When the Gloves Come Off: Signaling Toughness through Private Trademark Litigation

Abstract

This research explores the role of a tough reputation in protecting a trademark against future infringement in markets where government enforcement is weak. Incumbents' tough reputation can convey to potential counterfeiters that they would sue upon entry, thereby deterring infringement activities. We explore this idea empirically in the context of pharmaceutical trademarks in India. We construct a database capturing trademarks, litigation activity, and other market variables constituting about 100,000 monthly observations from 2007 to 2013. Our findings, supported by IV estimation, indicate that an incumbent's tough reputation reduces subsequent infringement and increases competitors' trademark differentiation, especially in lucrative markets. We also underscore that developing such a tough reputation can be extremely costly and may not be justifiable for all trademark-holding firms. Given this, some firms are better off surrendering to infringers and incurring a cycle of settlements with future infringements. Overall, our evidence indicates that an incumbent's tough reputation can be an effective non-market strategy in weak IPR regimes, offering insights into safeguarding intellectual property and enhancing consumer welfare.

Keywords: Trademarks, Reputation, Litigation, Intellectual Property Rights

JEL Classification: O34, L140, K42