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Free-riding on the repute of trademarks – Does protection generate innovation?

On April 9-11, 2015, we had the opportunity to participate in the 16th EIPIN Congress held at the European Patent Office and at the Max Plank Institute for Innovation and Competition. On the second day of the Congress, we had a module on ‘The Need to Limit the Scope of Intellectual Property’ where we had the pleasure of listening to Prof. Ansgar Ohly.

The speaker began the session by explaining how innovation is normally associated with patents – which create a financial motivation for invention in return for the disclosure of the invention to the public[1] – and copyright – by promoting creativity through the attribution of exclusive rights to creators. It is not the case with trademarks, whose rationale is more connected with the protection of consumers by capacitating them to make informed decisions in the marketplace.

Free-riding

The term ‘free riding’ is often described as one of the component of unfair competition. According to the World Intellectual Property Organization (WIPO), free riding is defined as ‘any act that a competitor or another market participant undertakes with the intention of directly exploiting another person’s industrial or commercial achievement for his own business purposes without substantially departing from the original achievement’[2]. The argument of free riding was raised in L’Oreal v Bellure[3], where the Court of Justice of the European Union (CJEU) ruled that ‘free riding per se shall be prohibited’ and that ‘taking unfair advantage (intentionally clinging to the coat tails of trademark’s owner mark) is synonymous with ‘parasitism’. Furthermore, according to the Court’s ruling, ‘parasitism’ refers not to the detriment caused to the mark but to the advantage taken by the third party as a result of the use of an identical or similar sign’.

Link with innovation

Professor Ohly proposed to analyse whether trademarks are indeed dissociated from innovation. In a landmark opinion delivered in in the Sirena case[4], Advocate General Dutheillet de Lamothe observed that trademarks may not be necessary to promote innovation, noting that ”a trademark right is distinguishable in this context from other rights of industrial and commercial property, inasmuch as the interests protected by the latter are usually more important, and merit a higher degree of protection, than the interests protected by an ordinary trademark” (para. 7). However, and in contrast, innovation is mentioned as one of the goals of the trademark reform currently under discussion at the European Union, on the occasion of the adoption of the Council common position last July[5].

Thus, it appears that the issue is not as straightforward as one could think. In this context, Professor Ohly analysed why trademarks are different from other intellectual property rights with respect to innovation: first, the “invention” of trademarks is often not a creative activity – many trademarks are not even invented/created and already exist even if not as a trademark per se. Second, the economics associated with trademarks are different as the attribution of exclusive rights to their holders does not generate an incentive to the creation of other trademarks. However, trademarks play a very important role regarding competition in the market and thus they can be an important tool (even if not directly) in companies’ ability to innovate. Indeed, by establishing a channel of communication between their owners and consumers, trademarks are essentially about competition: they allow consumers to distinguish between competitors; they lower consumer search costs and they allow trademark owners to establish goodwill in the market.

In the context of these functions performed by trademarks and in particular their traditional function of indicating origin, reference was made to George Akerlof’s 1970 paper ‘The Market for Lemons: Quality Uncertainty and the Market Mechanism’ and the market failure identified therein: sellers often mischaracterize their goods as having only good qualities, hiding the undesirable aspects. Trademark law plays an important role in addressing this potential market failure as their traditional function of indicating origin allows consumers to overcome the mentioned uncertainty and make rational, informed choices when acquiring goods in the market.

Trademark functions

The main question, whether trademarks could function against innovation, was addressed by using some notorious examples of latest European trademark practice. In the case of L’Oreal v Bellure, the speaker emphasized the problem of referential use of a competitor’s trademark. In fact, such a use, initially seen as a necessary tool for promoting innovative products, was qualified by the CJEU as trademark infringement, referring to the extended functions of a trademark. The second example was the case Google v France[6] which clearly problematized the use of the innovative business model of keyword advertising. Not only new business models could potentially be stopped by current trademark practice, but also new monopoly rights could be created: 3D-trademarks can be a good illustration of such impediments for potential innovators.[7]

Therefore, trademarks have a different goal, rather than rewarding creators or creating direct incentives for the inventor, they guarantee market transparency, protecting clear channels of communication between innovative products and consumers. Nevertheless, extended protection of trademarks could create obstacles to innovation and thus the public interest – in particular the public interest of referring to a trademark in commercial or non-commercial speech – should be balanced against the interests of trademark holders. In this context, Prof. Ohly suggested that more defences are introduced in trademark law so that a fair balance can be properly achieved.

By Carolina Oliveira, Alena Kapachova, Pratyush Nath Upreti


[1] World Intellectual Property Organisation (WIPO), “R&D, Innovation and Patents”, Available at http://www.wipo.int/patent-law/en/developments/research.html.

[2] WIPO, Protection Against Unfair Competition 55 (1994) WIPO Publication No. 72.

[3] C-487/07, L’Oreal SA v Bellure.

[4] Case 40/70, Sirena Srl v Eda Srl and others [1971].

[5] It was expressly observed that “the reform is also aimed at fostering innovation and economic growth by making trademark registration systems all over the European Union more accessible and efficient for businesses in terms of lower costs and complexity, increased speed, greater predictability and legal certainty”. Council of the European Union, “Trademarks reform: agreement on Council common position”, Press Release ST 12130/14 PRESSE 425, Brussels, 23 July 2014, Available at http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/intm/144127.pdf.

[6] C-236/08 – C-238/08 Google v France.

[7] C-48/09 Lego, T-508/08 Bang & Olufsen.


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