Valuing Residual Goodwill after Trademark Forfeiture

Abstract

Trademarks contribute to an efficient market by helping consumers find products they like from a sources they trust. This information transmission function of trademarks can be upset if the law fails to reflect both how trademark owners communicate through marks and how consumers understand and use them. But many of trademark law’s forfeiture mechanisms (the ways a trademark can lose protection) ignore or discount consumer perception. This failure threatens not only to increase consumer search costs and consumer confusion, but also to distort markets.

For example, trademark protection may be forfeited when the mark owner interrupts or abandons use, even though consumers still see the mark as identifying products from that owner. Or a mark may be forfeited if the mark owner licenses the mark for use without following certain quality control requirements, even if there is no evidence that licensees produce subpar products or disappoint consumers. As a result, a new seller can adopt a forfeited mark to identify its own products, even when many consumers will be confused by that use. If consumers think forfeited marks often identify products from the original mark owner, widespread reuse of forfeited marks can disrupt the ability of trademarks to transmit useful information to consumers.

Trademark forfeiture mechanisms operate like information forcing penalty default rules, but failure to account for consumer perception renders the information that they force incomplete. Those mechanisms should be readjusted to account for residual consumer goodwill – the likelihood that consumers reasonably associate a forfeited mark with the original owner. This Article proposes a framework for revealing and valuing residual consumer goodwill, and in the process, restores needed balance to trademark’s forfeiture mechanisms as new entrants jockey for market position by appropriating residual goodwill.

Keywords: trademarks, intellectual property, auction theory, signaling, abandonment, forfeiture, linguistics, naked licensing, assignment in gross, modification

JEL Classification: O3, O34, D44