Fool.com: Trademarks: What's In a Name?[Rule Maker] May 1, 2000

RULE MAKER PORTFOLIO
Trademarks: What's In a Name?

By Rob Landley (TMF Oak)
May 1, 2000

Ideas are slippery things. Giving them away doesn't cause you to lose them, and they're impossible to take away from anyone who already has them. Ideas naturally exist in the "public domain," as a shared resource like the air we breathe, owned by none yet usable by all. Any attempt to treat ideas as property that belongs to someone specific is a shaky compromise at best, because the flow of ideas is almost impossible to effectively regulate. Nevertheless, the whole point of intellectual property laws is to do exactly that.

Intellectual property laws turn ideas into property that can be bought, owned, and sold. They take specific ideas out of the public domain and assign the rights to them to a specific owner. The only practical way to go about this is to not even attempt control over who can HAVE ideas, but to instead control what anyone can do with them. Central to the idea of intellectual property laws is restricting an individual's rights to act on the information they have, and reserving those rights to the legal owners of that information.

This week, I'm going to explain what little I know about four types of laws that turn ideas into intellectual property. In a day and age where intellectual property is an increasingly valuable source of competitive advantage, I think you'll find this discussion quite relevant to understanding and identifying Rule Makers. On Thursday, I'll be talking about contracts; on Wednesday, I'll cover patents; tomorrow's article is about copyrights; and the topic for the rest of today is trademarks. I am not a lawyer, and this is not legal advice, but it's a start.

Trademark law regulates names. A "trade mark" was originally a craftsman's signature on their work, and the concept has since expended to cover unique names for products and businesses, images such as drawings of Mickey Mouse or the orange splash on a box of Tide laundry detergent, and even advertising slogans. The legal foundation for accumulating value within brand names is trademark law.

A trademark gives someone exclusive permission to use a unique name for something, such as the beverage "Coca-Cola" or the software "Windows." A name must be sufficiently unique and original to qualify for a trademark, which is why Intel created the name "Pentium" after losing a trademark infringement lawsuit against AMD, in which a judge ruled that numbers like "286," "386," and "486" could not be trademarked.

Trademark protection is not absolute ownership of a word, merely its usage as a name for something specific. The existence of a video game called "Ultima II" from Origin Systems did not prevent another company from producing a line of lipstick called "Ultima II," because Origin's trademark was on computer software and not cosmetics. Coca-Cola has a trademark on the name "Sprite" for a lemon-lime beverage; Marvel Comics had a trademark on a super-hero character named "Sprite"; and neither affected the word's existing public domain usage from British mythology. Instead, Coca-Cola's trademark on "Sprite" simply prevents another soft drink from being called "Sprite," so that the brand name of their product remains unique and customers can identify it.

The regulation of trademarks in the United States is the job of the Patent and Trademark Office (PTO) in Washington D.C., where anyone can search the archives for existing trademarks and register new ones. Registered trademarks have the little circle around the letter R symbol after the name, whereas the little "tm" symbol is mainly a warning that whoever is using this name is willing to sue other people over it if necessary. Registration is a darn good idea if defending the trademark in court is at all likely, but is not legally required for the trademark to exist.

Service marks are a variant of trademarks conceptually similar to subletting. For example, Linus Torvalds owns the trademark to "Linux" (because someone else registered it and as the creator of the product he sued them to get it away from them, proved his case, and wound up owning a registered trademark), and companies like Red Hat Linux or VA Linux have to get signed statements from Linus giving them permission to incorporate his trademark in their own trademarks. Nobody else can call their version of Linux "Red Hat," but Red Hat couldn't use the term "Linux" without Linus's permission. Linus has only bothered to enforce his trademark once so far, to prevent the sale of a group of "Linux" domain names by a squatter. His e-mail on the subject is quite informative about trademark law in general.

Trademarks are probably the messiest form of intellectual property. How far a trademark extends is in large part a matter of opinion, and the only real way to determine the boundaries is to sue for trademark infringement and see if you win. Convincing a judge as to the strength of your claim and the uniqueness of your brand is important, and what constitutes infringement is subject to interpretation. Does Wal-Mart's "Dr. Thunder" infringe on the trademark of "Dr. Pepper"? Does "Bubble Up" infringe on "Seven Up"? Well, obviously the one product is trying to position itself as similar to the other, but where does actual infringement take place? Generally, a lawsuit defines the boundaries, the two sides argue their case, and the result is largely a matter of professionally defined opinion.

Trademarks are also a fairly unstable form of intellectual property. Their uniqueness must be vigilantly defended in order to remain defendable. Years ago, Coca-Cola lost the second half of its name to the public domain, when a judge ruled that "Cola" had become a generic term for referring to soft drinks. Similarly, "Aspirin" started as a brand name and wound up as the generic name for the drug. This is why the makers of "Kleenex" brand facial tissues bother with the "brand facial tissues" part, because there MUST be a viable generic term for a defendable brand name to exist.

Strange as it sounds, the Xerox corporation promoted the term "copier" so people saying they "xeroxed" some documents wouldn't erode the uniqueness of the brand name. They wanted to keep that "X" capitalized. Corporate legal departments send out letters urging other companies to acknowledge the ownership of their brand names with a symbol or footnote, not because they care about somebody taking their name in vain but because the more actively they defend their brand names out of court, the better their chances of convincing a judge of the strength of their brand name in court.

Trademark infringement isn't just a matter of names, either. Coca-Cola's trademarks include not just the name on their cans, but the white cursive lettering on a red background. (Yes, the PTO has a color drawing of it in their files.) The whole logo identifies them, and another company that makes a soda with a white cursive name on a red background can expect to be sued by Coke. If Coke convinces a judge that the competitor is trying to confuse customers into unfairly associating their product with Coke's product, they can get an injunction and force them to stop, and may even be awarded damages.

Similarly, Matt Groening owns the trademarks on "The Simpsons" (both the name of the show and the names and likenesses of each individual character including Moe (tm) and Grandpa (tm)), but if he were to allow unlicensed "Simpsons" merchandise like T-shirts to exist without at least TRYING to stop them, he could gradually lose his ability to defend his trademark in the future. The undefended intellectual property would pass into the public domain, and if he did sue after a long period of apathy he probably wouldn't win.

Trademarks are very similar to the brand names they regulate. They must be maintained or they erode, and investing in them and strengthening them makes them both wider in scope and easier to defend in specific instances. All of our companies use trademarks, from Pfizer's Viagra to the look and feel of Yahoo!'s logo. Yahoo!'s brand name isn't quite strong enough to prevent other search engines from having main pages laid out similarly to Yahoo!'s, but Coke's brand name is strong enough that someone putting the Coca-Cola logo on an unlicensed tote bag would be sued for millions.

The ideas trademarks regulate are the identity of the companies and their products, and as such they're probably the purest form of intellectual property as well as the messiest. If you put on a silly hat with bells on it and give financial advice, you're probably violating the Motley Fool's trademark. There's no possible way to define that clearly in legalese, but you get the idea. And the important thing is that we could convince a judge that the idea in question belongs to us.

- Oak


 




Rule Maker Portfolio

5/1/2000 Closing Numbers
Ticker Company Day Chg % Chg Price
AXPAMER EXPRESS7/81.25%$151.38
CSCOCISCO SYSTEMS1/83.07%$71.44
GPSGAP INC5/163.57%$38.06
INTCINTEL CORP5/160.25%$127.13
JDSUJDS UNIPHASE CORP9/160.54%$104.25
KOCOCA-COLA CO-1-2.12%$46.25
MSFTMICROSOFT CORP11/165.29%$73.44
NOKNOKIA CORP ADS15/167.02%$60.00
PFEPFIZER, INC-5/16-0.74%$41.81
SGPSCHERING-PLOUGH9/161.40%$40.88
TROWT.ROWE PRICE ASSOC-5/16-0.82%$37.81
YHOOYAHOO INC5/80.48%$130.88

  Day Week Month Year
To Date
Since
2/2/1998
Annualized
Rule Maker 1.82% 1.82% 1.82% .96% 72.07% 27.35%
S&P 500 1.09% 1.09% 1.09% -.07% 49.78% 19.72%
S&P 500(DA) 1.09% 1.09% 1.09% -.07% 51.55% 20.34%
S&P 500(DCA) n/a n/a n/a n/a 25.99% 10.84%
NASDAQ 2.52% 2.52% 2.52% -2.73% 144.42% 48.90%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
6/23/1998150CSCO16.432$71.44334.74%
2/13/199865INTC53.762$127.13136.46%
2/17/199935YHOO70.647$130.8885.25%
5/1/199882GPS22.708$38.0667.62%
2/3/199866PFE27.433$41.8152.42%
2/3/199859MSFT49.352$73.4448.80%
5/26/199822AXP107.998$151.3840.16%
2/15/200068NOK47.500$60.0026.32%
2/3/199856TROW33.673$37.8112.29%
2/15/200032JDSU100.750$104.253.47%
8/21/199844SGP47.993$40.88-14.83%
2/27/199827KO69.107$46.25-33.07%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
6/23/1998150CSCO$2,464.86$10,715.63$8,250.77
2/13/199865INTC$3,494.54$8,263.13$4,768.59
2/17/199935YHOO$2,472.64$4,580.63$2,107.99
2/3/199859MSFT$2,911.79$4,332.81$1,421.02
5/1/199882GPS$1,862.06$3,121.13$1,259.07
5/26/199822AXP$2,375.95$3,330.25$954.30
2/3/199866PFE$1,810.58$2,759.63$949.05
2/15/200068NOK$3,230.00$4,080.00$850.00
2/3/199856TROW$1,885.70$2,117.50$231.80
2/15/200032JDSU$3,224.00$3,336.00$112.00
8/21/199844SGP$2,111.70$1,798.50($313.20)
2/27/199827KO$1,865.89$1,248.75($617.14)
  Cash: $218.42  
  Total: $49,902.36  


Notes
The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it added $2,000 in August 1998 and February 1999. Beginning in July 1999, $500 in cash (which is soon invested in stocks) is added every month.