Another business is ripping off your trademark? It may be tempting to run to the courthouse, but litigation isn't always the best solution.
Back in 2007, 16-year-old Jimmy Winkelmann was looking for a way to pay for college when--Eureka!--inspiration hit. With $5,000 in startup funds, his own savings and a match from his father, the Missouri teen created a spoof of outdoor clothier North Face. His brand, South Butt, flipped the North Face logo and tweaked the mantra. Instead of North Face's "Never Stop Exploring," South Butt encouraged wearers to "Never Stop Relaxing."
South Butt was a modest hit, earning $4,900 its first year. But North Face--which measures its sales in billions--wasn't amused by Winkelmann's cheeky enterprise. In 2009, it wrote a cease-and-desist letter, asking him to abandon his pending trademark application and discontinue use of the South Butt design mark and tagline. Winkelmann declined to comply.
Then the letter hit the blogosphere. In defending its intellectual property, North Face inadvertently launched South Butt to stardom. According to ABCNews.com, Winkelmann's entire inventory sold out 24 hours after media coverage began.
It's not surprising that businesses such as North Face are fiercely protective of their intellectual property. Trademarks, patents, copyrights, trade secrets and the like take plenty of time and money to develop and are generally considered an integral part of a company's value. According to a 2007 publication by the Arlington, Va.-based nonprofit World Growth, "two-thirds of the value of America's large businesses can be traced to the intangible assets that embody ideas, especially the intellectual property (IP) of patents and trademarks."
IP theft isn't uncommon. In 2009, the U.S. Chamber of Commerce's Global Intellectual Property Center estimated the cost to U.S. companies at $200 billion to $250 billion annually in lost revenues. And if businesses feel their property is threatened, they aren't afraid to litigate: According to Baltimore-based advisory firm FTI Consulting, 8,966 trademark, patent and copyright cases were filed in U.S. District Courts last year.
Mueller Smith & Okuley managing member John Okuley says he understands why North Face was no fan of South Butt. "And, you know, maybe they have a leg to stand on, but what happened was the guy used it as advertising. It made something that was unknown suddenly become known to everybody because North Face was tough about it."
North Face's story illustrates one of the challenges for businesses' management of their IP portfolios. In order to receive continued legal protection for IP such as trademarks, a trademark holder must actively protect itself against unauthorized use. But if the matter isn't approached with care, a business can easily find itself trapped in a PR nightmare or embroiled in an expensive legal battle. For that reason, experts suggest a thoughtful approach to IP protection and enforcement.
The Best Defense
Generally speaking, a company's IP portfolio consists of some combination of patents, trademarks, copyrights and trade secrets. Patents cover inventions for up to 20 years. Trademarks protect words, names, symbols, sounds or colors that distinguish goods and services, and can be renewed as long as the holder is in business. Copyrights protect original literary and artistic expression fixed in a tangible form. Trade secrets are pieces of information that provide companies an advantage over competitors (think KFC's proprietary blend of herbs and spices or the recipe for Coca-Cola).
The law treats each of these pieces of IP differently. For instance, although it's best to register a trademark with the U.S. Patent and Trademark Office, a business doesn't have to do so to have rights to it. Common law protection is available as long as the mark is properly used. Still, federally registered trademarks receive greater protection.
Similarly, under basic copyright law, a work is created whenever it is fixed in a tangible medium of expression. Copyright notice--that c-in-a-circle symbol, year of publication and author name--isn't required, but is beneficial, as it offers a visible warning that the work is copyright-protected. The presence of a copyright symbol can also prevent a defendant in a copyright infringement suit from claiming he was an "innocent infringer." Copyright registration helps create a public record of a copyright and also gives holders the ability to bring action in federal court.
What to do if you discover a company is infringing on your IP? The first step should be research. The findings will dictate what to do next. "With respect to copyrights and trademarks, some of it depends on who the parties are and the relative size and strength and extent to which the intellectual property is being used," says Holly Kozlowski, a Cincinnati-based Porter Wright Morris & Arthur attorney who leads the firm's IP practice. "Sometimes unauthorized uses are innocent and some of them are not, and some of that will dictate how the situation is handled."
"It all depends on what the kind of relationship between the two
companies is. Is it a small startup company that started using your name and you don't like it? Well in that case, maybe just [send] a simple letter letting them know you claim rights to it, that ‘Maybe you want to think twice about this.' If it's a big company and they're maybe starting a big advertising campaign, you might need to be more proactive and say, ‘Look we need to get this settled right away or we're going to have some serious problems,' " says Okuley.
Ideally, prior to any troubles, a business should set up an IP review committee that is well-versed on its intellectual property portfolio. Pre-existing strategies and policies strengthens a company's hold on its IP, says Kremblas & Foster attorney Yimei Chen Hammond. "A lot of IP--for example, trademark--if you do not perform due diligence and keep on checking to see if somebody infringed, and take action if they do infringe, you lose your IP rights."
After some amount of sleuthing--but before making contact with the alleged infringer--a business should consult an attorney. "Sometimes it's appropriate after that consultation is made for one business to contact the other. Sometimes it's more appropriate for the contact to be made by an attorney. But I think it's important before contact is made that the intellectual property owner understands the extent of their ownership rights and the different avenues for enforcing their intellectual property," says Kozlowski.
Business owners should do their best to remove emotion from the equation, especially because defending IP can be an expensive proposition. "Flying off the handle and sending angry emails--although they have their place--many times, they aren't productive," says Okuley.
Before jumping into legal action that could easily run into the six figures, businesses would be wise to consider the actual value of their intellectual property. "It's not a small consideration for companies to think about how they might defend a particular trademark before they put it into wide use, because if you have 20 trademarks and it costs you $10,000 to make someone else stop using it, you don't want to do that for all 20 once a year, or once every five years. But if you have a handful of very good trademarks that you defend aggressively, then you don't have as much territory that you're forced to enforce," says Okuley.
A company should "do what is logical from both a business and a legal standpoint, because the right business decision is not always the right legal decision, and vice-versa," says Jim Eley of the Eley Law Firm. He says executives should also take public perception into account when calculating their next steps: "Sometimes it might make more sense just to put them on notice and then back off, because the long-term threat may not end up being as serious as you thought it was, and then you end up blowing things out of proportion."
Depending on the circumstances--and if a relationship already exists between the parties--a business may call the offending party and ask them to stop using the IP in question. "In many cases, the initial communication can be cordial, and a good businessman will work out problems without making it worse," says Okuley. "If you can't work things out, you have to make a business decision on whether a trademark is valuable enough to take steps to enforce it. So your next step might be to send them a cease-and-desist letter and talk to them about how they're to change their advertising or stop using the trademark."
Cease-and-desist letters are, as the name suggests, intended to persuade someone to stop his or her activities immediately. But as the North Face case shows, there's no guarantee that email or even snail mail will remain private, especially when a worldwide audience is only a click away. And, says Kozlowski, it's not likely to be a magic bullet anyway. "I would say rarely is that letter in and of itself enough to obtain the action you're looking for," she says. "Sometimes it works, but a lot of times you may need more communication back and forth among the parties."
Tread carefully: The content of a cease-and-desist letter, if not well-considered, also could provide the other party with ammunition against you. "That's another very good reason why you should consult with an attorney before you take any steps to enforce your intellectual property, because you don't want to make any accusations that aren't well-founded; you don't want to understate your case or overstate your case. You want to make sure you've got a reasoned position before you approach what could be an adversary in a legal proceeding and is obviously a business competitor in some realm, or you wouldn't be taking this action in the first place," says Kozlowski.
Hammond says before sending a letter, a business should know exactly what end result it wants. Litigation? Cash? If so, how much? "If you're not sure where you're going to go, your tone may provoke action that you do not participate in," Hammond says. For example, a licensing request letter could be interpreted as a letter for possible litigation. "They could use that for litigation, basically declaration that your patent is invalid. You gave them a foothold, so you need to be careful."
"In many cases the initial stages, pre-litigation, are enough to get people to act within the law. Because the other side, the potential infringer, if you make them aware of the possible consequences of continuing, they're going to make a business decision also whether it's more prudent to cease the activity or change the trademark or to fight over it. If they talk to their attorney, they'll get similar numbers to what someone who is trying to enforce their rights will hear," says Okuley.
Take It to Court
Apart from mounting legal bills, there's another potentially costly aspect to litigation: losing your IP altogether. For example, a business litigating over patent infringement will see its patent closely scrutinized, which could lead to the patent being invalidated, Hammond says.
"Quite often, it is necessary to file suit just to get the attention of the alleged infringer--but again, there needs to be a financial reason for doing so. The intellectual property needs to be important to the owner and there needs to be a measurable amount of damages that are occurring because of the infringing use," says Kozlowski.
In 1997, Donatos Pizza was unhappy with Pizza Hut's plans to unveil a new pizza, "The Edge," in a pricey Super Bowl advertisement and $55 million marketing campaign. Donatos, which since 1988 had used "Edge to Edge" to describe its pizza toppings, immediately went to court to prevent the Dallas-based chain from using the term. A judge agreed, prohibiting Pizza Hut's use of "The Edge" in the five markets where Donatos did most of its advertising. But some ads still aired.
Ultimately, an agreement between the pizza purveyors included an undisclosed payment from Pizza Hut to Donatos for cash damages and an agreement that Pizza Hut could use "The Edge" to market itself, while Donatos would hold on to "Edge to Edge." Says Eley, then an attorney with Kegler, Brown, Hill & Ritter who represented Donatos, "It was hard to quantify. ... But since the genie got out of the bottle, we had to come up with some sort of equitable relief."
Donatos spokesman Tom Santor says the company actively protects its IP, including the Pizza Hut case. "For over 48 years, we have worked diligently and invested millions of dollars into building the Donatos brand. Thus, protecting the unique ideas and proprietary processes that have played an integral role in defining our brand is crucial to the ongoing success of our company."
As the Donatos case illustrates, even when the stakes are high, it's possible to find a resolution outside of a jury verdict. Licensing is a common way to do just that. "Sometimes when one company will license intellectual property, it gives them a little more control than they would have in the absence of any license," says Kozlowski. Through licensing agreements, an IP holder can have greater control over what markets the competitor can enter. "We try to tell our clients there are definitely some situations that need to be litigated, but if you can reach a business resolution that you can give and take a little bit, and the other side can give and take a little bit, probably more than 50 percent of the time, you're going to reach a better resolution than you would in litigation," she says.
Companies must quickly come to terms with the expense of defending IP, says Eley client Steve Funk, president of Hilliard-based Vanner Inc., which makes power conversion and battery products for vehicle manufacturers. "When I say expensive, I'm saying hundreds of thousands of dollars before it even got to court, so you really have to prepare yourself and make sure you're financially able to prosecute that sort of lawsuit," he says.
In the mid-1990s, Vanner discovered someone was violating its patent. The case "got pretty far. We were getting pretty close to court, and then when you looked at what it was going to cost and what our loss was, it was almost equal, so the gain we were going to get was just going to go to the attorneys, so it was a good time to stop. ... You need to take emotion out of it, and that's sometimes hard to do, especially if it's your invention."
For South Butt founder Winkelmann, who was sued by North Face, things ended with an undisclosed settlement agreement in April 2010. In February, the Columbia Daily Tribune reported that the University of Missouri student was working on a new brand, "Olop," or "Polo" spelled backward. Winkelmann told the newspaper his previous venture had been a financial success: "Thanks to South Butt, I can pay for my college tuition and probably medical school."
Jennifer Wray is a staff writer for Columbus C.E.O.
Reprinted from the November 2011 issue of Columbus C.E.O. Copyright © Columbus C.E.O.