I. Introduction
As a unique form of intellectual property, trademarks serve two primary functions. First, trademarks exist to protect consumer expectations about products and services.
[1]
A trademark should help consumers to accurately predict the quality of the product they are purchasing regardless of the actual source.
[2]
Second, trademarks allow owners of businesses to accumulate goodwill in their products.
[3]
Trademarks can accumulate value for their owner, and are often sold, licensed, and assigned for millions of dollars.
[4]
In many trademark claims, therefore, courts are forced to balance the owner’s rights in the mark and the consumer’s interests in the
mark.[5]
In traditional trademark infringement, or forward confusion, a junior user attempts to use a well-known senior user’s mark to sell
its product. In this context, enforcement of the trademark is beneficial to the consuming public, because it prevents marketplace confusion which would increase search
costs and harm the trademark owner because of his ownership interest in the mark. However, in reverse confusion, the interests
of trademark owners and consumers are often in tension.
In reverse confusion cases, a junior user (defendant) adopts a mark already in use by the senior user (plaintiff). However, the junior user dwarfs the senior user through
advertising and other expenditures used to promote the mark. While the senior user has a “property” interest in protecting the mark, the public may benefit more from
the junior user’s adoption of the mark because they only identify the mark with the junior user and are not confused by the dual uses of the mark. That conflict is the
focus of this Note. This Note argues that the doctrine of reverse confusion should be limited to cases in which society does not benefit from the junior user’s use of the
mark enough to outweigh the harm to the senior user’s property rights.
II. The Doctrine of Reverse Confusion
Reverse confusion was first recognized in 1974 in the Tenth Circuit. Prior to Big O Tire Dealers, Inc. v. Goodyear Tire & Rubber Co.,
[6]
courts were hesitant to recognize trademark rights for small senior users. In Westward Coach Mfg. Co. v. Ford Motor Co.,
[7]
the Seventh Circuit refused to recognize the doctrine of reverse confusion when Ford adopted the mark “Mustang” for its experimental cars in 1962, subsequent to
Westward’s use and registration of the mark for use on its trailers and campers.
[8]
Ford, ignoring a request by Westward to cease use of the mark, began mass-production of the Mustang in April 1964.
[9]
By October 1965, Ford had spent over $16 million dollars in advertising the Mustang,
[10] typical of
the expenditures in reverse confusion cases. The circuit court employed a traditional trademark infringement analysis and found that Westward did not own a strong
mark, and therefore found no infringement.
[11]
As critics pointed out, “[f]ailure to distinguish between direct and indirect confusion often led to seemingly inequitable results.”
[12]
Ford adopted Westward’s mark with full knowledge that Westward had federal registration rights to the mark.
[13]
Because of the disparity between the two users of the mark, it was likely that a purchaser of Westward’s product would think that
Ford, the junior user, was the source of the product. Therefore, “[t]aken by itself, this case would allow powerful junior users to undermine the trademark
protection accorded smaller businesses through sheer economic strength.”
[14]
That is why a different analysis, a reverse confusion analysis, is necessary to protect smaller senior users who properly use their
marks. The Tenth Circuit originated this stronger analysis in Big O.
A. Recognition of Reverse Confusion in the Courts
Reverse confusion began to take shape in 1974, in Big O.
[15]
In Big O, Goodyear Tires adopted the mark “BIG FOOT” for use on its tires, when Big O had already established common law rights to the mark.
[16]
Goodyear representatives met with Big O representatives and Big O rejected Goodyear’s offer of money in exchange for permission to use the Big Foot mark.
[17]
Goodyear continued its use of the mark and by August 31, 1975, had spent nearly ten million dollars on its “massive, saturation campaign.”
[18]
Big O commenced a trademark infringement suit against Goodyear.
[19]
At issue was whether Big O had an actionable trademark infringement claim when “Big O does not claim nor was any evidence presented showing Goodyear intended
to trade on the goodwill of Big O or to palm off Goodyear products as being those of Big O.”
[20]
The circuit court held that reverse confusion was an actionable claim under the trademark laws of Colorado.
[21]
The Tenth Circuit reasoned that Colorado’s “‘policy of protecting trade names and preventing public confusion’ as well as having
‘ the tendency (of widening) the scope of that protection’” called for protection against reverse confusion.
[22]
Also persuasive was evidence of actual confusion presented by witnesses showing they thought that Goodyear was the source of Big O’s tires after seeing the
Goodyear commercials.
[23]
Therefore, for the first time, a circuit court recognized and enforced the doctrine of reverse confusion in trademarks.
B. Characteristics of Reverse Confusion Cases
Since Big O, most circuit courts have recognized reverse confusion.
[24]
Several characteristics are fairly consistent throughout the cases, the most notable of which is the unpredictable nature of the cases.
Much to the dismay of both parties, it is very difficult to predict the outcome of a reverse confusion case based on the facts. Rather, the outcome appears
to rely heavily on the arguments of lawyers.
[25]
This unpredictability frustrates settlement procedure since it obfuscates the question of
liability.[26]
Another characteristic of reverse confusion cases is that they often involve large
damage awards due to the high sales volume of the infringer.
[27] In Sands, Taylor & Wood Co. v. Quaker Oats
Co., the seminal case on damages in reverse confusion, the circuit court held that in
the absence of bad faith, “[a] reasonable royalty . . . would [ ] accurately reflect both
the extent of [the junior user’s] unjust enrichment and the interest of [the senior user]
that has been infringed.”[28] Therefore,
plaintiffs often receive either a reasonable royalty with or without an enhancement for
deterrence or ten to thirty percent of defendant’s profits.
[29] This percentage, a “windfall to the
[Sands] plaintiff, likely exceeded a typical licensing
fee.”[30]
[p168] A third characteristic is that plaintiffs risk little
in a lawsuit because of the nature of damages awarded. The expected value of the lawsuit
is skewed by the opportunity for large damages. Sands was understandably a large
trademark case, with a large plaintiff’s verdict. Therefore, conservatively speaking, due
to the types of damages awarded in a reverse trademark infringement case against a
mid-sized company, the plaintiff could hope to recover, arguendo, ten million dollars in
damages. The median litigation cost of a single trademark case is $502,000.
[31] Therefore, to break even, the plaintiff would
only need a slightly greater than five percent chance of succeeding on his or her claim
to be economically encouraged to bring suit.[32]
It is also important to realize that the development of an infringing trademark is not
always the result of bad faith. In IHSA v. GTE Vantage, Inc., the use of “March
Madness” began when Brent Musberger, a CBS broadcaster, used the term during a television
broadcast of the NCAA “Final Four” championship game.
[33] Presumably, Musberger did not have knowledge
of IHSA’s trademark and had no intention to infringe on it. Similarly, in Sands,
the circuit court stated that “evidence of bad faith here is marginal at best.”
[34] As discussed infra, selection of a mark by
an infringing junior user does not necessarily rely on free riding by the junior user,
but rather sloppy trademark research. Therefore, requiring bad faith intent would most
likely negate the protection afforded under reverse confusion. However,
the harms of reverse confusion somewhat dictate the level of
protection that small senior users should receive.
C. The Harms of Reverse Confusion
Proponents of strong reverse confusion protection often struggle to identify the
specific harms of reverse confusion. As the Ninth Circuit espoused, “[w]hat could be
better for Dreamwerks [a small senior user] than to have people confuse it with a mega
movie studio [DreamWorks SKG]? Many an infringer has tried to manufacture precisely such
[p169] confusion and thereby siphon off the goodwill of a popular
mark.” [35] Realistically, a small senior user may
see a jump in sales when a large senior user adopts the same mark and begins promoting
the product line. In addition, the mark is not causing confusion as to the source of the
junior user’s good, so it does not fall into the auspices of traditional likelihood of
confusion analysis, where a court would look to see whether consumers believe that the
senior user is the producer of the junior user’s goods.
[36] However, victims of reverse confusion
still contend that they are harmed by the junior user.
One harm of reverse confusion is that it diminishes the value of the senior user’s
mark. In IHSA, the Illinois High School Association argued that GTE’s use of the
term “March Madness” “impair[ed] IHSA’s ability to make money by licensing its trademark
on merchandise and other incidentals.”[37]
Therefore, CBS’s use of the March Madness trademark destroyed the marketability of the
mark for licensing purposes. In the extreme, “consumers may consider [the senior user]
an unauthorized infringer” on the junior user’s mark resulting in injury to the senior
user’s goodwill and reputation.[38] Similarly,
consumers may experience disappointment when they discover that they are doing business
with the small senior user and not the large junior user.
[39] Therefore, reverse confusion may elicit a
visceral cognitive response from consumers with respect to the senior user, the proper
owner of the mark and can also injure the economic viability of the senior user’s mark.
A second harm associated with reverse confusion is that the senior user loses its
control over its own mark. As the plaintiff in Dreamwerks argued, “whatever
goodwill it has built now rests in the hands of DreamWorks; if [DreamWorks] should take a
major misstep and tarnish its reputation with the public, Dreamwerks too would be pulled
down.”[40] Additionally, a
[p170] senior user may lose its ability to expand into new
markets.[41] Therefore, the senior user is at the
mercy of the junior user if the courts refuse to prohibit the junior user’s use of the
mark. While this harm is more abstract than the economic harm to the senior user’s mark,
it is very real and another justification for the enforcement of reverse confusion. In
the era of corporate scandal, one can only imagine the harm that Worldcom’s collapse
could have on the reputation of a small telecommunications company in Albany, Georgia.
The harms of reverse confusion are therefore most notable because they differ from the
traditional harms of trademark infringement. In a typical trademark case, the consumer
suffers from confusion in the marketplace when there is a likelihood of confusion. The
senior user is harmed when the junior user infringes on the mark and siphons off business
from the senior user, resulting in a loss of business for the senior user.
[42] As a result, the infringer is unjustly
enriched because it profits from the goodwill associated with the senior user. Therefore,
the harms associated with reverse confusion are distinguishable from the harms associated
with forward confusion. While the infringer is not reaping any of the benefits typically
associated with trademark infringement, the senior user loses the significance and
distinctiveness of its mark, similar in fact to dilution.
[43] Finally, while reverse confusion laws
provide only the most basic trademark infringement protection to
senior users, they provide protection in a distinct context and
therefore garner considerable theoretical criticism. [p171]
Due to the competing interests behind enforcing relatively weak marks through reverse
confusion, scholastic debate centers around how strong reverse confusion protection
should be for small senior users. A great deal of the discussion centers around whether
property rules or liability rules should be used to protect trademarks.
[44] However, this Note will attempt to apply the
fundamental theories used in law and economics as well as moral rights theories to
suggest a balance between the creator’s needs and the needs of the consuming public. This
Note will look at the most equitable and efficient applications of law at the time a
lawsuit is likely to take place rather than the time of adoption or infringement because
a legal decision is more likely needed to resolve a dispute after the initial
infringement has already occurred and consumers have begun to associate goodwill with the
infringing junior user’s use of the mark.[45]
Therefore, a fundamental assumption underlying these arguments is that the junior user is
currently infringing on the senior user’s mark and the mark has value to consumers in the
form of reduced search costs.[46]
A. Lockean and Moral Rights Theories Applied
Equitable concerns dominate the justifications for protecting small junior users
through strong reverse confusion protection. One of the [p172]
underlying theories of trademark protection is that trademarks are an incentive to
business owners to “produce high-quality goods and services,” knowing that their
competitors cannot mimic their mark and free ride off of their hard work.
[47] This is consistent with Locke’s labor theory,
which posits, “we must provide rewards to get labor.”
[48] A defensible trademark does not infringe on
an already existing trademark, therefore, it is an “unclaimed good.” A trademark owner
takes this mark out of the public commons and associates a particular product with that
mark, making the word or symbol more useful to the public.
[49] Therefore, strong trademark protection
encourages investment in a mark and weak trademark protection discourages investment in a
mark. Reverse confusion is merely a specialized form of trademark protection, which
protects the smaller senior user. Without reverse confusion protection, “a company with a
well established trade name and with the economic power to advertise extensively [would
be immunized from suit] for a product name taken from a competitor.”
[50] Therefore, the existence of reverse confusion
provides equal trademark protection to all creators of marks, regardless of their size
and provides the necessary encouragement for mark owners to develop their trademarks.
An analysis under Lockean Theory suggests the junior user should lose rights to the
mark because the senior user has invested time and money in developing the mark. However,
the junior user has done so as well, and in most cases, has done so without any intention
to free ride and often without knowledge of infringement. Therefore, under Locke’s
theory, the junior user is also entitled to the fruits of its labor, which would be
eliminated under strong reverse confusion laws.
Moral rights theories expand on the idea that a creator should have control over his
or her creation. In copyright law, it is often stated in one way or another that “an
author’s book is his ‘property.’”[51] While hotly
debated, laws which restrict subsequent improvements on patents and copyrights have the
de facto effect of conferring rights in the creator to [p173]
control his or her creation.[52] This same moral
rights theory can be applied to trademarks as the owners similarly must expend
effort in developing a mark before it will be recognized as a defensible trademark.
Therefore, moral rights would dictate a trademark owner’s control over uses of its
trademark, which would prevent unauthorized infringement, be it reverse or forward
confusion. Therefore, the natural rights theory could suggest
giving trademark owners strong property rights in their marks
and therefore strong protection against reverse confusion.
The appeal of moral rights is limited in the context of trademarks. In a traditional
sense, although trademarks have some property aspects, they really belong to the public
at large as source identifiers. Unlike copyrights, trademarks do not equally express the
“personality” of the creator. Therefore, it is likely that harm through trademark
infringement is largely economic and moral rights add little to what Lockean theory
already provides for protecting the fruits of one’s labor.
B. Utilitarianism and Economic Efficiency Applied
While many of the arguments in favor of strong reverse confusion protection are
compelling, they find little support in the world of law and economics. Efficiency
concerns dominate the economic analysis of reverse confusion. The granting of a trademark
gives the owner a de facto monopoly over use of the mark.
[53] Therefore, with strong reverse confusion
protection, the owner of a mark can prohibit anyone else from using the mark even though
the mark may be more valuable to an infringer.
One applicable theory of economic efficiency is pareto efficiency. A system of
distribution is said to be “pareto optimal” when there is no different allocation in
which someone is better off without making someone else worse off.
[54] Presumably, the trademark is allocated to the
senior user due to statutory or common law priority. While the trademark may be more
valuable to the infringing junior user, conveying any rights to the infringer would make
the senior user worse off economically as discussed in the aforementioned harms analysis.
Therefore, the current system of trademark right allocations is said to be pareto
optimal, as it is impossible to make the junior user
better off without making the senior user worse off.
[p174] A second theory of economic efficiency is Kaldor-Hicks
efficiency. Under Kaldor-Hicks, one looks at wealth maximization to decide whether a
transaction will increase the overall wealth within society.
[55] If reverse confusion protection was weak, it
would facilitate the transfer of rights to the junior user. Therefore, the inquiry to
determine Kaldor-Hicks efficiency is whether the benefits of allowing the junior user to
infringe on the trademark of the senior user exceed the harm to the senior user.
[56] Under this analysis, consent is irrelevant,
but ability to pay is very relevant.[57] However,
because of the inherently large size of junior users by definition in reverse confusion
cases, the junior user will normally have the ability to pay the minimum fee
requested by a reasonable and rational senior user.
There are two beneficiaries from the junior user’s infringement on the senior user’s
mark. From a property standpoint, the junior user clearly benefits. At the time a
trademark infringement case is brought under reverse confusion, the junior user has
presumably already invested large amounts of money in developing the mark,
[58] since a recurring aspect of reverse confusion
is flooding or saturation of the marketplace with the junior user’s mark.
[59] Therefore, it may be economically inefficient
to prohibit the junior user from continuing his use, as it may discourage a senior user’s
development of the trademark.[60] The more tenuous
but supportable argument is that the public benefits from the junior user’s use of the
mark, especially when there is no bad faith involved in the infringement.
[61] The benefit that consumers derive from the
use of [p175] trademarks is reduced search costs. Therefore, if a
disproportionately large number of consumers use the infringing junior user’s mark to
reduce search costs than use the senior user’s mark, then one positive externality of the
junior user’s use is reduced search costs.[62] A
Kaldor-Hicks analysis therefore compares the benefits to both the junior user and the
consuming public and the harm to the senior user, as previously discussed. Where the
benefits exceed the harms, which seems to be likely based on the junior user’s investment
in the mark, the economically efficient solution is to allow infringement despite the
harm to the senior user and the likelihood of confusion.
Economic efficiency considerations must also take into account the deterrence that
weak protection will have on the development of marks by small companies. Considered even
further, one would need to determine whether discouraging small companies from developing
trademarks would have any detrimental effect on society at large. As previously stated,
the harms of preventing future use of the mark by the junior user should be considered at
the time of trial, not at the time of adoption, as the harm to society of taking a
popular trademark out of the marketplace is more severe than the harm of putting a
different trademark into the marketplace contemporaneous with product introduction.
Therefore, it appears that the economically efficient solution under Kaldor-Hicks, with
no consideration of Lockean principles, is to allow
the junior user to infringe on the senior user’s mark.
C. The Coase Theorem Applied
In the day and age of settlements, one might wonder why reverse confusion cases even
make it to court. Empirical evidence suggests that large infringers are often willing to
pay large amounts for trademarks. To use the name “Explorer” with its web browser,
Microsoft paid nearly five million dollars to a small search company.
[63] This amount paled in comparison to the $19.6
million awarded to the plaintiff in Big O and the [p176]
$26 million awarded to the plaintiff in Sands.
[64] Since the smaller senior user presumably
lacks capital to develop his trademark, a valuable exchange may occur where the senior
user receives cash and the junior user receives rights to use the trademark. When
voluntary transactions reallocate the resources to satisfy both parties, the Coase
Theorem dictates the parties will rationally behave to maximize their self-interest in
the absence of high transaction costs.[65] Some
scholars regard the Coase Theorem as the ultimate compromise between equitable and
efficiency concerns.[66]
Therefore, the Coase Theorem merits consideration.
Most new companies start small and envision infinite growth.
[67] Therefore, it is impossible for the Patent
and Trademark Office to determine the extent of future use of a trademark when the office
initially grants use of the rights to the mark under the Lanham Act. When a mark is
federally registered, the senior user should presumably get the initial allocation of the
rights. The primary inquiry, therefore, is whether the infringer is willing to pay an
amount equal to or greater than the lowest amount the senior user will accept in exchange
for the trademark. As stated above, there is an indication of willingness of junior users
to compensate senior users for their trademarks. In terms of transaction costs, the fees
associated with a licensing or an assignment are legal fees. Considering the legal fees
associated with a trademark infringement case,[68]
it is reasonable to assume the transaction fees are lower for settling than for defending
a trademark infringement case. Therefore, the Coase Theorem suggests a compromise between
equitable and efficiency concerns and suggests that junior and senior users will reach
an agreement that benefits all parties involved. The Coase Theorem predicts that strong
reverse confusion protection will force junior users to negotiate with senior users but
that an efficient and equitable transfer of rights will occur
that benefits all parties and consumers. The Coase Theorem, with its
limited applicability, seems convincing in this context.
This analysis changes under common law rights. When two companies are in a trademark
dispute over the right to use a mark, perhaps the inquiry should take into account not
only the priority of use, but also the relative size of the mark. In this context, the
junior user would not have to bargain [p177] with the senior
user, but would automatically be assigned rights to the mark so long as the junior
user’s use was more beneficial to the public than the senior user’s use. However, one
drawback of this approach is that it obscures the distinction between reverse confusion
and forward confusion. No finite distinction exists between a senior user deserving of
reverse confusion protection and a senior user deserving of traditional trademark
protection. Regardless, the Coase Theorem suggests that the two parties will be able to
find an amicable solution where each party receives a valuable resource.
In any trademark case, there are three parties to consider: the trademark owner, the
infringer, and the public. Trademarks are a distinctive form of intellectual property
because they lack many of the property rights that copyrights, patents, and trade secrets
have. Therefore, the primary consideration for the application of trademark law should
take account of the benefits to the consuming public.
De facto, most consumers will benefit more from the junior user’s use of the mark than
the senior user’s use. This is because consumers are either unaware of the senior user’s
use or are not confused by the concurrent uses. Disallowing the junior user to continue
use will harm the consuming public, as they must reorient themselves to the various
sources of products, and as it is not likely that DreamWorks would stop making movies
simply because they lose rights to the name. Rather, consumers would need to be educated
as to the new name of DreamWorks. In addition to increased search costs, the cost of
education would obviously fall on the junior user, who would pass along the cost to
consumers. Therefore, whenever a reverse confusion case
arises, someone must lose something of value.
Under Lockean theory, it seems that the equitable solution is to allow the senior user
of the mark to continue its uninfringed use since it was the originator of the mark and
should be entitled to the exclusive fruits of its labor. However, economic efficiency
realism should temper enthusiasm for Lockean theory. It is in this context that the
property function and consumer expectations function are in tension. When in tension, the
primary function of trademarks, protecting consumers, should
trump the senior user’s property rights in its mark.
Hence, when the Coase Theorem fails to predict some form of settlement between the
parties, the government must step in and speak for the unrepresented public. If the
courts fail to recognize the needs of consumers and the advantages that trademarks have
to consumers, the [p178] courts will overemphasize the property
aspects of trademarks and over allocate rights to senior users. Therefore, in the
interest of protecting consumers, the law should force the transfer of the trademark from
the senior to the junior user. Ideally, this transfer would be accompanied by
compensation, which would satisfy all parties to some extent while still protecting
the prevailing interest of the consuming public.
