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Trademarks | Trademark Distinctiveness | Trademark Dilution
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A trademark or tradename is a legally protected name, word, symbol, or design (and their
combinations) used by a manufacturer or seller to identify a product or service and distinguish it
from other goods (see 15 U.S.C. section 1127). Similarly, a tradename is a legally- protected
word or symbol that is used to identify a business entity. Typically, a trademark says little
directly about the composition or specification of the good; instead, it identifies the maker of the
good. The buyer infers information about the features of the good by remembering his/her
previous experience(s). Similarly, the tradename of a company does not explicitly reveal
information about the company. The tradename just identifies the company; consumers have to
remember what the company produces, the reputation of its quality, etc.
Trademarks are protected by the Federal Trademark (Lanham) Act of 1946 (see 15 U.S.C.
section 1127). Many states offer some trademark protection within their respective boundaries
through a registration process. Symbols, words or designs, upon being “trademarked,” become
the property of the producer, under specified rules of use and abuse, and thereafter are part of the
assets of the producer. The trademark holder is given a legal monopoly on the use of these
trademarked symbols and names in connection with the attached commodity, and is exclusively
protected against infringement. Similarly, the law allows a tradename to be registered and used
exclusively by a business entity. Legal protection of trademarks is granted with respect to
specified and related goods and does not extend to all products. For example, the trademark
FORD owned by the automobile manufacturer does not cover unrelated items, say clothing. Thus, the same (or similar) trademark can be used by different owners in different product
categories. Trademarks qualify for legal protection immediately upon use when they are “inherently
distinctive.” For marks that are not “inherently distinctive,” the owner must establish a
“secondary meaning” or “acquired distinctiveness” to receive legal trademark protection. Inherently distinctive trademarks fall into three types, “fanciful,” “arbitrary,” and “suggestive”
trademarks. Fanciful trademarks are words that usually have no other meaning, such as EXXON.
Arbitrary marks are words that have an inherent meaning, but have no apparent meaning when
applied to the specific product, such as APPLE as applied to computers. Suggestive trademarks
imply or suggest certain properties of the product to which they apply, such as FRIDGEDAIRE
as applied to refrigerators. For suggestive trademarks the implied meaning is not immediate but
requires mental effort by the consumer.
Non-inherently distinctive trademarks are legally protected if they have acquired a
“secondary meaning,” attesting to the mark’s acquired distinctiveness. Non-inherently
distinctive trademarks may be surnames, such as MACY’S that have acquired a distinctiveness. They also may be geographically descriptive terms, such as MARLBORO, which have acquired
distinctiveness and do not indicate the place of origin of a good. The existence of a “secondary meaning” must be proved as an association in the
consumer’s mind between the trademark and the origin of the good. Marks that are merely
descriptive terms for a good or its features or purpose do not qualify for legal protection. Legal
protection of such marks would result in economic inefficiencies and social welfare losses, for
the following three reasons. First, a descriptive term does not identify the good of a particular
seller. Therefore a descriptive mark cannot properly perform the fundamental function of a
trademark. Second, if the law gave monopoly rights to a term of general use by allowing it to be
trademarked, the new “owner” of the mark would unfairly benefit from the value associated in
the general pre-registration use of the word. Third, if a descriptive term were registered as a
trademark, the rest of society, including competing firms would be deprived of the use of the
term. In a similar vein, a design that is just “functional,” that is required for the good just to
perform a certain function, does not qualify for protection, while distinctive designs, such as that
of the COCA-COLA bottle can be trademarked.
A “generic” term that just describes a class of goods is a primary example of a descriptive
mark that cannot be trademarked. For example, the word BOOK cannot be trademarked. Often,
the big success of certain brand names makes them vulnerable to becoming generic by describing
a whole class of goods rather than the product(s) of a particular manufacturer. Famous examples
of trademarks that became generic to the detriment of the original trademark owners include
ASPIRIN, ESCALATOR, CELLOPHANE, and THERMOS. 2. Economic Function of Trademarks
The primary reasons for the existence and protection of trademarks are that (1) they
facilitate and enhance consumer decisions, and (2) they create incentives for firms to produce
goods of desirable qualities, even if these qualities are not observable before purchase. Both of
these effects are consequences of the fact that trademarks permit consumers to distinguish
between goods which look identical in all features that are observable before purchase.
The Senate Committee’s recommendation on the law that became the Lanham Act
described the two purposes of trademarks as follows: “One is to protect the public so it may be
confident that, in purchasing a product bearing a particular trademark which it favorably knows,
it will get the product which it asks for and wants to get. Secondly, where the owner of a
trademark has spent energy, time, and money in presenting to the public the product, he is
protected in his investment from its misappropriation by pirates and cheats. This is the well-
established rule of law protecting both the public and the trademark owner.” (S. Rep. No. 1333,
79th Cong., 2d Sess. (1946), reprinted in 1946 U.S.C.C.A.N. 1274)
In many markets sellers have much more and better information about the unobservable
features of a good for sale than buyers, i.e., there exists an informational asymmetry. Often,
unobservable features are key determinants of the value of the good. Moreover, it may be easy to
imitate to the last detail the observable features of a good, while significant differences remain in
the features that are unobservable before purchase. In the absence of trademarks, consumers
would often pick a good of undesirable qualities, while firms, unable to transmit to the consumer
signals of the unobservable high qualities of their goods, would choose to produce goods with the
cheapest possible unobservable qualities. However, when there exists a way to identify the
unobservable qualities of a good at the time of purchase, consumers are facilitated in their
choices, and firms have an incentive to cater to a spectrum of tastes for variety and quality. The
economic role of the protected trademark is just that: to identify the unobservable features of the
trademarked product, so that consumers are directly helped in their purchase decisions, and firms
are indirectly prompted to produce what consumers truly desire.
The trademark does not provide information in analytic form, such as a list of ingredients
or indication of size or chemical composition. Instead, trademarks provide information in
summary form, through a symbol which the consumer identifies with a specific combination of
features. Information in analytic form is a complement to rather than a substitute for trademarks.
Trademarks were originally used to identify makers of jewellery in the middle ages,
although the craftsmen’s marks had been used since antiquity. Although the original intent was
to identify the maker for possible fraud regarding the composition of the alloy, trademarks were
soon used to identify the quality standards of particular producers. At present, besides its
function in indicating the source of a product and its quality, a trademark identifies the product
(the full combination of features that constitute the product). For example, the trademark DR.
PEPPER identifies the particular kind of Cola drink.
A tradename of a business entity can be used to attach a positive reputation of high
quality to many products that this firm produces. Thus, there are typically increasing returns to
scope in the use of a tradename. For example, given a valuable tradename in small cars,
HONDA was able, over time, to use the same tradename for larger cars that it produces. However, given the association of a trademark with specific variety and quality features, it is
sometimes not desirable for a manufacturer to use the same trademark in all its related goods. For example, Honda uses the name ACURA for its more luxurious models. Ralph Lauren, a
clothes manufacturer, has three separate trademarks for its goods, stratified by quality: POLO,
RALPH LAUREN, and CHAPS.
3. Degree of Success of the Economic Function of Trademarks
For goods that are frequently purchased by the same consumer (experience goods) the
degree of a trademark’s success depends on (a) the consumer’s ability to recall the mark and its
associated features; (b) the inability of others to use a confusingly similar mark; and (c) the
reluctance of firms to change the variety and quality features of the trademarked product. For
goods that are infrequently purchased by the same consumer (search goods), tradenames may
indirectly signal a quality standard extending to multiple products within a product category, or
even to unrelated products that originate from the same firm.
4. Confusion and Dilution
For the trademark to function effectively, it is necessary that there be no confusion in the
minds of consumers about the source of the product. Thus, marks that resemble other trademarks
are not allowed to be registered as trademarks if their use is “likely, when used on or in
connection with the goods of the applicant, to cause confusion, or to cause a mistake, or to
deceive.” (15 U.S.C. section 1052(d))
A different kind of infringement on a trademark may occur through “dilution.” Dilution
does not necessitate the existence of likelihood of confusion among similar products, since
dilution is relevant to use of the same mark in different lines of business. There are two types of
dilution, “dilution by blurring” and “dilution by tarnishment.” Dilution by blurring occurs when
a mark is used by a different manufacturer in an unrelated line of business. For example, the
trademark XEROX would be diluted if it were used by a manufacturer of chairs. Dilution by
tarnishment occurs when the mark is used by a different seller in unrelated goods that are of
lower quality than those of the trademark holder.
Dilution by blurring prevents consumers from identifying a trademark or a tradename
with a particular good or collection goods, thereby diminishing the effectiveness of a trademark. Dilution by tarnishment does not allow the information about the quality level of the trademarked
good or collection of goods to be correctly inferred. Thus, dilution interferes with the proper
economic function of trademarks.
5. Possible Distortionary Effects of Trademarks
Some distortions may result from the introduction of trademarks. Trademarks make
perception advertising possible. Through perception advertising, a desirable mental image may
be added to the quality and variety features of a trademarked product, permitting competition in
yet another dimension. The tie-in of the objective attributes of the product with the ones attached
to it through perception advertising may distort purchasing decisions. Moreover, resources are
wasted in the effort to link desired mental images with advertised goods. Other distortions may
also occur from opening competition in a new dimension (see Economides (1986)). These
potential distortions are generally expected to be small and outweighed by the benefits of the use
of trademarks, described earlier.
The legal protection of trademarks may also create a distortion through the awarding of
exclusive monopoly rights in the use of certain words, symbols, or designs that are
“trademarked.” The law has provided insurance against such potential distortions through the
exclusions of generic and descriptive names from trademark protection (See section 14(c)
Lanham Act, 15 USC §1064(c), and §15(4) Lanham Act, 15 USC §1065(4)). Not only is the
protection of merely descriptive names limited under the Lanham Act, but also designations that,
in the eyes of the relevant public, primarily come to denote a product category rather than the
product’s producer cease to be valid trademarks.
In summary, trademarks play an indispensable role in the efficient provision of
experience goods that have the variety and quality features consumers desire. A similar role is
played by trademarks in upholding the quality level of infrequently consumed goods. Trademarks make perception advertising possible and therefore can result in anticompetitive
distortions associated with perception advertising. Moreover, the legal monopoly on the use of
names that are trademarked also creates a potential distortion. However, both of these distortions
are expected to be small, and are unlikely to outweigh the benefits of the efficient provision of
variety and quality benefits that trademarks facilitate.
Trademark Act (1946), 15 USC §§1051-1127, (Lanham Act).
Economides, N. 1988. The Economics of Trademarks. Trademark Reporter 78: 523-539.
Landis, W. M. and R. Posner 1988. The Economics of Trademark Law. Trademark Reporter 78:
Schechter, F. 1925. The Historical Foundations of the Law Relating to Trade-Marks. New
Legal protection of trademarks is granted with respect to specified and related goods and does not extend to all products. Symbols.Trademarks
A trademark or tradename is a legally protected name. the reputation of its quality. The buyer infers information about the features of the good by remembering his/her previous experience(s). a trademark says little directly about the composition or specification of the good.
Scope of Protection Trademarks are protected by the Federal Trademark (Lanham) Act of 1946 (see 15 U. Similarly. and is exclusively protected against infringement. word.
section 1127). Many states offer some trademark protection within their respective boundaries through a registration process. instead. etc. the trademark FORD owned by the automobile manufacturer does not cover unrelated items. or design (and their combinations) used by a manufacturer or seller to identify a product or service and distinguish it from other goods (see 15 U. Similarly. section 1127). the law allows a tradename to be registered and used exclusively by a business entity.protected word or symbol that is used to identify a business entity. say clothing.S. upon being “trademarked. under specified rules of use and abuse. The tradename just identifies the company. consumers have to remember what the company produces.C. symbol. the tradename of a company does not explicitly reveal information about the company. and thereafter are part of the assets of the producer. Similarly. a tradename is a legally. words or designs.” become the property of the producer. it identifies the maker of the good.C. For example. Typically.
1. The trademark holder is given a legal monopoly on the use of these trademarked symbols and names in connection with the attached commodity.S.
a descriptive term does not identify the good of a particular
.” For marks that are not “inherently distinctive. for the following three reasons. such as FRIDGEDAIRE as applied to refrigerators. Non-inherently distinctive trademarks are legally protected if they have acquired a “secondary meaning. “fanciful. Arbitrary marks are words that have an inherent meaning. First. Fanciful trademarks are words that usually have no other meaning.” the owner must establish a “secondary meaning” or “acquired distinctiveness” to receive legal trademark protection. The existence of a “secondary meaning” must be proved as an association in the consumer’s mind between the trademark and the origin of the good.” and “suggestive” trademarks. Suggestive trademarks imply or suggest certain properties of the product to which they apply. Trademarks qualify for legal protection immediately upon use when they are “inherently distinctive. such as EXXON.Thus. Non-inherently distinctive trademarks may be surnames. which have acquired distinctiveness and do not indicate the place of origin of a good. For suggestive trademarks the implied meaning is not immediate but requires mental effort by the consumer.” attesting to the mark’s acquired distinctiveness. such as MACY’S that have acquired a distinctiveness. Marks that are merely descriptive terms for a good or its features or purpose do not qualify for legal protection.” “arbitrary. the same (or similar) trademark can be used by different owners in different product categories. They also may be geographically descriptive terms. such as MARLBORO. such as APPLE as applied to computers. Inherently distinctive trademarks fall into three types. but have no apparent meaning when applied to the specific product. Legal protection of such marks would result in economic inefficiencies and social welfare losses.
Economic Function of Trademarks The primary reasons for the existence and protection of trademarks are that (1) they
facilitate and enhance consumer decisions. such as that of the COCA-COLA bottle can be trademarked. the rest of society. In a similar vein.” that is required for the good just to perform a certain function. Often. and THERMOS. CELLOPHANE. the big success of certain brand names makes them vulnerable to becoming generic by describing a whole class of goods rather than the product(s) of a particular manufacturer. while distinctive designs. Both of these effects are consequences of the fact that trademarks permit consumers to distinguish between goods which look identical in all features that are observable before purchase. and (2) they create incentives for firms to produce goods of desirable qualities.
2. Famous examples of trademarks that became generic to the detriment of the original trademark owners include ASPIRIN. Second. does not qualify for protection. the new “owner” of the mark would unfairly benefit from the value associated in the general pre-registration use of the word. a design that is just “functional. the word BOOK cannot be trademarked. Therefore a descriptive mark cannot properly perform the fundamental function of a trademark. A “generic” term that just describes a class of goods is a primary example of a descriptive mark that cannot be trademarked. if the law gave monopoly rights to a term of general use by allowing it to be trademarked. For example. Third. ESCALATOR. The Senate Committee’s recommendation on the law that became the Lanham Act
. even if these qualities are not observable before purchase. including competing firms would be deprived of the use of the term.seller. if a descriptive term were registered as a trademark.
trademarks provide information in
.e. The trademark does not provide information in analytic form.C. 1333.S.described the two purposes of trademarks as follows: “One is to protect the public so it may be confident that. No.C.” (S. 1274) In many markets sellers have much more and better information about the unobservable features of a good for sale than buyers. and money in presenting to the public the product. time. and firms have an incentive to cater to a spectrum of tastes for variety and quality. unable to transmit to the consumer signals of the unobservable high qualities of their goods. consumers are facilitated in their choices. while firms. However. where the owner of a trademark has spent energy. he is protected in his investment from its misappropriation by pirates and cheats.. 79th Cong. in purchasing a product bearing a particular trademark which it favorably knows. 2d Sess. The economic role of the protected trademark is just that: to identify the unobservable features of the trademarked product. would choose to produce goods with the cheapest possible unobservable qualities. there exists an informational asymmetry. and firms are indirectly prompted to produce what consumers truly desire. (1946).N. i. it may be easy to imitate to the last detail the observable features of a good. Moreover. This is the wellestablished rule of law protecting both the public and the trademark owner. it will get the product which it asks for and wants to get. In the absence of trademarks. while significant differences remain in the features that are unobservable before purchase. Instead. unobservable features are key determinants of the value of the good. Rep. Often. reprinted in 1946 U. so that consumers are directly helped in their purchase decisions.A. consumers would often pick a good of undesirable qualities. Secondly.. when there exists a way to identify the unobservable qualities of a good at the time of purchase. such as a list of ingredients or indication of size or chemical composition.
given the association of a trademark with specific variety and quality features.
Degree of Success of the Economic Function of Trademarks
. to use the same tradename for larger cars that it produces. Thus. Although the original intent was to identify the maker for possible fraud regarding the composition of the alloy. the trademark DR. over time. RALPH LAUREN. a clothes manufacturer. At present. although the craftsmen’s marks had been used since antiquity. there are typically increasing returns to scope in the use of a tradename. a trademark identifies the product (the full combination of features that constitute the product). Ralph Lauren. has three separate trademarks for its goods. HONDA was able. through a symbol which the consumer identifies with a specific combination of features. However. For example. besides its function in indicating the source of a product and its quality. For example. trademarks were soon used to identify the quality standards of particular producers. and CHAPS. Honda uses the name ACURA for its more luxurious models. PEPPER identifies the particular kind of Cola drink.summary form. given a valuable tradename in small cars. Trademarks were originally used to identify makers of jewellery in the middle ages. Information in analytic form is a complement to rather than a substitute for trademarks. For example. stratified by quality: POLO. A tradename of a business entity can be used to attach a positive reputation of high quality to many products that this firm produces.
3. it is sometimes not desirable for a manufacturer to use the same trademark in all its related goods.
Confusion and Dilution For the trademark to function effectively.” Dilution by blurring occurs when a mark is used by a different manufacturer in an unrelated line of business.
4. it is necessary that there be no confusion in the
minds of consumers about the source of the product. (b) the inability of others to use a confusingly similar mark.S. For example. tradenames may indirectly signal a quality standard extending to multiple products within a product category. and (c) the reluctance of firms to change the variety and quality features of the trademarked product. Dilution by tarnishment occurs when the mark is used by a different seller in unrelated goods that are of lower quality than those of the trademark holder. marks that resemble other trademarks are not allowed to be registered as trademarks if their use is “likely. “dilution by blurring” and “dilution by tarnishment. the trademark XEROX would be diluted if it were used by a manufacturer of chairs. when used on or in connection with the goods of the applicant. or to deceive. For goods that are infrequently purchased by the same consumer (search goods).C.
. Thus. to cause confusion. section 1052(d)) A different kind of infringement on a trademark may occur through “dilution.” Dilution does not necessitate the existence of likelihood of confusion among similar products. or even to unrelated products that originate from the same firm. There are two types of dilution. since dilution is relevant to use of the same mark in different lines of business. or to cause a mistake.” (15 U.For goods that are frequently purchased by the same consumer (experience goods) the degree of a trademark’s success depends on (a) the consumer’s ability to recall the mark and its associated features.
Possible Distortionary Effects of Trademarks Some distortions may result from the introduction of trademarks. resources are wasted in the effort to link desired mental images with advertised goods. Trademarks make
perception advertising possible. Through perception advertising. The legal protection of trademarks may also create a distortion through the awarding of exclusive monopoly rights in the use of certain words. or designs that are “trademarked. Other distortions may also occur from opening competition in a new dimension (see Economides (1986)). but also designations that.Dilution by blurring prevents consumers from identifying a trademark or a tradename with a particular good or collection goods.
5. a desirable mental image may be added to the quality and variety features of a trademarked product. 15 USC §1064(c). Dilution by tarnishment does not allow the information about the quality level of the trademarked good or collection of goods to be correctly inferred. Not only is the protection of merely descriptive names limited under the Lanham Act. Thus. 15 USC §1065(4)). described earlier.
.” The law has provided insurance against such potential distortions through the exclusions of generic and descriptive names from trademark protection (See section 14(c) Lanham Act. symbols. Moreover. thereby diminishing the effectiveness of a trademark. These potential distortions are generally expected to be small and outweighed by the benefits of the use of trademarks. The tie-in of the objective attributes of the product with the ones attached to it through perception advertising may distort purchasing decisions. and §15(4) Lanham Act. permitting competition in yet another dimension. dilution interferes with the proper economic function of trademarks.
primarily come to denote a product category rather than the product’s producer cease to be valid trademarks.
Summary In summary. the legal monopoly on the use of names that are trademarked also creates a potential distortion. and are unlikely to outweigh the benefits of the efficient provision of variety and quality benefits that trademarks facilitate. Trademarks make perception advertising possible and therefore can result in anticompetitive distortions associated with perception advertising. However. both of these distortions are expected to be small.
. trademarks play an indispensable role in the efficient provision of
experience goods that have the variety and quality features consumers desire.in the eyes of the relevant public. Moreover. A similar role is played by trademarks in upholding the quality level of infrequently consumed goods.
N. 1988. (Lanham Act). W. Schechter. 15 USC §§1051-1127. The Economics of Trademark Law. 1925.References Statute Trademark Act (1946). Posner 1988. Trademark Reporter 78: 523-539. The Historical Foundations of the Law Relating to Trade-Marks.
. Trademark Reporter 78: 267-306. The Economics of Trademarks. F. and R. Landis.
Bibliography Economides. New York: Columbia University Press. M.
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