The Zombie Trademark Business Model In Light Of Trademark Law Principles And Macy's, Inc. v. Strategic Marks, LLC
I Scope And Organization Of The Article
Companies like River West Brand LLC, The Himmel Group, Strategic Marks LLC and Aristide & Co. try to make money out of the revival of old famous brands. Their business method consists of finding out which famous brands have been abandoned by their owners. For these marks, such companies file an "intend-to-use" registration with the United States Patent and Trademark Office (USPTO). Often the application is combined with a petition to cancel a registration of the mark if it is still on the Register. The applications generally cover quite broad and vague descriptions of the goods. Once registration is complete, such companies attempt to "sell" these "marks" to the public. Because the mark, after abandonment, is in the public domain, the new owner is legally not required to use the mark on products with the same quality level that the public previously associated with the mark.
This business model came under attack when Strategic Marks registered a number of trademarks that it claims have been abandoned by Macy's, Inc. Strategic Marks petitioned to cancel the registered marks on abandonment grounds. It operates a website, www.retrodepartmentstores.com, advertising as its goal "to bring back the old shopping experiences and brands you remember." On this website, Strategic Marks uses the names and logos of nine brands, eight of which Macy's claims it still owns and uses. Strategic Marks applied to federally register marks identical to Macy's heritage marks for identical products and services. It plans to use the marks for online and retail department store services featuring items such as clothing and accessories, cosmetics and fragrances, jewelry, and home furnishings.
Macy's has sued Strategic Marks in the United States District Court for the Northern District of California. The action was brought for trademark infringement, false designation of origin, dilution, and unfair competition. Macy's alleged that Strategic Marks infringed a number of its "world famous marks."
Macy's moved for a preliminary and permanent injunction, seeking to stop Strategic Marks from using its heritage marks, any logo, trade name, trademark or service mark associated with Macy's. In addition, Macy's is asking that Strategic Marks remove the marks from its websites and business cards.
This article focuses on trademark law questions that arise out of what is known as the Zombie Trademark Business Model" and the pending Macy's, Inc. v. Strategic Marks, LLC litigation. Part II of the article gives a general overview of the policies underlying trademark law. Part III discusses abandonment under Section 45 of the Lanham Act, 15 U.S.C. § 1127. Part IV gives a small insight into case law discussing the doctrine of residual goodwill. Part V concludes this article.
II Policies Underlying Trademark Law
The primary goal of the Lanham Act is the protection of the public. S. Rep. No. 79-1333 (1946). The Senate Report states that the purpose of any trademark law "is to protect the public so it may be confident that, in purchasing a product bearing a particular trade-mark which it favorably knows, it will get the product which it asks for and wants to get." S. Rep. No. 79-1333 (1946).
Therefore, there are at least two important policies underlying trademark law: First, protecting consumers from being deceived as to the source or origin of goods. S. Rep. No. 79-1333 (1946). Secondly, reducing the consumers' search costs by making it easy and convenient for them to identify the particular product they are looking for. McCarthy, § 2:3; W. T. Rogers Co., Inc. v. Keene, 778 F.2d. 337, 38 (7th Cir. 1985). The likelihood of consumer confusion is for this reason the determinative factor considered by the examining attorney in the case of a trademark application and by the court in the case of a trademark infringement claim. Trademark protections also exist to protect the trademark owner's interest in his investment.
Under trademark law, non-usage of a mark can result in abandonment of the mark. Rights in a mark "grow out of its use" and are "not the subject of property except in connection with an existing 1979). Therefore, non usage can result in the loss of rights in the mark, or "abandonment," in the language of the statute. Abandonment is the very core of the Zombie Trademark Business Model because the model takes advantage of abandoned marks that are then in the public domain and free for everyone to use.
After abandonment, the mark can be used on any product, with any quality level. Nothing restricts the new owner to use the mark in connection with the product for which it has been used by its former owner. This is an asset for the new owner. An abandoned mark with a measure of consumer recognition saves time and money which the new owner would otherwise have to spend developing and marketing a new brand.
As stated above, rights in a mark arise out of its use. The Lanham Act requires that the mark is used in commerce. The statute defines the term "use in commerce" as "the bona fide use of a mark in the ordinary course of trade, and not made merely to reserve a right in a mark." 15 U.S.C. § 1127. The registrant not only has to show "use" when he applies for registration but he also needs to continue using the mark to keep his rights. 15 U.S.C. § 1058, § 1059. At a first glance, the question of non use seems fairly easily answered. However, courts have been struggling to determine whether an owner discontinued using his mark. In Procter & Gamble v. Johnson & Johnson, the court held that "broad statements of principle ... will not answer for a particular case since '(d)etermining what constitutes sufficient use ... (is) a case-by-case task ... (and) the balance of the equities plays an important role in deciding whether defendant's use is sufficient ....'" 485 F. Supp. at 1204 (quoting La Societe Anonyme des Parfums le Galion v. Jean Patou, Inc., 495 F.2d. 1265, 1274 n. 11 (2d Cir. 1974)).
Before the revision of the Lanham Act, so called "token use" was commonly accepted to fulfill the use requirement upon registration. The term "token use" refers to initial, one time sales made merely for the purpose of making the mark eligible for registration. Legislation tried to end such a mark." Report of the T.R.C., 77 Trademark Reporter 375, 395 (1987). Even though it was made clear that mere "sham" sales were not considered to be sufficient, a bottom line of what constitutes valid use is still far from being established.
Clearly, if use does not meet the pre-1989 "token use" standard, which was so much broader, than it will certainly not be sufficient to support "use" under the current law. McCarthy §19:111. But everything beyond that is a question of fact and requires a case by case analysis. The question of "token use" is important not only when it comes to registration, but since abandonment requires non use, this concept is also dispositive when it comes to the question whether abandonment in fact occurred. The case of Macy's v. Strategic Marks is an example of how difficult it can be to determine if a use is "use in commerce" under the Lanham Act.
Macy's Heritage Brands, those that allegedly were abandoned, consist each of three products: a shirt and two handbags. Each product is identical to the others with the exception of the branding of the mark. A handbag bearing the mark "The Broadway" is identical to a handbag bearing the mark Abraham & Straus, Bamberger's, The Bon Marché, Bullock's, Jordan Marsh, and so forth. The marks are sold over the website www.macys.com under "Macy's Brand Heritage" or "Nostalgia Shop." So, how would these brands fare under a "use in commerce" analysis? Given the way the products are aligned - 21 brands each having three identical products - it could be argued that this is simply a "trademark maintenance program" and that the marks thus do not qualify as use in commerce.
"Trademark maintenance programs" have been discussed by courts over the course of decades and have generally ruled that such programs are not sufficient to maintain rights in the mark. In La Societe Anonyme, French perfume manufacturer nn brought suit against Patou, an American perfume manufacturer, challenging defendant's ownerships rights in the perfume trademark SNOB for which defendant had obtained registration. See 495 F.2d. at 1265. LeGalion sold its perfume SNOB for years in a number of foreign countries but not in the United States, where defendant obtained registration for SNOB in 1951. See id.
Apart from the registration, however, Patou never made a serious effort. LeGalion claimed that Patou had never used the SNOB trademark sufficiently to sustain its claim of ownership. Patou, on the other hand, argued that 89 sales were all profitable and that the practice of reserving trademarks through trademark maintenance programs provided a legitimate excuse for the minimal use. The court agreed with LeGalion, and stated that "[a]doption and a single use of the mark may be sufficient to entitle the user to register the mark ... [b]ut more is required to sustain the mark against charge of non usage." La Societe Anonyme, 495 F.2d. at 1271 (citing Maternally Yours, Inc. v. Your Maternity Shop, Inc., 234, F.2d. 538 (2d Cir. 1956); Xtra, Inc. v. Warren Petroleum Corp., 175 U.S.P.Q. 660 (Trademark Trial and & App.Bd. 1972)). "To prove bona fide usage, the proponent of the trademark must demonstrate that his use of the mark has been deliberate and continuous, not sporadic, casual or transitory." Id. at 1271-72 (citing 3 Callmann, Unfair Competition, Trademarks & Monopolies § 76.2(d) (1969)).
The court concluded that the 89 sales were just a "meager trickle of business" which did not constitute "the kind of bona fide use intended to afford a basis for trademark protection." La Societe Anonyme, 495 F.2d. at 1272. The court further concluded that even if Patou managed to have a net profit of a few dollars on its sales of SNOB, "its use of the trademark would still not constitute good faith commercial exploitation." Id. at 1272. The court therefore held that Patou never put its product on the market in any meaningful way. Id. The court further stated that "carrying on trademark maintenance programs" was not "sufficient to establish rights to the SNOB mark." Id. at 1273.
The La Societe Anonyme court ruling is not unique. "Courts have uniformly manifested reluctance to consider usage sufficient when it is obviously contrived solely for trademark maintenance purposes." Id. at 1273. In a trademark infringement case involving two companies complaining of the other's use of the mark RUGGER or RUGGERS on sport shirts, the plaintiff decided to discontinue the RUGGER mark on its regular line of shirts and instead exhaust the remaining labels on promotional and close-out items which were supplemented with other shirts manufactured to fill in missing sizes in the inventory. Anvil Brand, Inc. v. Consolidated Foods Corp., 464 F. Supp. 474, 81 (S.D.N.Y. 1978). The court further concluded that the application of the label was not a "purposeful act of the merchandising management." Id. at 481. Combined with the minimal sales of between 80,000 and 120,000 shirts per year prior to giving up the mark on the regular line to fewer than 100,000 shirts in five years, the court concluded that the company in fact abandoned the mark. Id. at 481. Furthermore, the court then went on to state that "[t]he application of the label was merely to exhaust existing inventory and not a trademark use designed to identify the source of the garment and the good will of the manufacturer." Id.
The court in Macy's v. Strategic Marks may not rely solely on the number of sales generated, but will take this into account as a factor in determining if a "good faith commercial exploitation" exists. It will also take into account how much effort Macy's invests in advertising and promoting the marks or if Macy's at least has a concrete plan to commercially exploit the mark in the near future. Finally, it will balance the equities at issue and may take into account the intentions of Strategic Marks in appropriating the marks.
IV Zombie's Nourishment - Consumer Confusion and the Question of Residual Goodwill
Companies seeking to register and use or sell old marks are looking for marks with a measure of consumer recognition. The mark's recognition by the consumer is the purpose of reviving the old mark. The greater the consumer recognition, the more value the mark has. Consumers are drawn more to products that they already know and with which they have had positive experiences. McCarthy §2.18. "Humans have a psychological momentum to continue doing the same thing in the same way as was done in the past. Buying habits are no exception." McCarthy §2.18. Consumers are more likely to stick to the product or service they have experience with, which spares them the hassle of starting all over every time they shop. McCarthy §2.18. In addition to avoid starting all over, humans have some sort of "pull" toward something they already know. Known territory equals comfort. McCarthy §2.18. Establishing such a "pull" from scratch needs time, energy and most of all money by the mark holder.
Is riding on this consumer recognition after abandonment legally questionable? The statute does not explicitly prohibit benefitting of this psychological behavior. However, taking advantage of a consumer's connection with a mark is arguably inconsistent with the goal of the Lanham Act to protect consumers from confusion. A trademark is a source identifier. A revived mark by a new owner however is not identifying what the consumer thinks the mark is identifying. It will most likely take a while until the consumer recognizes that the source is not the original source. The product or service may not even have the quality or characteristics that it had before and for which the consumer knows the product. The consumer is therefore confused. Here lies the dilemma. One way out of this is taking into account the policy of residual good will in determining if a mark is abandoned.
But what is good will exactly? "'Good will' is not a tangible, physical object that can be seen, felt and tasted. Its real existence is in the minds of the buying public." McCarthy §2.17. "Good will is a business value" which indicates that consumers are satisfied with the product or service and willing to purchase it again. McCarthy §2.17. A trademark, besides identifying goods and services coming from a particular source, also identifies the good will of the business offering the product or service.
Trademarks and goodwill are therefore intertwined. McCarthy §2.15. A trademark "has no existence apart from the good will of the product or service it symbolizes." McCarthy §2.15. By the time the consumers recognize the product or service as not coming from the source anymore, there is no remaining good will in the mark and consumer confusion is not likely to occur. However, as long as there is residual goodwill, consumer confusion is likely.
Companies like Strategic Marks look for marks that are abandoned, which are free for them to use, and which carry residual good will. The remaining consumer recognition and the resulting fate of consumer confusion does not legally stop
them from using the mark once it has been abandoned. Therefore, the remaining consumer recognition should be taken into account when determining whether abandonment occurred. If there is a significant amount of consumer recognition and good will, this factor weighs against a finding of abandonment.
In Emergency One, Inc. v. American FireEagle, Ltd., a fire and rescue truck manufacturer stopped manufacturing fire trucks under the AMERICAN EAGLE brand but continued to provide exclusive warranty and repair services on AMERICAN EAGLE trucks and promoted the mark in various ways. 228 F.3d. 531 (4th Cir. 2000). The court held that "[b]ecause fire trucks have very long lives (often twenty to thirty years), the mark stays visible, and the good will value of the mark persists long after production of trucks with that mark has ceased. Thus, it might be reasonable for a fire truck manufacturer to spend five or six years considering the reintroduction of a brand, even though the same passage of time would be unreasonable for a maker of a more ephemeral product, say potato chips." Id. at 537.
In American Motors Corp. v. Action-Age, Inc., a registration for SCRAMBLER was opposed by American Motors because of its registered mark RAMBLER. 178 U.S.P.Q. 377 (T.T.A.B. 1973). American Motors sold over four million automobiles displaying the mark RAMBLER. It stopped employing the mark on its new cars. By the time of the opposition, more than two million RAMBLER cars were still registered for vehicle licenses in the US and approximately two hundred dealers displayed the RAMBLER sign in their windows. The Patent Office Trademark Trial and Appeal Board (TTAB) held that American Motors' residual good will in the mark meant that abandonment had not occurred. Id. at 378.
In Ferrari S.p.A. Esercizio Fabbriche Automobili e Corse v. McBurnie, the court also found that the mark had not been abandoned due to its residual good will. 11 U.S.P.Q.2d 1843 (S.D. Cal. 1989). Ferrari manufactured 127 convertibles in the name SPYDER. The car became popular under the name DAYTONA SPYDER due to its success at the Daytona Florida racing track. Ferrari ceased manufacturing the SPYDER car but continuously manufactured mechanical and body parts for the repair and servicing for its DAYTONA cars, and the DAYTONA SPYDER car was still driven at the time of the appeal. Id. at 1845. The court therefore concluded that Ferrari never intended to abandon its rights in or use of the DAYTONA SPYDER trade dress and had not abandoned its rights. Id. at 1849.
Zombie trademarks bear with them the problem that they are likely to cause consumer confusion. In order to prevent this from happening, courts should evaluate the measure of consumer recognition and the remaining good will as an integral factor in their abandonment analysis.
Nevertheless, total consumer protection is not possible. After abandonment, a mark is free to the public and nothing can prevent companies like Strategic Marks from adopting abandoned marks. Even though it seems morally problematic, it is well within the law. To avoid this practice of "cashing in" on consumer confusion, courts must carefully balance residual good will against the trademark law's requirement of use. A rights owner who lacks a genuine use in commerce cannot prevent others from using the mark.
It is clear that companies like Strategic Marks are looking for marks that have the most consumer recognition and therefore are likely to produce the most confusion. But it is also clear that Macy's is trying to protect its marks on a very tenuous basis. It will be interesting to see what arguments the court will put on the scale and how those arguments will ultimately be balanced.
Desiree Jaeger is currently pursuing her LL.M. degree in Intellectual Property and Information Technology Law at Fordham Law School. She is from Germany where she earned a law degree from the University of Bonn. During and after her law studies in Germany, she worked for PriceWaterhouse Coopers. Desiree worked in the entertainment industry for almost 10 years as an actress and producer. She is the founder of LLM-United, a professional online network for LLM alumni and current and prospective students around the world.