September/October 2015
Landslide
By Danny M. Awdeh; Brian R. Westley
By the time RadioShack filed for bankruptcy in February, the once-mighty electronics chain had long been in decline. Yet nostalgia for the 94-year-old brand continues to linger, as evidenced by the recent auction of the iconic RadioShack name for $26.2 million.1 Its sale in May to hedge fund Standard General LP, which will reportedly keep more than 40 percent of RadioShack stores open, underscores the value of a trademark—even in the case of a declining business struggling to survive decades after its prime, something RadioShack itself acknowledged in a self-mocking "Goodbye '80s" Super Bowl commercial in 2014 featuring Hulk Hogan, Mary Lou Retton, Alf, and other 1980s pop-culture icons.
That the RadioShack name commanded a robust sales price should not come as a surprise. While patents frequently garner much of the attention in a company's intellectual property (IP) portfolio, trademarks are a sometimes-overlooked but substantial source of value.2 In fact, a trademark may be a company's most valuable asset. After all, a trademark does more than simply tell consumers that a particular company is the source of a product or service; a trademark also symbolizes the value that consumers have come to associate over the years with those products and services, known as goodwill. The more goodwill consumers associate with a trademark, the more valuable the brand. And that value can be considerable. In its annual list of the most valuable global brands, Interbrand in 2014 ranked Apple first with a brand value of nearly $118.9 billion, Google second at $107.4 billion, and Coca-Cola third at $81.5 billion.
The value of a company's intangible assets (including intellectual property such as trademarks) can have a considerable impact on a company's overall value. According to a study by intellectual capital research firm Ocean Tomo, the portion of corporate market value on the S&P 500 attributable to intangible assets has soared from 17 percent in 1975 to 84 percent in 2015.3 Consequently, a company's ability to successfully leverage its trademark assets can significantly improve its financial performance.
Savvy companies would therefore be wise to carefully consider strategies to fully monetize these important IP assets. Companies that fail to do so could be missing out on substantial revenue opportunities. This article addresses various ways to leverage trademarks—whether by expanding the use of those marks beyond a company's traditional products and services, increasing the number of consumers in the market for products sold under the mark by adding new product price points, or seeking to sell marks that clutter a company's trademark portfolio—while also providing some cautionary examples for avoiding pitfalls along the way.
Superheroes on plastic lunchboxes. Designer brand names on sunglasses. University logos on T-shirts. These are some classic examples of licensed products. Licensing programs are perhaps the most common way to leverage the value of a company's trademarks. Indeed, worldwide retail sales of licensed merchandise exceeded $155 billion in 2013, according to one report, with sports and fashion merchandise leading the way.4 Although licensing royalties can vary significantly across industries and product lines, the most frequently reported royalty rates for trademarks are 5 percent and 10 percent of sales.5 When done right, licenses can allow a company to cost effectively extend its brand to goods and services it does not otherwise have the resources to offer, thereby extending its reach to new markets and consumers. However, companies must take a strategic approach to licensing so as not to overextend their brand, thereby diminishing its value.
Brand owners should be selective about the types of goods and services they seek to associate with their brand to avoid diminishing consumer goodwill in the licensed trademark. For example, licensing can be a particularly lucrative, yet perilous, issue for luxury apparel brands. Companies that cater to consumers eager to spend thousands of dollars on high-end apparel understandably might want to expand their brand to a broader audience. As the Trademark Trial and Appeal Board recently noted, Chanel and "many other well-known luxury brands have either expanded into or licensed use of their brand names in fields outside of the fashion industry . . . . For example, Versace now offers interior design services, Fendi provides kitchen design services and Jason Wu markets designer-styled bathroom fixtures."6 Calvin Klein, in a recent complaint for trademark infringement and counterfeiting, detailed the breadth of its various licensing arrangements, which include product lines ranging from women's dresses and men's suits to "golf apparel, jeanswear, underwear, fragrances, eyewear, women's performance apparel, hosiery, socks, footwear, swimwear, jewelry, watches, outerwear, handbags, small leather goods, and home furnishings (including furniture)."7
Such licensing practices, if done carefully, can greatly expand a company's sales.8 In 2014, licensed products accounted for 57 percent of Calvin Klein's global retail sales. However, licensing—if carried too far—can risk alienating core consumers. The Pierre Cardin brand serves as a cautionary tale: This once-venerable luxury brand initially saw its revenue soar as it agreed to various licenses for perfumes and cosmetics.9 However, the brand arguably became overextended, into items like baseball caps and cigarettes.10 Today, the brand has some 400 licensing partners.11 Calvin Klein appears to have recognized this danger. In a 2001 survey, Calvin Klein was ranked last as a luxury clothing brand by women.12 Since then, the brand has rehabilitated its image by buying back some of its licenses.13
Conversely, leveraging a brand through licensing can yield instant success when consumers already associate a company's name with a product that the company does not actually offer. For example, when a brand extension agency was conducting focus group tests for the hand tool company Stanley, one man insisted that he owned a Stanley ladder.14 Stanley, however, did not make ladders. But because the Stanley brand had won a significant following among consumers who frequent hardware stores, the idea of Stanley ladders seemed perfectly plausible. Recognizing this opportunity, Stanley worked out a licensing deal with ladder maker Werner, which began making and selling ladders with the Stanley trademark. Such a deal allowed Stanley to broaden its presence in the hardware industry and generate royalty revenue without having to invest in the production facilities and other overhead required to manufacture its own ladders.
Importantly, as the trademark owner, a company must exercise quality control over the goods or services sold by the licensee. In other words, there must be some system or method in place to control the quality of the license product. Failing to exercise adequate quality control can result in a "naked license," which in turn can lead to the loss of some or all rights in the licensed trademark. Even if a company doesn't actually lose its trademark rights, poorly made products can significantly damage a company's hard-won reputation for quality, potentially decreasing the mark's value.
Besides licensing a trademark for use on products that a company does not make, brand owners may wish to extend the reach of their core products and services to more price-sensitive consumers. Such a strategy has become particularly enticing in recent years as a struggling economy forced cash-strapped consumers to "trade down" for more affordable merchandise. This approach can also help companies target younger consumers. While extending a brand downward can potentially preserve, or even expand, a company's market share, just as with careless licensing, it can ultimately undermine a trademark's value by eroding its image with consumers. Companies should therefore proceed with caution when extending the use of their marks over multiple price points. One way to alleviate the risk is through the creation of sub-brands or freestanding brands.
Sub-branding involves using one trademark, or "house mark," as the umbrella mark for a company's products with separate marks for each product line. This can be a helpful strategy when a company's product range includes distinct variations and price points for the same general category of goods and when the overall reputation for quality is generally the same. Luxury automakers like Audi and Mercedes-Benz have used sub-branding when offering lower-priced versions of their vehicles. The Audi A3 sedan, for example, starts at $29,900,15 and Mercedes-Benz sells its CLA-Class compact sedan at $31,500.16 Both of these vehicles are tens of thousands of dollars cheaper than other models in the automakers' lineups, such as the Audi A8 L W12, which starts at $137,900, and the Mercedes S-Class sedan, which starts at $94,400. By using sub-brands, these automakers are attempting to differentiate their products by price point while also leveraging the considerable cache associated with their house marks. This sub-branding strategy has been criticized by wealthier consumers who worry that these less expensive models could erode the exclusivity of luxury brands.17 However, the chief executive of the U.S. division of Mercedes-Benz says clinging to a brand's prestige at the expense of attracting younger consumers, who may be repeat customers for years to come, would be a mistake. "You're risking irrelevance," Steve Cannon told the Washington Post.18
Sometimes, however, a clean break from the "flagship" trademark is advisable. In these instances, companies can extend their trademark portfolio by creating separate brands for lower-priced products that they may want to distance from their primary brand. For example, in the 1990s, Gap Inc. watched as discount retailers and department stores increasingly offered similar styles of its staple blue jeans and T-shirts at prices up to 30 percent less than its GAP-branded stores, thus eroding its market share.19 Gap initially responded by launching a new line of lower-priced clothing made with cheaper fabrics under the name "Gap Warehouse." While the company believed this approach would allow it to better compete with discount retailers, the name was quickly dropped over concerns that associating lower-priced clothing too closely with the Gap name would erode the value of the GAP mark and cannibalize Gap's sales. Instead, Gap decided to launch a new brand under the mark OLD NAVY, giving its less-expensive clothing a separate and distinct identity.20
Just as going down-market can require a new mark, so too can going in a more upscale direction. Gap, for instance, uses the BANANA REPUBLIC trademark for stores selling apparel at higher price points than either its Gap or Old Navy stores. Toyota offers another example: rather than linking its luxury line of vehicles to the same "Toyota" house mark as its Corolla, Camry, and other models, the automaker instead chose a new name, LEXUS, and sold its luxury vehicles in separate dealerships.
Understandably, not all companies can afford the marketing and distribution costs associated with launching a new freestanding brand, or may not have the willingness or the time necessary to do so. Separate legal costs are also an important consideration, as each new mark added to a portfolio will bring additional trademark clearance costs, applications, fees, and risks.
At some point, a company may find that it has too many trademarks, which can lead to cannibalized sales and inefficient marketing efforts. This problem tends to occur after a company acquires or merges with another entity. In an effort to focus on its most successful core brands, a company may decide that it wants to consolidate its portfolio by discontinuing brands—even, in some cases, brands that may still have a loyal following and plenty of goodwill from consumers. Such a decision comes with a risk that a competitor, recognizing the residual value in the mark, will swoop in and eventually start using the discarded mark. After all, nonuse of a trademark for three consecutive years is prima facie evidence of abandonment.21 Merely reserving the right to use a mark, or intending not to abandon it, does not constitute use under the Lanham Act.22 As such, explained one court, "Once abandoned, the mark reverts back to the public domain whereupon it may be appropriated by anyone who adopts the mark for his or her own use."23
Given the possibility of a competitor using a cast-aside trademark, a company that remains intent on trimming its portfolio should strongly consider selling or licensing the mark, thereby potentially obtaining millions of dollars for a brand that it no longer wants. This is the approach that Limited Brands took in 2002 when it discontinued its STRUCTURE-branded clothing stores aimed at young men. Limited relaunched the stores under the EXPRESS trademark, which was already in use for Limited stores targeting young women.24 The idea was to have men and women shopping at the same store under the same brand. In 2003, Limited sold the STRUCTURE trademark for about $10 million to Sears Roebuck & Co., which then used the mark to develop a line of men's clothing to be sold within its department stores.25 David S. Ruder, a founder of brand acquisition company River West Brands LLC, which helped advise Limited on the sale, described it as a "win/win" for both companies: "Limited was able to generate value for a brand it had discontinued, while Sears was able to acquire a strong brand that will thrive as a proprietary brand in its stores."26
Trademarks are a valuable component of a company's IP portfolio. By thinking about ways to leverage these important IP assets, a company can increase its revenue and the reach of its brand in the marketplace. But with so much at stake, these decisions should be made with great care.
Endnotes
1 In re RadioShack Corp., No. 15-bk-10197 (Bankr. Del. Feb. 5, 2015); see also Dawn McCarty, RadioShackName Goes to Standard General for $26.2 Million, Bloomberg Bus. (May 13, 2015), http://www.bloomberg.com/news/articles/2015-05-13/standard-general-bid-of-26-5-million-winsradioshack-brand.
2 A trademark is defined as any word, name, symbol, device, or any combination thereof, used by a person to identify and distinguish that person's goods from those of others and to indicate the source of the goods. 15 U.S.C. § 1127.
3 See Annual Study of Intangible Asset Market Value from Ocean Tomo, LLC, Ocean Tomo (Mar. 4, 2015), http://www.oceantomo.com/2015/03/04/2015-intangible-asset-market-value-study.
4 TLL Survey: Global Retail Sales of Licensed Merchandise Up 1.7% in 2013, 38 Licensing Letter, June 16, 2014, at 1.
5 Russell Parr, Royalty Rates for Licensing Intellectual Property 57–58 (2007).
6 Chanel, Inc. v. Makarczyk, 110 U.S.P.Q.2d 2013 (T.T.A.B. 2014).
7 Complaint at 3–4, Calvin Klein Trademark Trust v. P'ships & Unincorporated Ass'ns, No. 1:15-cv-02224 (N.D. Ill. Mar. 13, 2015), ECF No. 1.
8 PVH Corp., Tear Sheet: Calvin Klein's Provocative Modern Designs Generated $8.1 Billion in 2014 Global Retail Sales (2014), https://www.pvh.com/pdf/tearsheet_CK.pdf.
9 Mergen Reddy & Nic Terblanche, How Not to Extend Your Luxury Brand, Harv. Bus. Rev. (Dec. 2005), available at https://hbr.org/2005/12/how-not-to-extend-your-luxury-brand.
10 Id.
11 Christina Passariello, Pierre Cardin Ready to Sell His Overstretched Label, Wall St. J., May 2, 2011, http://www.wsj.com/articles/SB10001424052748704547604576263541408680576.
12 Fabrizio Jacobacci & Lauren R. Keller, Bucking the Trend: When Luxury Brands Target Mass Appeal, World Trademark Rev., Feb.–Mar. 2014, at 62.
13 Mark Ritson on Branding: Calvin Klein's Renaissance, Marketing, Sept. 23, 2008, http://www.marketingmagazine.co.uk/article/848402/mark-ritson-branding-calvin-kleinsrenaissance.
14 Rob Walker, Can a Dead Brand Live Again?, N.Y. Times, May 18, 2008, http://www.nytimes.com/2008/05/18/magazine/18rebranding-t.html?pagewanted=all.
15 Models, Audi USA, http://www.audiusa.com/models# (last visited June 22, 2015).
16 Mercedes-Benz, http://www.mbusa.com/mercedes/index (last visited June 22, 2015).
17 Drew Harwell, Tesla and Luxury Carmakers' Surprising Strategy to Hook New Buyers: Lower Prices, Wash. Post, Oct. 9, 2014, http://www.washingtonpost.com/news/business/wp/2014/10/09/tesla-and-luxury-carmakerssurprising-strategy-to-hook-new-buyers-lower-prices.
18 Id.
19 David A. Aaker, Building Strong Brands (1996).
20 Id.; see also Stephanie Strom, How Gap Inc. Spells Revenge, N.Y. Times, Apr. 24, 1994, http://www.nytimes.com/1994/04/24/business/how-gap-inc-spells-revenge.html?pagewanted=1.
21 15 U.S.C. § 1127.
22 Id.; see also Grocery Outlet Inc. v. Albertson's Inc., 497 F.3d 949, 954 n.4 (9th Cir. 2007) ("An 'intent to resume' requires the trademark owner to have plans to resume commercial use of the mark. Stopping at an 'intent not to abandon' tolerates an owner's protecting a mark with neither commercial use nor plans to resume commercial use. Such a license is not permitted by the Lanham Act." (quoting Exxon Corp. v. Humble Exploration Co., 695 F.2d 96, 102–03 (5th Cir.1983)).
23 Gen. Cigar Co. v. G.D.M. Inc., 988 F. Supp. 647, 658 (S.D.N.Y. 1997) (quoting Dial-A-Mattress Operating Corp. v. Mattress Madness, Inc., 841 F. Supp. 1339, 1355 (E.D.N.Y. 1994)).
24 David S. Ruder, New Strategies for Owners of Discontinued Brands, 3 Nw. J. Tech. & Intell. Prop. 61, 76 (2004).
25 Sears Buys Structure Apparel Brand, L.A. Times, Sept. 16, 2003, http://articles.latimes.com/2003/sep/16/business/fi-sears16.
26 Ruder, supra note 24, at 76. Another option, as Ruder notes, is for a company to license the mark that it no longer intends to use. Assuming a company wishes to continue exercising sufficient quality controls over the mark and keep the mark within its IP portfolio, this is a viable option. See Sands, Taylor & Wood Co. v. Quaker Oats Co., 978 F.2d 947, 956 (7th Cir. 1992) (finding that efforts to license a trademark during a period of nonuse was "sufficient evidence of intent to resume use to rebut a prima facie case of abandonment").
Reprinted with permission from the Vol. 8, Issue 1, 10/07/2015 edition of Landslide ©2015 by the American Bar Association. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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