The Merchandising Right: Fragile Theory or Fait Accompli?

Abstract

Trademark merchandising is big business. One marketing consultant estimated the global market for licensing and marketing sports-related merchandise at $17 billion in 2001. With this much money at stake, it's no surprise that trademark holders demand royalties for use of their marks on shirts, key chains, jewelry, and related consumer products. After all, the value of these products comes largely from the allure of the trademarks, and it seems only fair to reward the party that created that value . . . doesn't it?

It turns out that the answer is more complicated than this intuitive account would predict. Trademark law historically has existed primarily to protect against the consumer deception that occurs when one party attempts to pass off its products as those of another. From an economic and policy perspective, it is by no means obvious that trademark holders should have exclusive rights over the sale of products that use marks for their ornamental or intrinsic value, rather than as indicators of source or official sponsorship. Trademark law seeks to promote, rather than hinder, truthful competition in markets for products sought by consumers; if a trademark is the product, then giving one party exclusive rights over it runs in tension with the law's pro-competitive goals, frequently without any deception-related justification. On the other hand, there may be circumstances in which consumers expect that trademark holders sponsored or produced products bearing their mark, in which case use of the mark by others - even as a part of a product - might result in genuine confusion.

Given these complexities, together with the economic interests at stake, one might expect that the law and practice of merchandising rights would be well-settled and reflect a considered balancing of the interests of trademark holders and their competitors. In reality, however, much of the multi-billion dollar industry of merchandise licensing has grown around a handful of cases from the 1970s and 1980s that established merchandising rights with little regard for the competing legal or policy concerns at stake. Those cases are far from settled law - indeed, at least as many decisions decline to give trademark owners the right to control sales of their trademarks as products. We think it is high time to revisit that case law and to reconsider the theoretical justifications for a merchandising right.

That review provides little support for trademark owners' assumptions about merchandising. Doctrinally, the most broad-reaching merchandising cases - which presumed infringement based on the public recognition of the mark as a trademark - were simply wrong in their analysis of trademark infringement and have been specifically rejected by subsequent decisions. Philosophically, even a merchandising right that hinges on likelihood of confusion raises competition-related concerns that should affect courts' analysis of both the merits and appropriate remedies in merchandising cases. Perhaps most importantly, recent Supreme Court case law suggests that, if it had the opportunity to evaluate the merchandising theory (something it has never done), the Court would deny the existence of such a right. Further, the Court would be right to do so. When a trademark is sold, not as a source indicator, but as a desirable feature of a product, competition suffers - and consumers pay - if other sellers are shut out of the market for that feature.