Trademark Valuation

A Tool for Brand Management

Gordon V. Smith, Susan M. Richey

• Publisher: Wiley
• Year: 2013
• Print ISBN:
  9781118245262
• eBook ISBN:
  9781118283189
• Edition: 2
• Topic: Droit
• Subtopic: Procédure civile

A practical and useful resource for valuing trademarks

The Second Edition of Trademark Valuation is a fresh presentation of basic valuation principles, together with important recent changes in worldwide financial reporting regulations and an update on the current worldwide legal conditions and litigation situation as they relate to trademarks.

A new section discussing issues surrounding valuation of counterfeits and the economic effects of trademark counterfeiting is included in this informative Second Edition.

• Considers methods to determine the real value of your trademark and exploit its full potential
• Offers dozens of case studies that illustrate how to apply valuation methods and strategies to real-world situations
• Communicates complex legal and financial concepts, terms, principles, and practices in plain English
• Discusses GATT, NAFTA, emerging markets, and other international trademark considerations

CHAPTER 1

The Nature of a Trademark

It is September 21, 2012, and thousands of people are lined up outside Apple stores in San Francisco, New York, Hong Kong, Singapore, and many other places, waiting to purchase an “iPhone 5” smartphone. Three days later 5 million had been sold worldwide.

The iPhone 5 had been announced just two weeks prior to when the lines were forming. Philip Schiller, Apple’s senior vice president commented, “iPhone 5 is the most beautiful consumer device that we’ve ever created.”1

The iPhone 5 was the latest in a series of upgrades to the original iPhone, a revolutionary smartphone product that was introduced in 2007. Seventy-four days after its introduction, the late Steve Jobs, and Apple’s former CEO, commented, “1 million iPhones in 74 days—it took almost 2 years to achieve this milestone with the iPod®.

“Three days, ” “two years, ” “74 days”—what has driven this phenomenal success story?

Yes, the mobile telephone market has expanded dramatically in the past 10 years to the point where there are over 6 billion subscribers worldwide. Apple, however, does not have a dominant market share in the mobile phone marketplace by any means. And the iPhone is one of the more expensive units on the market. In spite of this, we observed the intense market interest in the iPhone 5, which is essentially an upgrade of an existing product.

So what drove buyers to queue up outside stores in September? Was it the iPhone 5’s new display, its new high-performance chip, extended battery life, or faster wireless technology? Or was it the redesign of the unit with a new, thinner, lighter, aluminum body? Or was it the jewelry-like fit and finish? Possibly it was because Apple stores are conveniently located or because store personnel are helpful and knowledgeable. Or was it the confident expectation of high quality performance that prospective buyers felt, based on the past performance of the products and services delivered by Apple under its family of i-prefaced trademarks and service marks?

Or was it all of the above?

We suggest to you that the answer to this question is “yes.” Those folks were standing in line because they were influenced in varying degrees by all the factors that we just noted and likely other influences that we did not list.

This is a book about trademark valuation. Certainly the sale of 5 million iPhone 5 smartphones in three days (together with the sales of millions more previously) had a significant positive economic impact on Apple Corporation. If our task was to opine on the value of the iPhone trademark, one of our tasks would be to estimate the portion of that economic impact that could be ascribed to the trademark. Clearly, iPhone 5 sales are also driven by the product’s design features and the many elements of its built-in technology that deliver the performance smartphone buyers are seeking.

This is not a simple task. But there are tools and methods of analysis available to us and that is what this book is about. Our first step is to examine what a trademark is, not just in the legal sense, but also in the economic/business context.

Trademarks are images with many levels of meaning. They can be nostalgic reminders of times and products past, examples of outstanding graphic design, or the symbols of powerful institutions that influence our lives. As pleasant as it might be to contemplate their nostalgic or artistic aspects, however, we must focus on the role of trademarks in commerce. Trademarks are business assets and must be viewed primarily in the context of a commercial enterprise. Their task is to contribute to the profitability of the parent enterprise. Commerce is driven by return on investment (ROI) principles, and trademarks are not exempted from that requirement. Even trademarks that are associated with nonprofit, governmental, or institutional organizations are used for a purpose and promoted with an objective in mind. They must be judged by how well they meet those objectives.

TRADEMARK DEFINED

A trademark generally identifies the source of a product or service and distinguishes that product or service from those coming from other sources.2 As defined in the U.S. Trademark Act of 1946 (the Lanham Act), a trademark is “any word, name, symbol or device or any combination thereof [used by someone to] identify and distinguish his goods, including a unique product, from those manufactured or sold by others and to indicate the source of the goods[.]”3 A trademark also serves as an assurance of quality—the consumer comes to associate a level of quality with the goods or services bearing a given trademark. Trademarks have also been described as the embodiment of goodwill.

In the United States, the federal law and the courts have addressed these aspects of trademarks in various ways:

Trademarks help consumers to select goods. By identifying the source of the goods, they convey valuable information to consumers at lower costs. Easily identified trademarks reduce the costs consumers incur in searching for what they desire, and the lower costs of search the more competitive the market. […]4

A trademark also may induce the supplier of goods to make higher quality products and to adhere to a consistent level of quality. The trademark is a valuable asset, part of the “goodwill” of the business. If the seller provides an inconsistent level of quality, or reduces quality below what consumers expect from earlier experience, that reduces the value of the trademark. The value of a trademark is in a sense a “hostage” of consumers; if the seller disappoints the consumers, they respond by devaluing the trademark.

— Scandia Down Corp. v. Euroquilt, Inc.5

The protection of trade-marks is the law’s recognition of the psychological function of symbols. If it is true that we live by symbols, it is no less true that we purchase goods by them. A trade-mark is a merchandising short-cut which induces a purchaser to select what he wants, of what he has been led to believe he wants. The owner of a mark exploits this human propensity by making every effort to impregnate the atmosphere of the market with the drawing power of a congenial symbol . . . to convey, through the mark, in the minds of potential customers, the desirability of the commodity upon which it appears. Once this is attained, the trade-mark owner has something of value.

—Mishawaka Mfg. Co. v. Kresge Co.6

The European Court of Justice offered the following summary:

In addition to its function of indicating origin and, as the case may be, its advertising function, a trade mark may also be used by its proprietor to acquire or preserve a reputation capable of attracting consumers and retaining their loyalty.

Although that function of a trade mark—called the investment function may overlap with the advertising function, it is none the less distinct from the latter. Indeed, when the trade mark is used to acquire or preserve a reputation, not only advertising is employed, but also various commercial techniques.

When the use by a third party, such as a competitor of the trade mark proprietor, of a sign identical with the trade mark in relation to goods or services identical with those for which the mark is registered substantially interferes with the proprietor’s use of its trade mark to acquire or preserve a reputation capable of attracting consumers and retaining their loyalty, the third party’s use must be regarded as adversely affecting the trade mark’s investment function.7

Trademark Types

The word trademark is used in an umbrella sense to refer to the array of specific types of marks in the upcoming discussion. “Trademark” also may be used in a discrete sense to indicate marks that are physically affixed or attached to goods, in contrast, for example, to service marks that are used in advertising to promote specific services. Trademark holders give notice of their ownership of marks by denoting federally registered marks with the symbol ® or, if unregistered, by the symbols ™ or sm to indicate trademark or service mark use, respectively.

While they may or may not be protected as trademarks, some “spokespersons” or “spokescharacters” can take on a form of secondary meaning with respect to a product or service. Even Charlie Brown’s dog “Snoopy, ” with a strong identity of his own, has become associated with MetLife’s financial services.8 In fact, some trademark holders prefer to create their own spokescharacters to enhance the brand and, in the process, these creations take on trademark significance of their own. Mars, Inc., has used this marketing strategy to maximum effect in the creation of “spokescandies” (referred to by the company as “M&M’s Characters”)9 made to look like animated M&M’s chocolate candies but exhibiting personality characteristics unique to the color of their candy shell and filling, such as the seductive Ms. Green (dark chocolate), the know-it-all Red (milk chocolate), the gullible but likeable Yellow (peanut), the confident and hip Blue (almond), the slightly paranoid Orange (crispy), and so on.

Trademark

Many common trademarks are a form of the name of the entity that holds the mark, oftentimes shown in distinctive type style, or in conjunction with a logo. Examples include:

Source:10

Source:11

12.

13.

Source:14

Trademarks most familiar to consumers are those associated with the merchandise they purchase for private consumption, such as “L’eggs” hosiery, “Birds Eye” frozen foods, and “Tide” detergent.

Service Mark

For all practical purposes, service marks function the same way that trademarks do except that they identify services rather than products. Examples would be “MetLife” and “American Express”, financial service providers, and “United”, which provides commercial aviation services.

Trade Name

A trade name is the name of a business, association, or other organization, used to identify it. There is no symbolic identifier associated with trade names and trade names may not be federally registered. Ownership would be governed by common or state law. A trade name is typically not an asset of material value, unless it also functions as a trademark because the buying public recognizes goods and services by their trademark and, in many cases, may be un...

Table of contents

• Cover
• Series
• Title Page
• Copyright
• Dedication
• Preface
• Acknowledgments
• Chapter 1: The Nature of a Trademark
• Chapter 2: Valuation Basics
• Chapter 3: Using Financial Information
• Chapter 4: Trademark Valuation
• Chapter 5: Trademark Economic Benefit
• Chapter 6: Income Method
• Chapter 7: The Income Method
• Chapter 8: Trademark Licensing Economics
• Chapter 9: Quantification of Harm in Trademark Enforcement Cases
• Chapter 10: Special Trademark Valuation Situations
• Chapter 11: Global Trademark Issues
• Appendix A: Basic Investment Principles
• Appendix B: Theoretical Foundations for the Determination of a Fair Rate of Return on Intellectual Property
• Appendix C: Investment Rate of Return Requirements
• Appendix D: Predicting Sales and Revenues for New Ventures with Diffusion Models
• Appendix E: Dealing with Uncertainty and Immeasurables in Trademark Asset Valuation
• About the Authors
• Index