Draft July 28, 2006 Please do not circulate or cite without permission The Normative Foundations of Trademark Law

CThe Natural Right in One’s Business Conception Explains a Variety of Long-Standing Doctrines

While the natural rights approach to trademark rights may seem to modern readers a bit anachronistic, that approach had one significant virtue: it was capable of determining in most cases what ought to count as someone’s property and what should not. In fact, the natural rights perspective’s ability to identify the limits of legitimate protection is demonstrated by a number of ancient doctrines that delineated the scope of protection but which seem an odd fit with the consumer protection rationale.

(1)Trademark Use as a Proxy for Labor

As all trademark lawyers know, trademark rights are a function of use of the mark in connection with particular products or services. One acquires rights through use, and priority as between competing users is determined by first use.¹⁹⁹

The first use rule fits uneasily with a consumer protection justification. If trademark law were intended simply to enhance marketplace efficiency, we might expect the law to award the right to use a particular mark to the party with whom the majority of consumers associate the mark, regardless the parties’ respective first use dates. To do otherwise is to dash the expectations of the greater number of consumers and create confusion rather than remedy it.²⁰⁰ But the natural rights approach focused on encouraging productive expenditure of labor, and therefore called for rules that gave primacy to use. The relevant labor was labor expended to build one’s business, and the trademark acted as a proxy for the property interest in that business. Thus, a junior user of a mark, even if that user was substantially larger and more visible than the senior user, interfered with the senior user’s established property right and with the incentives to labor industriously. A natural rights theory of trademark protection, unlike the consumer protection theory, is makes no attempt to value the respective uses of labor.²⁰¹

(2)Unfair Competition Requires Competition

Just as use of a mark was significant as a trigger for trademark rights, the scope of those rights was dependant on the scope of the mark owner’s use. Thus, courts traditionally restricted the scope of a party’s rights to a particular line of trade. This rule was clear even as early as the decision in The Leather Cloth Company, Ltd. v. The American Leather Cloth Company,²⁰² in which Lord Westbury stated that the “property in a trade mark is the right to an exclusive use of some mark, name or symbol in connection with a particular manufacture of vendible commodity.”²⁰³ As the court said in Hanover Star Milling, quoting Vice Chancellor Wood in Ainsworth v. Walmsley,²⁰⁴ an 1866 English decision:

This court has taken upon itself to protect a man in the use of a certain trademark as applied to a particular description of article. He has no property in that mark per se, any more than in any other fanciful denomination he may assume for his own private use, otherwise than with reference to his trade. If he does not carry on a trade in iron, but carries on a trade in linen, and stamps a lion on his linen, another person may stamp a lion on iron; but when he has appropriated a mark to a particular species of goods, and caused his goods to circulate with this mark upon them, the court has said that no one shall be at liberty to defraud that man by using that mark, and passing off goods of his manufacture as being the goods of the owner of that mark.²⁰⁵

Similarly, trademark rights traditionally were restricted to the geographic markets in which the mark owner operated.²⁰⁶

Since natural property rights were concerned with protecting labor, courts sought to protect mark owners from illegitimate interferences in the markets in which the mark owners had labored to acquire customers. Mark owners, however, were not entitled to interfere with the like rights of others to use a mark in markets in which the mark owners had not labored. Infringement then was defined by situations in which the defendant attempted to steal a competitor’s existing customers. As the court said in The Leather Cloth case, “[i]t is indeed true that, unless the mark used by the Defendant be applied by him to the same kind of goods as the goods of the Plaintiff, and be in itself such, that it may be, and is, mistaken in the market for the trade mark of the Plaintiff, the Court will not interfere, because there is no invasion of the Plaintiff’s right …”²⁰⁷

(3)Evidence of Fraud Not Required

Conceiving of the property right as one in continued patronage also sheds light on the distinction English courts made between cases where the plaintiff had established title in a mark and was therefore entitled to an injunction and cases in which title was unclear and the plaintiff had to prove the defendant improperly sought to divert the plaintiff’s customers. If a plaintiff had substantially exclusive use of a mark that was not descriptive, then consumers were likely to associate that term with the senior user. In those circumstances, any use of the same mark by competitors was likely to divert customers who were trying to patronize the senior user, whether or not the junior user intended to defraud anyone. And because in those circumstances the mark had no descriptive significance, competitors had no legitimate need to use the mark.²⁰⁸ Thus it made sense that, where a party had established exclusive rights, evidence of intent was not necessary.

American courts, as noted above, essentially followed this approach of the English courts of equity in not requiring evidence of fraud. Thus, in Taylor v. Carpenter, the court held that

where one intentionally uses or closely imitates another’s trade marks, on merchandise or manufactures, the law presumes it to have been done for the fraudulent purposes of inducing the public, or those dealing in the article, to believe that the goods are those made or sold by the latter, and of supplanting him in the good will of his trade or business.²⁰⁹

Likewise in Elgin National Watch Co. v. Illinois Watch Case Co.,²¹⁰ the court wrote that "[i]f a plaintiff has an absolute right to the use of a particular word or words as a trade mark, then if an infringement is shown, the wrongful or fraudulent intent is presumed...."²¹¹

(4)Trademarks and Trade Names

American trademark law’s rough proxy for the distinction English courts drew between cases where the mark owner could demonstrate title and those in which it could not was the distinction between “technical trademarks” and “trade names.” As noted above, “trade names” were protected in actions for unfair competition only on a showing of secondary meaning.²¹² Though the law no longer makes any significant distinction between technical trademarks trade names,²¹³ the requirement that claimants demonstrate secondary meaning for surnames and descriptive terms to warrant protection persists.²¹⁴

There are several possible explanations for the distinction between trade names with and without secondary meaning. It makes sense from a search cost perspective: if parties acquired rights to words that accurately described a product, consumers could be hurt because they could not use those terms to search.²¹⁵ On the other hand, if those terms come to designate a particular producer, then consumers would not need to use the term to search for other entities. The rule might also encourage parties to adopt arbitrary or distinctive marks, which “while hardly trenching at all upon the common right, affords equal protection to the user.”²¹⁶ Historically, however, the rule developed as an application of the natural rights approach focused on trade diversion.

Surnames and descriptive terms have one thing in common – consumers are less likely to attach source significance to those terms than they are to coined or arbitrary terms. If consumers do not attach singular significance to a term, then we cannot reliably conclude that consumers who purchase a junior user’s products were seeking the senior user and therefore fraudulently diverted.²¹⁷ In other words, competitors have legitimate reasons to use those terms in some cases, and we cannot categorically condemn every use. Thus, a party must produce additional evidence to demonstrate that a particular use is illegitimate.²¹⁸

The traditional requirement that, in order to infringe, the defendant use a mark as a source designator (as a trademark) is a further application of this principle. A party using a mark in a non-source designating sense cannot use that mark to sell their goods as those of the mark owner.²¹⁹ Thus, under traditional trademark principles, it made no sense to suggest that non-trademark use infringed. Notably, the trademark use requirement need not be a feature of trademark law intended to promote information transmission. Non-trademark uses also have the potential to interfere with information clarity.

(5)Abandonment Rules Reflect Trade Diversion Theory

Given trademark law’s traditional focus on use, it should come as no surprise that a trademark owner traditionally was deemed to have abandoned its rights in a mark the moment it ceased use of that mark and lacked intent to resume use.²²⁰ This rule makes little sense viewed through a consumer protection lens because consumers’ association of the mark with a particular user may persist for some time after the party has ceased use. As a result, some modern courts have refused to find abandonment of a mark when there is evidence of persisting goodwill.²²¹

Traditional trademark law, however, was concerned with consumer confusion not for its own sake, but only as a proxy for diverting trade. With that focus, continuing goodwill is entirely immaterial. Absent intent to serve its former market, a party owner cannot claim its sales will be diverted by the defendant’s use; the former mark owner has no sales to divert. Thus, even if consumers continued to associate a mark with one party, traditional trademark law would not have found a violation because the former owner’s “property is in no wise interfered with.”²²²

(6)Assignment and Licensing Rules Reflect Connection to Trade

Assignment or licensing of a trademark traditionally was prohibited unless attendant to a transfer of the related business. The court in Memahan Pharamacal Co. v. Denver Chemical Manufacturing Co.,²²³ summarized the bar as follows:

A trade-mark cannot be assigned, or its use licensed, except as incidental to a transfer of the business or property in connection with which it was used. An assignment or license without such a transfer is totally inconsistent with the theory upon which the value of a trade-mark depends and its appropriation by an individual permitted. The essential value of a trade-mark is that it identifies to the trade the merchandise upon which it appears as of a certain origin, or as the property of a certain person. When its use has been extensive enough to accomplish that purpose, and not till then, it becomes property, and when it so becomes property it is valuable for two purposes: (1) as an attractive sign manual of the owner, facilitating his business by its use; (2) as a guaranty against deception of the public … Disassociated from merchandise to which it properly pertains, it lacks the essential characteristics which alone give it value, and becomes a false and deceitful designation. It is not by itself such property as may be transferred.²²⁴
This refusal to accept the disassociation of a trademark from the underlying business is consistent with the natural law theory on which trademark law originally was based. Trademarks were understood to indicate the actual source of or origin of the product or service with which it was used, and if the mark was assigned or transferred without the owner’s business, its use by others would not divert customers from the entity consumers had come to expect.²²⁵ Since, trademarks were not protected per se, but only as a proxy for an attempt to steal away business, separation of the mark from the underlying business destroyed its significance.²²⁶