While Aereo is liquidating, is the "Innovators' Dilemma" still alive and kicking?

After a high-profile IP case is decided by the courts, there tends to be little interest about what happens to the parties post-judgment. This is so, even when the losing party is a defendant that tried to disrupt an industry in a media-savvy way, but ultimately fell foul of an adverse judicial decision. An excellent case in point is the Aereo copyright litigation, which ended in June 2014. As readers will likely recall, Aereo was in the business of streaming over-the-air broadcast signals to customers via the internet, whereby each customer had its own tiny dedicated antenna from which the content was then transmitted to customers. No royalties were paid the broadcast providers for their content. All in all, Aereo’s business model was reasonably simple. The basic package was $8 per month to access the personalized antenna and 20 hours of DVR storage, with the option to pay an additional $4 of month for 60 hours of DVR storage. Compare these fees with the $80 a month charges for cable.

Broadcasters challenged this arrangement, alleging copyright infringement. The 2nd Circuit Court of Appeals ruled in Aereo’s favor, finding that no copyright infringement had taken place. The United States Supreme Court disagreed, ruling that Aereo’s scheme did infringe the U.S. copyright laws and ordered Aereo to stop making further use of their system. The decision put paid to the business model that had been employed prior to the Supreme Court decision. Aereo did not throw in the towel and tried to reconstitute itself as a cable company. However, in October a judge in New York approved a ban that prohibited the company from retransmitting live TV broadcasts.

Several weeks later, in November, the company filed for bankruptcy protection under Chapter 11 of the bankruptcy law, which is intended to enable a company to restructure its operations under court protection. However, on December 24, 2014 the U.S. Bankruptcy Court in Manhattan ruled that Aereo can go forward with the sale of its assets via an auction, which indicates that the company will be liquidated. Significantly, the court issued its ruling only after it reached agreement with certain major broadcasters, including CBS, Comcast, ABC and Fox, who will be allowed to attend the auction. As well, Aereo undertook to provide these broadcasters with a weekly update on the progress of the auction process.

The question immediately jumps to mind: why are the broadcasters so interested in monitoring the liquidation of Aereo’s assets? After all, the Supreme Court effectively shut the company down; what difference will it make to the broadcasters to whom and under what circumstances the company’s remaining hard assets are put up for sale ? The answer seems to lie in the fact that these broadcasters are concerned that the purchaser of these assets could use them as the springboard for another attempt to transmit content to end users without paying the content providers. This is so, even if the company itself has undertaken before the court that it will not recommence such activities in the future.

The concern expressed by the broadcasters is particularly interesting in light of the apparent disdain they have shown for the Aereo business model. Thus CBS chief executive Les Moonves is reported to have said in August 2014 that while Aereo attracted “a lot of attention for a service that virtually no one was using.” More generally, commentators wondered just how many people would ever sign up for the service, given that the broadcast signals are anyway free if one simply uses an appropriate antenna. But even if Aereo was a mere gnat in the firmament of television broadcasting, it was enjoying much more rapid growth than other content distribution channels. The Wall Street Journal estimates that Aereo had 108,000 subscribers in 14 cities when it closed down in June. This number pales in comparison with the reported 35 million subscribers at Netflix and Comcast’s base of 22.5 million. But Aereo’s rate of growth gave the industry pause for concern.

After all, Clayton Christensen’s iconic analysis on disruptive technology, The Innovator’s Dilemma, focused on new technologies being developed on a small scale and seemingly posing no threat to the entrenched industry. Even after the Supreme Court decision, perhaps the broadcasting industry has the “innovator’s dilemma” in mind as it seeks to bear careful watch on how Aereo’s assets will be disposed of.

Will online distribution of movies provide a Hollywood ending for Nollywood's distribution woes?

For more than a decade, the film industry continues to wrestle with the challenge of online distribution of its content, which
poses a tripartite threat to the existing business models. At once, online distribution is viewed as leading to a decline in cinema attendance as well as to a decrease in the sale of DVD copies for home viewing. If that were not enough, the ease by which unauthorized online copies can be made only serves to exacerbate the double whammy to both less cinema viewing and fewer DVD purchases. It may come as a surprise, therefore, that not everyone in the film business has the same wariness of the online environment. Indeed, at least one prominent national film industry may be seeking its commercial salvation in the online distribution of its contents. No, we are not talking about either Hollywood or Bollywood, but about a rival national film industry that is the second largest world-wide measured by the number of films produced on an annual basis, and the third largest as measured by revenues, namely the film industry of Nigeria, popularly known as Nollywood.

First some statistics: Nollywood produces 50 new film titles every week and the industry is said to constitute 1.2% of the gross domestic product of Nigeria. In a vast country with a pressing need to diversify its economy beyond the oil patch to provide jobs for its young and dynamic work force, Nollywood employs over one million employees. The problem, as described in a recent article that appeared in The Economist, “Selling BlackBerry Babies: Nigeria’s film industry”, is that its current business model, especially the means of distribution of DVD copies (which constitute 90% of revenues), is not up to the task. Consider the anecdotal description set out in the article: hawkers weave between vehicles on crowded Lagos streets, seeking to sell their DVD Nollywood wares for the equivalent of two or three dollars. How many copies does the vendor sell in a day: on a good day, up to five, but things are slow, maybe as few as one or two. Add to that the fact that the sale of pirated copies is rife.

Even at the typical low production cost of $40,000 and a mere ten-day production schedule, it is extremely difficult to make much money from any given single movie. Improving movie quality, which necessarily means increasing the production budget, does not provide a direct solution to the problem, because reliance on DVD sales and the limitations on physical distribution, as described above, do not lend themselves to increasing both pricing power and sales volumes. A better Nollywood movie product in and of itself is not answer. In the words of Obi Emelonye, a film director: “Distribution is hands down the biggest problem…. Solve that, and Nollywood will explode.” But what will be the catalyst to find a solution to this problem of distribution? Nollywood seems poised to rely more and more on on-line distribution via the internet.

Particular note is made of iROKOTV, which has a repertoire of about 5,000 film titles available for streamed viewing. iROKOTV is reported to pay between $8,000 and $25,000 for a film for a limited period of time. These sums, in the words of Mr Emelonye, have “absolutely” improved the profitability of his film business. Not only that, but streaming enables film producers to reach viewers seeking Nollywood contents outside of Nigeria. Indeed, it is reported that iROKOTV has more viewers in London than in Nigeria.

One might retort that the current state of electric power distribution and low levels of computer ownership in Nigeria serve as a powerful glass ceiling on expanding online distribution of contents in the country. Not necessarily so—as with banking services, particularly in East Africa, the smartphone provides a potential distribution device for online movies that will simply by-pass these current limitations. In the words of the piece, use of smartphones in this manner “is a mouth-watering prospect.” Time will tell to what extent these aspirations for leveraging on-line distribution will succeed in putting Nollywood on a more viable commercial footing. Even at this early stage, however, reliance on the oft-perceived enemy of the film industry—the internet and online distribution—is itself a fascinating reversal of accepted common commercial wisdom.

More on Nollywood here

STR-IP takes off

According to a media release recently received by this blogger concerning STR-IP -- that stands for "Startup-IP Program -- a new product from Foresight Valuation Group (an intellectual property strategy and startup advisory business). This is

" ... a new initiative aimed at helping technology startups build an IP portfolio that is aligned with their business goals and that would enhance their valuation. STR-IP is particularly important for startups in IP-rich industries ranging from the Internet of Things (IoT) segments such as wearables, automotive and home automation, to material sciences such as Nanotechnology. Foresight’s capabilities at the nexus of technology, IP and valuation, as well as its location in Silicon Valley, uniquely position it to help startups build an IP portfolio that would assist with their overall market success.

New patent laws in the US under the “First to File” regime, recent Supreme Court decisions, as well as the increased risk of patent litigation, make it absolutely critical for a startup to start building its IP portfolio as early as possible. Foresight’s STR-IPTM program provides startups with a structured approach to aligning their IP strategy with their business model and financial projections.
...

This is a brainchild of Efrat Kasznik (Foresight’s president and founder, Lecturer on IP strategy at the Stanford Graduate School of Business and a one-time guest contributor to IP Finance); we shall be keeping an ear out for news of STR-IP's progress,

The Secret to Start-up Success: Secure IP from a Local University?

Angel investor and founder of inBounce Entrepreneurship Bijan Khosravi makes several important points in a recent article in Forbes titled, “Why You Want IP for Your Startup.”  First, Mr. Khosravi points out that IP, particularly patents, provide a competitive advantage.  Sure, you have a great idea, but competitors are essentially free to copy that idea without IP protection.  The first mover advantage may not be good enough, especially if you need time to expand to other geographic markets.  This seems to be particularly true in the age of Rocket Internet.  Second, Mr. Khosravi points to local universities as great sources of intellectual property for startups.  He points to the Association of University Technology Manager’s search engine for finding university technology [here, http://gtp.autm.net/].  He provides his own successful example of securing patents from University of California, Davis.  [Hat tip to Glen Gardner at Vortechs Group.]

IP Issues in Mergers and Acquisitions: Any Recent Examples of Due Diligence Failures Involving IP?

Corporate Counsel has published a pair of informative articles concerning due diligence and intellectual property.  The first article is titled, “Identifying IP Risks in M&A and Tech Joint Ventures: Beyond the Data Room”, by Anne Cappella, Charan Sandhu and Brian Chang of Weil, Gotshal and Magnes.  The second article is titled, “The Financial Impact of IP Issues in M&A,” by Steve Ball and Jon Winter of St. Onge Steward Johnston & Reens.  Both articles provide useful advice designed to help counsel avoid missing intellectual property issues during due diligence.  The overarching message is that corporate counsel should include intellectual property specialists in any due diligence of a potential target.  Both articles raise specific points that should be considered such as: proactively examining a target’s competitors to ascertain whether patent trolls have litigated against the target’s competitors to determine if your target is next; considering potential trade secret misappropriation actions by competitors of the target based on new hires by the target; ensuring that third parties who have worked with the target have not improperly claimed intellectual property possibly owned by the target; having clear title to intellectual property; and properly recording title.  The second article provides a couple of examples where intellectual property counsel were not consulted or there were intellectual property issues missed in the due diligence.  One problem involved Rolls Royce and BMW:

[I]n 1998 the Volkswagen AG Corporation purchased the automobile assets of the bankrupt Rolls-Royce Motor Cars Limited for $790 million, with the value of the physical assets estimated at $250 million. Volkswagen was unaware that Rolls-Royce’s trademark rights were subject to a nontransferrable license from Rolls-Royce Aircraft. Volkswagen purchased the plant, the machinery and the automobile designs from Rolls-Royce, but only learned after the deal that the purchased assets did not include the Rolls-Royce® trademark. So while Volkswagen was able to build the car, it could not brand it with the famous trademark. BMW then acquired the trademark rights for $65 million from the bankrupt Rolls-Royce Aircraft and forced Volkswagen to concede the brand, resulting in a huge windfall for BMW.

The most recent example included Apple’s acquisition of Beats Electronics:

Apple Inc. agreed to acquire Beats Electronics for $3 billion. In doing so, Apple purchased an infringement suit by Bose Corporation, which owns a number of patents directed to noise-cancelling headphones. After the deal was announced, Bose filed infringement suits in district court as well as at the International Trade Commission seeking to ban imports of the Beats headphones into the U.S.

I have to imagine that Apple’s counsel knew they were likely to be sued by Bose Corporation.  Are there any more recent public examples of IP failures in the due diligence before merger or acquisition with a target company? 

The future of the UK Patent Box -- or is it the Nexus: what's the real story?

There's a very helpful client alert from Baker & McKenzie, "IP Tax Regimes (including the UK Patent Box) to be abolished and replaced by new "Nexus"- based regimes", which gives a good account on the fate of the UK's Patent Box. Has it been saved, killed, or modified, people ask. This alert gives the story:

On 11 November 2014, the UK and Germany made a joint announcement about a proposal they had developed to address some of the concerns raised over the OECD's suggested approach to dealing with preferential IP tax regimes.

The likely outcome is that the UK will need to modify its patent box rules, but there is a long grandfathering period, under which benefits from the patent box (and regimes in other countries) can continue to be claimed until June 2021. The regimes will close to new entrants from June 2016, and will be abolished in June 2021.

One of the Actions in the OECD's project to counter Base Erosion and Profit Shifting (BEPS) is on Countering Harmful Tax Practices More Effectively (Action 5). In September 2014, the OECD published a report on Action 5, stating that its Forum on Harmful Tax Practices (FHTP) would be focusing on ‘substantial activity’ in the context of IP tax regimes. The OECD's preferred approach, supported by a majority of OECD member countries, was to require a direct nexus between the income receiving tax benefits and the expenditure contributing to that income. This "Modified Nexus Approach" would require substantial economic activities to be undertaken in the jurisdiction in which the preferential regime exists, by requiring tax benefits to be connected directly to R&D expenditures.

The UK, Spain, Luxembourg and the Netherlands did not favour this approach. The nexus approach was also criticised on the basis that it would create a major compliance burden in tracking the relevant expenditure. Germany has long been a critic of IP tax regimes (including the UK patent box) on the basis that they distort competition. Germany does not have an IP tax regime of its own, although a German Government Minister did say recently that they might consider introducing one.

There's more in the alert, which end with a link to the joint UK-German proposal, which IP Finance reproduces here:

GERMANY-UK JOINT STATEMENT

Proposals for New Rules for Preferential IP Regimes

The Governments of Germany and the United Kingdom are fully committed to ensuring that the G20/OECD Base Erosion and Profit Shifting (BEPS) project is successfully concluded by the end of 2015. This requires all countries involved in the negotiations to work to ensure that progress is made on all of the Actions set out in the BEPS Action Plan agreed by G20 Finance Ministers in July 2013. 

The OECD Forum on Harmful Tax Practices (FHTP) has led work in relation to BEPS Action 5, Countering Harmful Tax Practices More Effectively, Taking into Account
Transparency and Substance. Work within the FHTP has led to the development of proposals for new rules, known as the Modified Nexus approach, based on the location of the R&D expenditure incurred in developing the patent or product. This approach seeks to ensure that preferential regimes for intellectual property require substantial economic activities to be undertaken in the jurisdiction in which a preferential regime exists, by requiring tax benefits to be connected directly to R&D expenditures.

In order to take forward these negotiations, Germany and the UK have co-operated to develop a joint proposal for the consideration of the G20 and OECD member countries in the FHTP. This aims to resolve the concerns countries have expressed about some features of the Modified Nexus Approach, and identify what further work is required in order to enable agreement to be reached on this issue during 2015. Concerns have been expressed about how to calculate qualifying R&D expenditure, transitional arrangements between regimes and time allowed for this through grandfathering provisions, and the tracking and tracing methodology for R&D expenditure that will determine whether it qualifies.

The proposal is based on the following elements, which seek to address the concerns that have been raised, whilst reinforcing the nexus approach and providing safeguards against profit shifting. These also aim to ensure that the approach to implementing new rules is consistent with existing OECD rules on the phasing out of harmful regimes. 

 Uplift of Qualifying Expenditure - where related party outsourcing or acquisition costs are incurred, which do not constitute qualifying expenditure, companies will be able to obtain a maximum 30% uplift of their qualifying expenditure (subject to a cap based on actual expenditure) included within the formula; the 30% uplift refers to the overall expenses for both, outsourcing and acquisition costs;  

 Closure and Abolition of IP Regimes – to allow time for the legislative process, all existing regimes will be closed to new entrants (products and patents) in June 2016. These schemes will be abolished by June 2021. 

 Grandfathering – to allow time for transition to new regimes based on the Modified Nexus approach, IP within existing regimes will be able to retain the benefits of these until June 2021.  

 Tracking and Tracing – the FHTP should work to reach agreement by June 2015 on a practical and proportionate tracking and tracing approach that can be implemented by companies and tax authorities, which includes transitional mechanisms for intellectual property from existing into new regimes, and special rules for previous expenditure. The focus of this should be on developing practical methodologies that companies and tax authorities can adopt. 

Germany and the UK will submit this proposal to the Forum on Harmful Tax Practices, during its meeting on 17-19 November. It is our shared hope that countries will agree that this forms the basis for future negotiations and eventual agreement on this aspect of Action 5. We remain committed to working with all G20 and OECD partner countries to achieve this shared aim. 

Licensing mobile technologies becomes even more essential

Dramatic structural changes in mobile communications technology supply, with the demise of vertical integration, is forcing those who are developing standard-essential technologies for 4G and "5G" networks to monetise these efforts through patent licensing, as well as their own product sales. Exiting the handset business, as have most of the original major technology suppliers, including former market leader Nokia earlier this year, eliminates participation in the largest product market, and the need for cross-licensed patent protection there.

Under New Management

The market size for mobile standard-essential patent (SEP) royalties paid remains below 5 per cent ($19 billion [€15.2 billion]) of the $377 billion in annual smartphones sales.

Netting-off
Once upon a time, new mobile communications technologies such as 2G GSM were developed by small clutches of vertically integrated players. Mobile technology pioneers including Alcatel, Ericsson, Nokia, Nortel Networks, Motorola, Qualcomm and Siemens all manufactured handsets, as well as network equipment. Some of these companies also produced communications chips.

Business models were predominantly oriented towards generating income from product sales. Technology development costs and risks of failure (e.g. with demise of the rival U.S. 2G TDMA standard) were compensated for through product sales and in cross-licensing, for little or no cash royalty payments among these major players, to obtain access to all the SEP technologies required to make and sell products.

Vertical disintegration
Over the last decade or so, virtually all the diversified mobile technology manufacturers have exited the handset market. From among the above, brand names Alcatel, Motorola and Nokia live on in handsets, but ownership is now completely removed from the original parent companies. I tracked the demise of some of these in the face of new market entrant challengers in another of my recent postings. Some of them have also ceased sales of other mobile products, including network equipment and chips.

Consequently, all the above parents have lost their ability to obtain a financial return on their mobile technology R&D investments directly through sales of handsets, which is by far the largest product market in the mobile sector. Global market revenues in 2013 were $377 billion for handsets, according to Morgan Stanley; $61 billion for network equipment, including radio, IP & transport and core equipment, according to Ericsson; and around $20 billion in baseband modems (which are mostly embodied in handset products). Nevertheless, the pace of technology development is continuing relentlessly in standard-essential technologies and in mobile technologies in general.

R&D spending continues to increase
Despite so many mobile technology vendors no longer selling handsets, mobile R&D spending, of approximately $42 billion in 2013, has grown 50 per cent since 2008, as indicated in table below. The figures include 12 large technology companies with a predominant or exclusive focus on mobile communications, including several named above. Some of these are quite diversified and do not break out their wireless R&D expenditures in public disclosures, so these figures include some R&D related to other technologies and product markets. However, my total excludes many companies that also invest significantly in cellular R&D; so I believe the table provides a fair, yet approximate, and consistent representation of total R&D investments and their growth by the mobile technology industry as a whole.

 Total Sales and R&D for Leading Cellular Technology Companies

	2008	2009	2010	2011	2012	2013
Total Sales (millions)	$399,917	$353,836	$401,722	$510,840	$559,173	$582,011
Total R&D (millions)	$27,990	$27,854	$30,829	$37,922	$39,970	$41,927
R&D/Sales	7.0%	7.9%	7.7%	7.4%	7.1%	7.2%

Sources: Includes public disclosures for Alcatel-Lucent, Apple, BlackBerry, Ericsson, Huawei, LG Electronics, MediaTek, Nokia, Qualcomm, Samsung, Electronics and ZTE.

New business model
Value is derived from standard-essential and other patented technologies through the manufacture and sale of one's own products, through cross-licensing to protect one's own product sales from infringement claims and through licensing for receipt of cash royalty payments.

Licensing value, in kind through cross-licensing or in cash, tends to correlate positively or proportionally with product sales revenues. Significantly for Alcatel-Lucent, Ericsson and Nokia, as indicated above, the network equipment business has only around one-sixth the market value of that for handsets. This means the value potential for royalty-generating licenses or royalty-mitigating cross-licenses is also likely to be correspondingly lower there for the mobile SEPs, which tend to apply to both networks and devices.
Therefore, in order to maintain R&D investment levels or increase them, technology developers are increasingly dependent on licensing others' handsets for cash royalties to recoup returns on their costly and risky R&D.

Qualcomm has been able to focus on developing its patent licensing while substantially growing its R&D. It needs to do so because R&D spending (e.g. $5 billion in 2013) exceeds the profit it makes on its chip sales. Qualcomm led the way in licensing with the company being the majority developer of CDMA technologies in the 1990s. Qualcomm's exit from network equipment and handset businesses around the turn of the millennium eliminated its need to patent-protect those operations through cross-licensing. Qualcomm's licensing revenues of $7.9 billion in 2013 are equivalent to a royalty rate yield of 1.77 per cent of total global handset revenues indicated above.

The opportunity to grow licensing income with SEPs and non-SEPs (also referred to as implementation patents) was presented as a significant strategic objective by Ericsson and Nokia at their recent Capital Markets Days in Stockholm and London. Ericsson's 2013 licensing income was around $1.6 billion, which corresponds to a royalty rate of 0.42 per cent on the same basis as for Qualcomm above. Corresponding figures for Nokia were $650 million and 0.17 per cent, respectively.

Nokia, in particular, has a history of handset patent licensing agreements which sought to minimize or eliminate royalty out-payments through cross-licensing, rather than to maximise royalty income. The company needs to unravel previous arrangements and substitute sales volume-dependent agreements for legacy sales volume-independent agreements. The latter were highly beneficial while handset market shares were up to around 40 per cent last decade. These two companies and Qualcomm are also including non-mobile SEPs and non-SEPs in some of their licensing. Ericsson, Nokia and others still need cross-licensing to provide "freedom to operate" in design, manufacture, sale and use of network equipment.

Low barriers with modest royalties paid
The mobile device business--including smartphones, feature phones, tablets and Internet of Things connectivity--has relatively low barriers to market entry through the freely available 3GPP standards. That is why there are so many new handset OEM names in recent years--with the most notable successes including Apple since 2007 and Xiaomi since 2011--seizing substantial market shares.

Ericsson, Nokia and Qualcomm are widely regarded as holding, in total, a substantial proportion, and quite likely the majority, of SEPs reading on 3GPP standards. On this basis, and the fact that Qualcomm has a far more well-developed patent licensing programme than any other company, a total aggregate SEP royalty across all handsets worldwide is most likely to be no more than a mid-single-digit percentage. Five per cent is conservatively more than double the total of 2.36 per cent in royalty rates I have calculated for Ericsson, Nokia and Qualcomm. Other significant SEP holders account for only relatively small licensing revenues. For example, InterDigital Communications, with a business model entirely focused on patent licensing, reported $264 million in patent licensing revenues in 2013. That corresponds to a comparable royalty rate of 0.07 per cent.

Smartphones designers also seek to include features which are subject to non-mobile SEPs and which might be subject to non-SEPs. But the latter are more easily ignored or worked around with alternative technologies, and some features might be omitted if this is not possible. In the case of SEPs, it is at least in theory not possible to implement the standard or part thereof without infringing.

On the basis of financially audited royalty incomes from leading licensors, my estimate that total mobile SEP royalties amount to less than a mid-single-digit percentage of handset revenues is in marked contrast to the erroneous aggregate royalty rate estimates of Intel and others. Elsewhere, I have published a detailed rebuttal of Intel's defective assessment that the smartphone "royalty stack" could amount to $120 on an average $400 smartphone, including SEPs and non-SEPs. That would correspond to a 30 per cent royalty rate, or around $100 billion per year in total royalties. This is more than five times my estimate of less than $19 billion, which includes all mobile SEPs, many non-cellular SEPs and many non-SEPs also thrown in to the licensing bundles. This figure is less than half the mobile industry's R&D spending.

Royalties paid on non-cellular SEPs (e.g. H.264 video and 802.11 Wi-Fi) and non-SEPs amount to no more than additional single-digit billions of dollars. It has been disclosed that Samsung, with 2013 smartphone revenue share of 34 per cent, paid Microsoft an annual $1 billion in licensing fees to implement Android. This is exceptional and accounts for a significant proportion of all non-SEP royalties paid.

I originally published this article in the mobile communications industry trade press with FierceWireless.

Trademarks and Homophones: The Selection of Marks and Should Trademark Law React?

Producers of products and services choose particular trademarks for a variety of reasons—most of those reasons are related to conveying a particular message about a product or service and ensuring they receive some legal protection through trademark law.  Of course, some particularly favorable words are not allowed legal trademark protection in the U.S. because to do so would impede the ability of competitors to fairly use words to describe their own products or refer to a product class.  Thus, the spectrum of distinctiveness has served to ensure that certain words are never protected or only protected when there is a substantial danger of consumer confusion, an investment in goodwill by the producer, and competitors will have some alternatives to describe their products and services.  The spectrum has worked well for word marks, but occasionally does not work well for non-word marks such as trade dress (or the get-up).  Aesthetic functionality could be applied to word marks the use of which would put competitors at a significant non-reputation related disadvantage.  However, aesthetic functionality is usually not needed for word marks because the spectrum should filter out words that would put competitors at a disadvantage.  Moreover, a defense of fair use may also protect a competitor’s ability to use a word mark. 

But, what about homophones?  Homophones are words that are essentially pronounced similarly, but have different meanings and are spelled differently.  An example of a homophone is the words “bye” and “buy.”  In a recent article, by Derick F. Davis and Paul M. Herr titled, “From Bye to Buy: Homophones as a Phonological Route toPriming,” published in the Journal of Consumer Research in April of 2014, the authors find that consumers experiencing heavy “cognitive load” are essentially influenced by homophones.  Thus, a consumer, for example, shopping and reading a lot of text on the Internet, is susceptible to influence from the usage of a homophone.  The article provides the example of a person reading the word “bye” on a page of text, turning the page and seeing an advertisement.  The consumer could be influenced to purchase the advertised product because of the meaning of the word “buy” even though they read the word “bye.”  If you add the word “good” to the “bye”, then you provide even more priming for the consumer.  Two other examples are the words “weight” and “wait,” which could be effective in the weight loss field, and the words “right” and “write,” which apparently made people write longer papers.  Importantly, the article makes a distinction between homophones and other word types, which may not result in the same effect:

An important conceptual distinction is warranted. Homophones are related to but different from (1) homographs (words with identical spellings but different pronunciation and meanings; e.g., “lead” the metal vs. to lead others), (2) stress homographs (stress on different syllables, e.g., “refuse” as in rubbish vs. to reject), and (3) homonyms, words that are both homophones and homographs (e.g., “bank” as in river vs. a financial institution). We suggest homophones’ ability to prime is rooted in shared phonology, not shared orthography.

Trademark law does take into account the multiple meanings of words, but does the spectrum of distinctiveness do a good job of that?  Would aesthetic functionality do better?  Do you put competitors at a significant non-reputation related disadvantage when you trademark a word with other positive meanings related to your particular word from a phonetic perspective, such as “good-bye”?  What if you misspell a word to create a fanciful mark to obtain a particular meaning, as pharmaceutical companies often do?  In a discussion concerning the article in Real Simple, Derick Davis, one of the authors of the study, notes that “Alli, a diet drug[‘s] name, . . . may be intended to remind you of an ally who will help you achieve weight loss.”  (I suppose it wouldn’t really be a fanciful mark then, but a suggestive or descriptive one.)

The article, for sure, provides some interesting and helpful information for selecting trademarks--certainly an important choice impacting the value of the mark and the success in marketing the product. 

Expanding Trademark Subject Matter and Overlapping Rights: a Website, Case and Conference

The issue concerning expanding trademark subject matter is a relatively hot one.  Trademark subject matter has continued to expand in the U.S. to cover everything from single colors alone to interesting forms of trade dress, such as a website or a restaurant's décor, to sounds to tastes to smells.  Indeed, motion marks are common now as well.  Attorney Michael Spinks has an interesting, helpful and entertaining blog titled, "Funky Marks."  (Well, I suppose these marks can be smelly, have a cool sound and are a little weird, but they don't all involve Mark Wahlberg.)   If you are interested in seeing just how far trademark subject matter is going, enjoy the website.
 
And, another new case on the subject of trademarks was just issued today.  The EU General Court in Luxemburg apparently upholds a three dimensional trademark over the Rubik's Cube despite the expiration of a patent.  The Simba Toys case can be found, here.  And, here is commentary by Bloomberg.  (Hat Tip to BNA). 
 
Couple expanding trademark protection with overlapping rights and you have a very hot topic.  With expanding trademark subject matter (and rights), you get the potential for conflict with other areas of intellectual property.  And, INTA (among others) is sponsoring an upcoming timely conference on the subject featuring our very own Neil Wilkof (Congratulations to Neil for his appointment to the board of INTA) and Jeremy Phillips.  (And, here is a link to an IPKat (Neil and Jeremy) post on the subject of the consumer protection function of trademarks.)
 
Here is information about the conference:
 

December 8–9 

Westin Grand Munich Hotel

Munich, Germany

  

The overlap between trademarks and other intellectual property rights is everywhere—whether in registration, enforcement or commercialization. For example:

• A product design can be protected as a two- or three-dimensional mark, trade dress, design patent, registered design, unregistered design or a work of applied art under copyright law.
• An artistic work can be registered as a trademark, whether or not it is protected under copyright law.
• A geographical indication can be registered as such or protected as a collective or certification mark, under passing off or unfair competition law.
• A trademark can be subject to unfair competition law, comparative advertising statutes or consumer protection laws. A trademark, as used in blogs and social media, can involve rights of privacy and rights of publicity.

It is essential that trademark and other IP practitioners have a solid understanding of the many opportunities and pitfalls of intersecting rights. The intersection of these rights also raises fundamental questions about the nature of trademark law and its relationship to the other areas of IP protection, and how policy should best address these overlaps.

Join the International Trademark Association (INTA) in Munich, Germany, on December 8–9, 2014, at the Westin Grand Munich Hotel for two days of information-packed, advanced-level sessions. Presented by leading authorities in their field, these sessions will deal with these and other emerging issues concerning the overlap of trademark rights with other IP rights.

This conference is cosponsored by the INTA’s Programs and Related Rights Committees and with the kind support of the German Association for the Protection of Intellectual Property (GRUR).