Brands hit the courts - BD 2001

As though South African courts were not sufficiently busy dealing with our daily dose of murder, robbery and corruption, they could soon be asked to adjudicate a new class of transgression. If we follow the American and European trend, owners of established brands will be able to take competitors to court that dilute the value of their brand through either blurring or tarnishing.

In the context of our own unlawfulness, this may seem petty, but give a thought to the owner of brands such as Cadbury’s, MacDonald’s or Tastic. Over many years they have invested vast fortunes in building customer loyalty and reputation and developing household names and market leaders. These brands are valuable assets to which a monetary value can be calculated.

The brand equity that has been created is boasted about in annual reports and considered by financial market analysts in the same breath as an investment in a huge property development or new factory. Consumers, on the other, use the brand name as a signal of quality, trust andreliability for which they are willing to pay a premium price. What was once simply a registered trademark has been transformed into a resource that has in the past and will continue in the future to earn the company a rich stream of earnings.

Along comes a competitor offering a pint and three quarters of dairy milk in its chocolate slab, or calling itself MacRonald’s ride-in fastburgers, or FanTastic Rice that boils better in no time at all. Allowed to succeed, these robbers of intellectual property might win market share from the established leaders (nothing wrong with that), but will do so by riding on the relationships, associations and reputation that are the cornerstone of the famous brand’s success. In short, the usurper will dilute the original’s brand equity; the basis of the brand’s value.

In legal terms this brand equity dilution is measured by the extent to which the original brand is able to distinguish itself within its market. If this has been lessened by the actions of a competitor with a similar product so that consumers have become confused, litigation is justified. There are two levels of dilution: blurring the identity, which weakens the uniqueness of the trademark; or tarnishing its positive associations or reputation. Two dimensions are used to measure dilution: typicality and dominance. Typicality is the trademarks’ ability to stimulate recognition of the category. So if I say BMW you have to say luxury car. Dominance is the opposite. If I say luxury car you have to say BMW.

All of this has recently been the subject of discussions in articles appearing in academic journals on both sides of the Atlantic (Journal of the Academy of Marketing Science, Spring 1999, and The International Journal of Market Research, 1st quarter 2001). What stimulated the authors is a new act signed into law a few years ago in the USA. Called The Federal Trademark Dilution Act it is having quite an impact on the relationship between finance, law and marketing.

The reason for this is that survey data is needed to measure the confusion of consumers and the extent of the dilution. In one article it is claimed that it is now routine for both sides in an intellectual property litigation to offer surveys to buttress their cases. Another says that this places a heavy onus on the market research industry to produce data that the courts will find have not prejudiced the respondent by the way the questions are framed.

Trademark valuation in South Africa still suffers a hangover from the days when acquired goodwill could be set off against income tax. This was halted in November 1999 when SARS suspended the infamous and much abused tax act clause 11 g(A). The valuation techniques used then were crude and simple. Modern brand valuation methodologies, which take account of legal rights such as those that will increasingly be the subject of trademark dilution cases, incorporate marketing data. Increasingly companies will have to commission market research for more than the traditional marketing strategy purposes.

It is quite hard for some business people to acknowledge the role of market research in financial, taxation and legal matters, but as one of the articles concludes: “some courts look askance on a litigation party that does not submit survey evidence.” That elevates marketing to the big league.