
seemthat,ratherthanfrequentlyusedwordsbeingshorterthaninfrequentlyusedwords,allwordswouldbeshortinordertoeconomizeon
communicationcosts.Butlengthisanimportantdimensionalongwhichwordsvary,andthisdimensionwouldbelostifallwordswere
short.Itmakeseconomicsenseforthefrequentlyusedwordstobeshortandtheinfrequentlyusedonestobelongthentotallengthis
minimizedwithoutsacrificingdistinctiveness,therebyincreasingthenumberoferrors(misunderstanding).Moregenerally,thedriveto
makelanguagesimpleisbalancedbythedesiretoavoidambiguitiesandconfusionsthatresultfromlackofdifferentiation.17
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Herearesomeotherexamplesofefficientlanguagerules.
1.Irregularitiesofgrammarandspellingaremorecommoninfrequentthaninfrequentwords.18Themorefrequentlyusedawordis,
theeasieritistolearnbyrote,andhencethelessimportantitisthatpeoplebeabletoconstructthewordbytheapplicationofarule.
Everyoneknowsthatthepastparticipleoftheverb"tobe"is"been"butitisconvenienttobeabletoconstructthepastparticipleof
"excogitate"byruleratherthanhavetomemorizeit.

2.Pronunciationchangesfasterthanspellingbecausechangesinpronunciationdonotreducetheintelligibilityofexistingreading
matter,whichrepresentsavastandvaluablecapitalstockofknowledge.

3.Perfectsynonymsareraretheywouldincreaselearningcostswithoutaddingtothecommunicationresourcesofthelanguage
(exceptthatsynonymsmakeiteasiertowritepoetrythatrhymesorhasregularmeter).

4.Pronouns,whichinalllanguagesknowntousareshort,areaningeniousdeviceforeconomizingonthelengthofwords.
Examplesoftheefficiencyoflanguagerulescouldbemultiplied,19butthemostimportantthingforpresentpurposesistonotethat
efficiencyisachievedwithoutasystemofpropertyrightsinwords,grammaticalforms,andsoon.Ofcoursethecostsofenforcementthe
costs,forexample,ofasystemunderwhichthecoinerofaword(suchasJeremyBentham,whocoined"codification,""minimize,"and
severalotherwordsstillincommonuse)obtainedapropertyrightinitwouldbeimmense.Thismaybeasufficientexplanationforwhy
thereisnosuchsystem.Yetitseems(thoughthisisnobetterthanaguess)thatevenwithoutpropertyrightsthelanguagehasattaineda
reasonabledegreeofefficiency.Ofparticularrelevancetotrademarksisthefactthatthecreationofnewwordsfornewthingsseemsnotto
beretardedbythefactthatthecoinerofawordcanobtainnopropertyright.Eitherthecostsofthinkingupnewwordsareslight,orthe
incentivestodoso,independentofanydirectcompensation,aregreat.Theformerseemsimportantforpropernames(namingababy,for
example)andfortermsofart(wehavecreatedafewourselves,suchas"jointcare''),20thelatterfortrademarksifaproducerwantsto
marketanewbrandeffectively,heneedsadistinctivenameunlessofcourseheistryingtopassoffhisbrandassomeoneelse's.
Thisanalysissuggeststhatwedonotneedtrademarkprotectionjusttobesureofhavingenoughwords,thoughwemayneedpatent
protectiontobesureofhavingenoughinventionsorcopyrightprotectiontobesureofhavingenoughbooks,movies,andmusical
compositions.Computeroperatingsystems,whichareaformoflanguage,arecopyrightablemaybeanyinventedlanguage,suchas
Esperanto,wouldbe.Buttheinvestmentrequiredtocreateawholenewlanguageismuchgreaterthanthatrequiredtocreateasinglenew
word,sothecaseforpropertyrightsismuchstrongerintheformerinstancethaninthelatter.
Ouranalysisalsosuggeststhattheuniversefromwhichtrademarksarepickedisverylarge.Theavailabilityofalternativewords,symbols,
andsoontothoseappropriatedforuseasparticulartrademarkswillplayanimportantroleinourformalanalysis,wherewerefertoitas
"W."ItturnsoutthatahighWisapreconditiontoasystemoftrademarksthatiseffectiveinloweringconsumersearchcosts.
2.TheCostsofLegallyEnforceableTrademarks
Thesecostsaremodest,atleastinthesimplecareofthe"fanciful"mark,suchas"Exxon"and"Kodak,"whichhasnoinformationcontent
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excepttodenoteaspecificproducerorbrand.Sincethemark"goeswith"thebrand(inasenseexplainedlater),thetransferofthemarkis
automaticallyeffectedbyatransferoftherightstomakethebrandedproduct,asbyasale,orlicensing,ofproductionrightsorassets.Quite
unlikeourcaseofthesunkenshipinSectionI,rentseekingtostakeoutatrademarkisnotmuchofaproblemeither.21Priortoestablishing
atrademark,thedistinctiveyetpronounceablecombinationsofletterstoformwordsthatwillserveasasuitabletrademarkareasapractical
matterinfinite,implyingahighdegreeofsubstitutabilityandhenceaslightvalueinexchange.Finally,thecostsofenforcement,thoughnot
trivial(especiallywherethereisadangerofabrandname'sbecomingagenericname),aremodestand(againputtingasidethegeneric
problem)donotincludethecostininefficientresourceallocationfromdrivingawedgebetweenpriceandmarginalcost.Aproper
trademarkisnotapublicgoodithassocialvalueonlywhenusedtodesignateasinglebrand.
Wemayseemtobeignoringthepossibilitythat,byfosteringproductdifferentiation,trademarksmaycreatedeadweightcosts,whetherof
monopolyor(excessive)competition.Wehaveassumedthatatrademarkinducesitsownertoinvestinmaintaininguniformproduct
quality,butanotherinterpretationisthatitinducestheownertospendmoneyoncreating,throughadvertisingandpromotion,aspurious
imageofhighqualitythatenablesmonopolyrentstobeobtainedbydeflectingconsumersfromlowerpricesubstitutesofequaloreven
higherquality.Inthecaseofproductsthatareproducedaccordingtoanidenticalformula,suchasaspirinorhouseholdliquidbleach,the
abilityofnamebrandgoods(Bayeraspirin,Cloroxbleach)tocommandhigherpricesthangeneric(nonbranded)goodshasseemedtosome
economistsandmorelawyersanexampleofthepowerofbrandadvertisingtobamboozlethepublicandtherebypromotemonopoly22and
brandadvertisingpresupposestrademarkstheyarewhatenableaproducerreadilytoidentifyhisbrandtotheconsumer.Besidesthe
possibilityofcreatingmonopolyrents,trademarksmaytransformrentsintocosts,asonefirm'sexpenditureonpromotingitsmarkcancels
outthatofanotherfirm.Althoughnomonopolyprofitsarecreated,consumersmaypayhigherprices,andresourcesmaybewastedina
sterilecompetition.
Theshortanswertotheseargumentsisthattheyhavegainednofootholdatallintrademarklaw,asdistinctfromantitrustlaw.Theimplicit
economicmodeloftrademarksthatisusedinthatlawisourmodel,inwhichtrademarkslowersearchcostsandfosterqualitycontrolrather
thancreatesocialwasteandconsumerdeception.Alongeranswer,whichweshallmerelysketch,isthatthehostileviewofbrand
advertisinghasbeenlargelyandwethinkcorrectlyrejectedbyeconomists.23Thefactthattwogoodshavethesamechemicalformuladoes
notmakethemofequalqualitytoeventhemostcoollyrationalconsumer.Thatconsumerwillbeinterestednotintheformulabutinthe
manufacturedproductandmaythereforebewillingtopayapremiumforgreaterassurancethatthegoodwillactuallybemanufacturedto
thespecificationsoftheformula.Trademarksenabletheconsumertoeconomizeonarealcostbecausehespendslesstimesearchingtoget
thequalityhewants.Ifthisanalysisiscorrect,therejectionbytrademarklawofamonopolytheoryoftrademarksisactuallyamarkin
favoroftheeconomicrationalityofthatlaw.
[Clickheretoseetheauthors'presentationofaformalmodelembodyingtheforegoinganalysis.]
III.TheEconomicsofSpecificTrademarkDoctrines
A.TheAcquisition,Transfer,andDurationofTrademarks
1.HowTrademarksAreAcquired
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Oneofthecostsofapropertyrightssystemthetransformationoftherentsflowingfrompossessionofavaluablerightintocostsof
acquiringtherightinthefirstplaceisapotentialproblemwithtrademarks.Therearethreesystemsinuseforregulatingtheacquisitionof
trademarks.Oneisregistration.Itresemblesthesystemsusedforacquiringpatentsandcopyrightsandisinuseinmostoftheworldoutside
theUnitedStates.Thesecondsystem,whichisthetraditionalapproachofthecommonlawisatypeof"firstpossession"ruleandisthus
analogoustothesystemforacquiringpropertyrightsinwildanimals,oilandgas,andcertainotherresources(including,insomestates,
water).ThethirdsystemisthecurrentAmericansystem,whichisamixtureofregistrationandfirstpossession.
Underthecommonlawapproach,thepossessionthatconfersownershipofatrademarkisdefinedasuseincommerce,whichmeanssaleto
intendedcustomers(typically,thepublic).28Thereareseveraladvantagesofafirstpossessionrule.
a)Itminimizesrentseeking.Afirmallowedtoregistertrademarkswithoutusingthemmightinvestsubstantialresourcesinthinkingup
plausiblenewbrandnames.Forevenif,aswehavesuggested,theelasticityofsupplyofsuchnamesisveryhigh,theownershipofavast
numberofthem,andtheaggregatelicensingrevenuesthatsuchownershipwouldcommand,wouldbeamagnetdrawingresourcesintothe
activityofcreatingbrandnames,probablybeyondtheoptimallevelofsuchinvestment.Apparentlythe"banking"oftrademarksin
countriessuchasJapanthathaveapureregistrationsystemdoesoccurandhasmadeitmorecostlytoentermarketsinthosecountries.
b)Firstpossessionreducesadministrativecostscomparedtodecidingwhofirstthoughtoforinventedthetrademark.Sincetrademarksoften
consistofcommonwords,shapes,colors,andsoon,itwouldbecostlytofigureoutwhichpartytoatrademarkdisputehadinventedthe
markfirst.Acheaper(wedonotsuggestcostless)alternativeistodeterminewhouseditfirst.Anevencheaperalternativeiswhoregistered
itfirst,butitleadstotheproblemdiscussedintheprecedingparagraph.
c)Useincommercemeanssaleofthegood,withthetrademarkattached,tothepublic.Thus,apotentialsecondcomerwillbeonnoticenot
toinvestresourcesindevelopingamarksimilaroridenticaltoonealreadyinuse.Potentialduplicationcostsarenotavoidedcompletely
because,asweshallseeinamoment,therewillbeanintervalbetweendevelopingandfullyexploitingthemarkduringwhichanother
person(the"junioruser")maybedevelopingthesamemarkunawareofthefirst("senioruser").29Butthecostsprobablyarelower,onthe
averageatleast,thaninthecaseofpatentsbecausethecostofadoptinganewtrademarkisnormallylessthanthatofinventinganew
productorprocess.30
d)Basingthepropertyrightonusefitsinwiththesocialfunctionoftrademarksinidentifyinganddistinguishinggoods.Ifthegoodisnot
availableforsale,thetrademarkconfersnobenefit.Thus,conditioningtrademarkrightsonuseisawayoflimitingtheuseofscarce
enforcementresourcestosituationsinwhichtherightsinquestionarelikelytoyieldnetsocialbenefits.Thesolutionisnotidealitcould
leadtotheprematuredevelopmentandmarketingofgoodsbyafirmeagertoestablisharightinaniftytrademark.Butiftheelasticityof
supplyofbrandnamesisashighaswebelieve,veryfewindividualtrademarkswillbesovaluableapartfromtheproductsthattheyname
thatafirmwilldistortitsmarketingdecisionsinordertoappropriateaparticularname.
ThecurrentAmericansystemofestablishingtrademarkrightsisamixtureofstatecommonlawrightsandanoptionalfederalregistration
system(itselfamixtureofregistrationandfirstpossessionprinciples)undertheLanhamAct.31RegistrationundertheLanhamActdoes
notconferapropertyrightwithoutuse,butlessuseisrequiredthanatcommonlawatokensoleorsingleshipmentwilloftenbe
sufficient.32Theprincipalsocialbenefitofafederalregistrationsystemisthatnoticeislikelytobemorewidespread,sothatinadvertent
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duplicationislesslikelyhence,usebecomesalessimportantmethodofpreventingduplication.Butthefederalregistrationsysteminvolves
significantcosts.Likeapureregistrationsystem,itmayenablefirmsto"bank"trademarks,providedtheuserequirementisminimal.Ifthe
saleoftrademarksapartfromthegoodstheydenoteisforbidden(whichitis,asweshallseeinthenextsection),"banking"trademarks
couldalsoimposecostsbyrequiringcompetitorstoadoptlessefficienttrademarks(thoseyieldingahigherHinourmodel)sincetheycould
notbuythemfromthe"bank."
Thebiggestproblemwithafirstpossessionruleforintellectualproperty,andthestrongestargumentthereforeforasystemofpapertitles
(thetrademarkregistry,corresponding,aswehavenoted,tothepatentregistry),isthatthethingpossessedhasnodefinitephysicallocus.
SupposethatproducerA,whomakesbrandXdesklamps,isatpresentsellingonlyinNewYorkState,buthehasplanstoselleventually
throughoutthecountry.CanproducerB,whooperatesonlyinCalifornia,sellthedesklampsundertheXname,onthetheorythatAisnot
usingthetrademarkinCalifornia?OrifAissellingthroughoutthecountryahammerunderthenameXbutplanseventuallytosellafull
lineoftoolsunderthename,canBaffixthenametohisownbrandofscrewdriver?IfAeventuallybeginstoselldesklampsinCalifornia
oreventuallybeginstoproducescrewdriversaswellashammers,whoownstheXtrademarkAorB?
Thecourtsresolvetheseissuesinawaythatseemscalculatedtominimizethecostsarisingfromduplicationoftrademarksbutisitself
rathercostlyanduncertaintoadminister.AssumingthatthegoodssoldbyAandB(ifandwhenAcompleteshisplansofexpansion,
whethergeographicorproduct,asthecasemaybe)willbetoosimilartosharethesamenamewithoutundulyconfusingtheconsumer,the
courtsconsiderprimarilytheclosenessbetweenA'soriginalandexpansionuses,A'sunreasonabledelay,ifany,inenforcinghistrademark
againstB(A's"laches,"asitiscalled),andB'sgoodorbadfaithwhetherheknewaboutA'strademarkandwascopyingitorwhetherit
wasacoincidencethathebeganusingthesamemark.33ThecloserA'soriginalandexpansionusesare,thecostlieritwillbeforAandits
customersifAisforcedtouseadifferentmarkintheexpansionuses.Giventhemobilityofconsumers,34theywillbeconfusedtofindthat
thesamebrandiscalledonethinginonestateandanotherthinginanother.ThatiswhyStandardOilCompanyofNewJerseycameupwith
anewmark,"Exxon,"toreplacetheEsso,Humble,Standard,andEncomarksthatithadusedfortheidenticalproductsindifferentstates.
Consumersmayalsobeconfusedifcomplementarygoods,suchasahammerandascrewdriver,madebythesameproduceraresoldunder
differentnames.Hence,ifAisdeniedtheuseofhistrademarkinhisexpansionmarkets,geographicorproduct,hemay,likeStandardOil
ofNewJersey,beforcedtoadoptawhollynewtrademark,thussacrificingsomereputationcapitalassociatedwiththeoriginalmark.
Adoctrineoflaches(unreasonabledelay)forcesAtointernalizeB'scostofduplication.IfAhasreasontoknowthatBisproceedingto
developaduplicativemarkinignoranceofA'sprioruse,Amust,onpainofnotbeingabletousehismarkinhisexpansionmarkets,warnB
off.If,however,B,farfromproceedinginignoranceofA'sprioruse,hasdeliberatelycopiedthatmark(badfaith),thecostsofduplication
areselfimposed,andheisentitledtolessconsideration.
TheLanhamActhaseasedtheproblemofgeographicoverlap,thankstoimaginativejudicialinterpretation.Thecourtshaveinterpretedthe
acttoeliminateanygoodfaithdefenseforafirmusingatrademarklistedinthefederalregistryonthesameproduct.35Theideaisthat,
beforebeginningtouseamark,thefirmshouldchecktheregistry,andifitfindsthatthemarkisbeingusedonthesameproduct,itcannot
laterclaimgoodfaithwhensuedforinfringement.Iftheproductsaredifferent(ourhammerandscrewdriverexample),thedefenseisnot
automaticallyextinguished,becausethepathofexpansionintodifferent,thoughrelated,productsisinherentlyuncertain.Thesamecanbe
saidforgeographicexpansion,butthereisacriticaldifference.Evenifthefirmthatisusingatrademarkinonepartofthecountrynever
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expandstootherparts,consumersarenotfixedinoneplace,andintravelingaroundthecountryorinmovingfromonepartofthecountry
toanothertheymaybeconfusedifdifferentbrandsofthesameproductaresoldunderthesamename.Theyareapttoassumethatevery
desklampsoldunderaparticularbrandnameisthesamebrand,thatis,isproducedbythesameproducer.Thecourtshaveeliminatedthis
sourceofconfusionforregisteredmarks.
[Clickheretoseetheauthors'applicationofthemodeltothelawgoverningthesaleanddurationoftrademarks.]
B.TheRequirementofDistinctiveness
1.Introduction
Trademarkprotectionisavailableonlyforawordorothersignifierthatidentifiestheunderlyinggood(orservice)anddistinguishesitfrom
thatofotherproducers.Lackofdistinctivenesswouldmakethemarkincapableofidentifyingthegoodandrecallingtoaconsumerthe
information(onthebasisofpreviousexperiencewiththegoodbyhimorotherconsumers)thatlowershissearchcostsandenablesthe
producertochargeahigherprice.Butevenwithoutadistinctivemark,Tmayreducesearchcostssomewhat,sothatH(T)wouldbe
minimallylowerthanifthereisnotrademarkatall.
Whatwouldbewrongwithtrademarkprotectionfornondistinctivesignifiers?Suchprotectionmightbeunnecessarybecausenoonewould
wanttofreerideonanondistinctivesignifiertheincentivetofreeridedependsonthedifferencebetweentheprofitsgeneratedbythemark
whichbyassumptionareclosetozerointhenondistinctivecaseandthecostsofduplication.Protectionwouldimposeothercosts,
aboveandbeyondenforcementcosts.Sinceamarkthatdoesnotdistinguishonebrandfromanotherprobablyuseswords,symbols,shapes,
orcolorsthatarecommontothoseusedbyotherproducersofX,theprotectionofsuchamarkmightpreventothersfromcontinuingtouse
wordsthattheyrequiretocompeteeffectively.***
2.TheTypesofTrademark
Thelawcoulddealwiththeproblemoftheundistinctivemarkbyrequiringineverycaseaninquiryintotheeconomiceffectsofallowingan
exclusiveright.Theeffect,however,wouldbetomakeatrademarkcaseverymuchlikeanantitrustcase.Antitrustcasesgovernedbythe
RuleofReasonareverycostlytotry(oreventosettle),andtheonlythingthatmakesthesecosts(sometimes)worthwhile,bothprivately
andsocially,isthelargeprivateandsocialcoststhatsomeantitrustviolationsimpose.Sincetheallocativeeffectsofindividualtrademark
abusesareprettymuchlimitedtoraisingconsumersearchcosts,thepotentialmisallocationsaremuchsmallerthaninmostantitrustcases.It
thereforewouldnotpay,privatelyorsocially,toconductanantitrusttypeanalysisinmosttrademarkcases.Instead,thelawhasclassified
potentialmarksbydistinctivenessinafewbroadcategoriesandhasmadeclassificationdeterminativeoflegalitymuchasinantitrustcases
governedbyperserules.Theresultissometimescriticizedforitscrudeness,44buttherearepotentiallyoffsettingreductionsin
administrativecosts.
Letusconsiderthecategories.45Thesocalledfancifulmarkthemadeupnamethatresemblesnootherword,suchas"Exxon"or
"Kodak"istheeconomically(andlegally)leastproblematic.Muchlikeafancifulmarkintheireconomicpropertiesarearbitraryand
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suggestivemarks.Theformertermreferstoawordincommonusethathasnomeaningrelatedtotheproductthatitisusedtoname"Apple
Computer"and"Black&WhiteScotch"areexamples.Theelasticityofsupply(Winourformalmodel)ofsuchtermsisveryhigh.There
are450,000wordsinWebster'sThirdNewInternationalDictionary,andalthoughtheyarenotfreelysubstitutableifoneistryingtosay
somethingthatwillbeunderstood,theyarefreelysubstitutableifoneisuninterestedinmeaning.
Somewhatmoreproblematicaresuggestivemarkswordsthatimplycharacteristicsofthegoodstheyareusedtonamebutdonotdescribe
them.Agoodexampleis"BusinessWeek."Theelasticityofsupplyofsuggestivemarksisless,butnotmuchlesswhenoneconsiders
substitutionbetweentrademarkcategories."BusinessWeek"competeswith"Forbes"and"Barron's"(arbitrarymarks)aswellaswiththe
"WallStreetJournal"thelastalsoanexampleofasuggestivemark.
Nextindecreasingorderofsubstitutabilityisthedescriptivemark,suchas"AllBran"or"HolidayInn."Here,trademarkprotectionis
allowedonlyonproofof''secondarymeaning,"whichmeansproofthattheconsumingpublicunderstandsthewordorphrasetonamethe
brand.46Agivenproducthasonlysomanyattributesthatinterestbuyers.Soifoneproducerisallowedtoappropriatethewordthat
describesthatattribute,hewillobtainrentsmeasuredbythehigherpricehereceivesforhisbrandbecauseitissocostlyforhisrivalsto
informtheircustomersoftheattributesoftheirbrandswithoutusingthedescriptivewordthathasbeenappropriated(Zineq.(10)).Over
time,however,thedictionarymeaningofthewordmaygooutofcommonuse,andthewordmaycometosignifyformostpeoplejustthe
nameofthebrand"AllBran"hascometomeannotanyallbrancerealbutaparticularbrandofallbrancereal.Oncethishappens,
allowingthewordorexpressiontobeappropriatedmaycreateconsumerbenefits,byreducingconfusionandsearchcostsbymorethanthe
coststorivalsofbeingforbiddentousethesameword.
Justaswordscanbeclassifiedintodifferenttypesoftrademarks,socanshapesandothersignifiers.Similartofancifulandarbitrarywords
areunusualsymbolsandshapesorcombinationsofwellknownsymbols,shapes,andcolors.Noproblemariseswhenafirmappropriates
suchasignifierasitstrademark.Theyaredistinctive,sothereisnoquestionwhethertheyarecapableofprovidingsourceinformationand
theirsupplyisvirtuallyunlimited,soacompetitorisnotatacostdisadvantageinchoosinganothersignifierasatrademark.Closely
analogoustodescriptivemarksarecommonsymbols(circles,squares,orhearts)andindividualcolors(particularlyprimarycolors).***To
allowafirmtoappropriateoneofthesepotentialsignifiersasitstrademarkcreatesthedangerthat,afterseveralfirmsdothis,thelimited
numberofattractivesymbolsandcolorswillallbeused,makingitmorecostlyforotherfirmstocompete.***Still,theremaycomeatime,
particularlyifthesymbolorcolorinquestionhasbeenusedexclusivelyoveraperiodofyears,whenthecommonsignifierdenotesthe
producer'sbrand.Thesymbolorcolornowprimarilyprovidessourceinformationintrademarkjargonithasacquiredsecondarymeaning.
Nottoallowexclusiveuseinthesecircumstanceswoulddestroyinformationcapitalshouldotherproducersstartusingthesamesignifier.
Notsurprisingly,thelawallowsappropriationinthiscase.
Aninterestingexampleisthetrademarkingofcommonshapesandcolorsofpillssoldasprescriptiondrugs.Afterapatentonadrug
expires,otherfirmsmaybeginsellingthe"same"drugunderadifferentbrandnameorunderitsgenericnamewhilecopyingtheshapeand
coloroftheoriginalmanufacturer'spill.Notwithstandingthelowerpricechargedbythenewentrants,manyconsumersmayprefertostick
withtheoriginalmanufacturermaybetheyhadgoodexperiencewiththedrugandarereluctanttobelieveclaimsthatthesubstituteis
identicalinallmaterialrespects.Sinceaconsumerisunlikelytoreadthefineprintonthepillthatidentifiesthemanufacturer(anditreally
isfineprint),hemayrelyontheonlyaccessiblesignifiersitsshapeandcolortoindicatethatheisusingthepillhewants.Soifentrants
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areallowedtousethesamesize,shape,andcolor,thismayleadtodeliberatesubstitutionbythedruggist(becausethemanufacturerofthe
genericsubstitutechargesthedruggistalowerpriceorbecausethedruggististemporarilyoutoftheoriginalmanufacturer'sdrug)orto
inadvertentsubstitutionbecauseofthedruggist'scarelessness.Inthesecircumstances,wheretherearelargebenefitsfromsource
identificationandhighcostsofusingmeansotherthansize,shape,andcolortoidentify,wewouldexpect,andwefind,thatcourtsgrant
trademarkprotectiontocommonsizes,shapes,andcolorsofprescriptiondrugs,47althoughtheywouldnotdothiswithotherproducts.
Nonprescriptiondrugsareanexample:themanufacturercandisplaythebrandnamepredominantlyonthecontainerandpackagingand
thereforedoesnotrequiresize,shape,andcolorforsourceidentification.
[Applicationofthemodeltoavarietyofothertrademarkdoctrinesisomitted.]

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