“This Milk Doesn’t Taste Hormone-free”: Creating Trademark Liability when Companies Alter Credence Qualities

J. Shahar Dillbary, Trademarks as a Media for False Advertising, 31 Cardozo Law Review 327 (2009), available at ssrn and through Cardozo Law Review. 

What if you learned that those Niman Ranch steaks you’ve been purchasing for $40 per pound were no longer pasture-raised?  What if Aveda, without notifying you, decided to begin testing its products on animals?  Or if your Bridgestone tires were no longer union-made?  In each of these cases, it would be nearly impossible to detect the change merely by using the product.  For an increasing number and variety of products, consumers choose a particular brand or pay premium prices based on imputed qualities that they never experience.  Trademark and false advertising law exist to protect consumers from deceptive branding practices, but the situations described above are currently immune from liability.  Or at least they will be until more people read Shahar Dillbary’s new paper.

Since its origin in the tort of deceit, trademark law’s goal has been the prevention of passing-off, or as Dillbary refers to it, inter-brand fraud.  The typical case is one where the consumer, intending to purchase A’s goods is fraudulently induced to purchase B’s.  Trademark law exists to protect both producers and consumers and to minimize the substantial deadweight losses that would otherwise exist if consumers were forced to undertake extensive searches to obtain the appropriate products.  As Dillbary notes, however, trademark law is substantially less concerned with situations of intra-brand fraud where “the trademark owner uses its own mark to misrepresent its own goods.”  Dillbary, at 334.  According to Dillbary the unequal treatment of trademark misuse stems from the widely accepted premise that “the only legally relevant function of a trademark is to impart information as to the source or sponsorship of the product.” Id. at 332, quoting Smith v. Chanel, 402 F.2d 562 (9th Cir. 1968).  This premise ignores the substantial role that a mark play in providing information about the product itself, and it enables a particularly insidious class of consumer fraud.

Because trademark jurisprudence is concerned only with false or misleading attributions of product source, its application to fraudulent uses of marks by the mark owners themselves is considerably limited.  Section 43 of the Lanham Act establishes a hierarchy of marks based on their distinctiveness, that is, their ability to distinguish the seller’s goods from others’.  At the top of the hierarchy are fanciful marks–those that have no apparent relationship to the product (e.g., Kodak cameras).  At the bottom are descriptive marks–those that seem to describe some feature of the product (e.g., Stevia sweetener which is derived from the stevia plant).  A number of legal issues follow from a mark’s classification in the hierarchy, but one is of particular importance to Dillbary’s point.  According to the current interpretation of the Lanham Act, descriptive marks but not fanciful marks may not be registered or may be cancelled if they are or become misleading.  Thus, if consumers incorrectly believed and purchased it because they so believed that Stevia was made from the stevia plant, then the mark would be “deceptive” and unregisterable.

At first blush, this distinction seems to make sense.  How could a fanciful mark, which is definitionally not descriptive of the product, ever be misdescriptive of it?  How could a Kodak camera not be sufficiently kodak-y?  It can occur, Dillbary argues, when a fanciful, arbitrary, or suggestive mark develops what he calls “secondary descriptive meaning.”  Id., at 330.  Marks that, when introduced, were fanciful or arbitrary may, over time, become associated with a variety of qualities.  Kodak, for example, may come to symbolize in consumers’ minds high quality paper, easy to focus lenses, or “green” manufacturing, and consumers purchase Kodaks or pay premiums because of these associations.  If, overnight, Kodak executives switched to cheap paper or complicated lens or environmentally-unfriendly production, purchasers who relied on the secondary descriptive meaning attached to the brand would be defrauded.  Dillbary’s recognition and elaboration of this concept alone would make the paper worth reading.

But Dillbary is too much the economist to be carried away by his new idea.  He realizes that just because he has a hammer, everything isn’t a nail, and like Holmes he recognizes that the “cumbrous and expensive machinery [of the state] ought not to be set in motion unless some clear benefit is to be derived from disturbing the status quo.”  Holmes, The Common Law, p. 96.   Accordingly, not all product changes should be treated identically.  Obviously, if the changed characteristic isn’t material to consumers’ decisions, it shouldn’t matter.  Similarly, if Kodak began using poor quality paper or lens, consumers would rapidly detect the change.  They could return their purchases and take their complaints to the Internet, seriously damaging Kodak’s reputation and goodwill.  The threat of consumer backlash is a sufficient deterrent.

Switching away from green manufacturing, however, presents a different situation.  The camera might work identically, and consumers would have no way of knowing about the shift.  They happily pay more because they want to protect the environment, and they end up defrauded while the manufacturer pockets the premium.  For so-called credence qualities like green manufacturing the consumer is not in a position to distinguish products experientially, and she is prevented by prohibitive search costs from detecting noncompliance.  Without the threat of consumer backlash associated with experience qualities (those like paper quality that are more or less immediately detectable), producers are not deterred from fraudulently misrepresenting the credence qualities of their products.

The incentive to misrepresent credence qualities is surely growing.  As painfully ironic as it must seem to a certain class of Crits, consumers are increasingly turning to the market as a medium for social and political communication.  Consumers routinely spend millions of dollars on sweatshop-free clothes, humane food and cosmetics, hormone-free milk, and products that are made in the USA, or by unions, or sustainably for reasons entirely irrelevant to their experiential quality.  (Not to mention the considerable boost in perceived experiential quality derived from the placebo effect of knowing that the product has some valued credence quality.)  While this kind of social policy driven purchasing might not be maximally efficient, it would certainly be disastrously inefficient to allow companies to bilk consumers by surreptitiously altering purchased credence qualities.

Dillbary’s solution to the problem is straightforward and politically feasible:  convince courts to follow the plain meaning of the Lanham Act to establish a private right of action in competitors to sue for intra-brand fraud.  According to Dillbary, the text of 1988 amendment to the Lanham Act clearly provides for such an action, but through tortuous misinterpretation, the action has been read out of the statute.  A proper reading of the Act would establish all classes of trademarks on the same footing for purposes of deceptiveness.  Mark owners would be liable when they changed without notice a materially important credence quality of their product, that is, one that substantially motivated consumer purchases.

Dillbary leaves until a future paper the task of establishing the precise contours of the cause of action.  While we wait, a number of questions present themselves for consideration:  Are competitors rather than consumers the appropriate plaintiffs in such actions?  How should the law treat hybrids of experience and credence qualities where the credence quality acts as a proxy for an experience quality (e.g., the belief that organic foods taste better)?  How should damages be calculated, and should defendant culpability (e.g., by inducing belief in the credence quality through advertising) affect damages?  And would liability create perverse incentives by discouraging producers from adopting certain valuable techniques if they are subject to liability when they switch away from them?

 
 
Discussion

1 comment
  1. 1

    As an economist he should know better. The trademark’s value is in reducing transaction costs – product A stands for quality because it is made by Company X and I need not do any research on the subject. As they cut corners, the trademark will presumably decrease in value (similar to the efficient market hypothesis). There is no free-riding because the company which is exploiting the brand name is the one that spent money to build it up (I would suggest this is the main reason for trademark law rather than consumer protection as the allowance for sales “puffery” is remarkably consumer unfriendly), a good example being Toyota who decontented their cars in the 90s but lived off of their goodwill for years after.

    Of course this is why rather than water down a brand, most companies segment their product line into multiple tiers. (Sony has multiple levels of televisions from S to XBR range).

    There is already a claim when the seller misrepresents facts – such as claiming something is organic when it isn’t. There are also issues that a lot of advertising falls into the “puffery” category and thus is allowed to make outlandish claims because the consumer is supposed to expect them – a horrible judicial precedent.

    Also, economically, it would be hugely inefficient to not be able to reposition a brand – should a value brand not be able to move upmarket when the consumer decides that he wanted to buy the cheapest TV possible, went to the store and bought by brand, only to find out that Vizio now makes premium televisions too and he could have found cheaper from another brand?

    I think the better solution would be to eliminate the puffery exception which contaminates transparency, require full disclosure of those intangibles if a company states it is using union labor in an ad, the change to non-union labor should invoke a continuing duty to notify the consumer and maintain marketplace transparency. Ideally it would be through the same route as the initial statement (which could prove quite expensive if a full TV campaign needs to be repeated – but this seems most equitable to the consumer).