The Demise of Lanham Act Trademark Disparagement Limitations Promotes Sound Free Market Economic Principles

Alden Abbott —  19 June 2017 — Leave a comment
  1. Background

On June 19, in Matal v. Tam, the U.S. Supreme Court (Justice Gorsuch did not participate in the case) affirmed the Federal Circuit’s ruling that the Lanham Act’s “disparagement clause” is unconstitutional under the First Amendment’s free speech clause.  The Patent and Trademark Office denied the Slants’ (an Asian rock group) federal trademark registration, relying on the Lanham Act’s prohibition on trademarks that “which may disparage . . . persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt, or disrepute.”  The Court held that trademarks are not government speech, pointing out that the government “does not dream up these marks.”  With the exception of marks scrutinized under the disparagement clause, trademarks are not reviewed for compliance with government policies.  Writing for the Court, Justice Samuel Alito (joined by Chief Justice John Roberts, Justice Clarence Thomas, and Justice Stephen Breyer) found unpersuasive the government’s argument that trademarks are analogous to subsidized speech.  The Alito opinion also determined that it is unnecessary to determine whether trademarks are commercial speech (subject to lesser scrutiny), because the disparagement clause cannot survive the Supreme Court’s test for such speech enunciated in Central Hudson Gas & Electric Company (1980).  Justice Anthony Kennedy, joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan, concurred in the judgment.  The Kennedy opinion agreed that the disparagement clause constitutes viewpoint discrimination because it reflects the government’s disapproval of certain speech, and that heightened scrutiny should apply, whether or not trademarks are commercial speech.

The Tam decision continues the trend of Supreme Court cases extending First Amendment protection for offensive speech.  Perhaps less likely to be noted, however, is that this decision also promotes free market principles by enhancing the effectiveness of legal protection for a key intellectual property right.  To understand this point, a brief primer on the law and economics of federal trademark protection is in order.

  1. The Law and Economics of Federal Trademark Protection in a Nutshell

A trademark (called a service mark in the case of a service) is an intellectual property right that identifies the source of a particular producer’s goods or services.  Trademarks reduce transactions costs by enabling consumers more easily to identify and patronize particular goods and services whose attributes they associate with a trademark.  This enhances market efficiency, by lowering information costs in the market and by encouraging competing firms to develop unique attributes that they can signal to consumers.

By robustly protecting federally-registered trademarks, the federal Lanham Act (see here for Lanham Act trademark infringement remedies) creates strong incentives for each trademark holder to invest in (and promote through advertising and other means) the quality of the trademarked goods or services it produces.  Strong trademark remedies are key because they promote the market-based interest in ensuring trademark holders that their individual property rights will be protected.  As one scholar puts it, “[i]t is generally accepted that [federal trademark] infringement actions protect both the goodwill of mark owners and competition by preventing confusion.”

Shielded by firm legal protection, the trademark holder will tend not to allow the quality of its trademark-protected offerings to slip, knowing that consumers will quickly and easily associate the reduced quality with its mark and stop patronizing the trademarked product or service.  Absent strong trademark protection, however, producers of competing products and services will be tempted to “free ride” by using a competing business’s registered trademark without authorization.  This sharply reduces the original trademark owner’s incentive to invest in and continue to promote quality, because it knows that the free riders will seek to attract customers by using the trademark to sell less costly, lower quality fare.  Quality overall suffers, to the detriment of consumers.  Allowing free riding on distinctive trademarks also (and relatedly) sows confusion as to the identity of sellers and as to the attributes covered by a particular trademark, leading to a weakening of the trademark system’s role as a source identifier and as a spur to attribute-based competition.

In short, federal trademark law protection, embodied in the Lanham Act, enhances free market competitive processes by protecting a trademark’s role in identifying suppliers (reducing transaction costs); incentivizing investment in the enhancement and preservation of product quality; and spurring attribute-based competition.

  1. The Demise of Lanham Act Disparagement Enhances Trademark Rights and Promotes Free Market Principles

The disparagement clause denied federal legal protection to a broad class of trademarks, based merely on the highly subjective determination by federal bureaucrats that the marks in question “disparaged” particular individuals or institutions.  This denial undermined private parties’ incentives to invest in “disparaging” marks, and to compete vigorously by signaling to consumers the existence of novel products and services that they might find appealing.

By “constitutionally expunging” the disparagement clause, the Supreme Court in Tam has opened the gateway to more robust competition by spurring the vigorous investment in and promotion of a larger number of marks.  Consumers in the marketplace, not bureaucrats, will decide whether the products or services identified by particular marks are “problematic” and therefore not worthy of patronage.  In other words, by enhancing legal protection for a wider variety of trademarks, the Tam decision has paved the way for the expansion of mutually-beneficial marketplace transactions, to the benefit of consumers and producers alike.

To conclude, in promoting First Amendment free speech interests, the Tam Court also gave a shot in the arm to welfare-enhancing competition in markets for goods and services.  It turns out that competition in the marketplace of ideas goes hand-in-hand with competition in the commercial marketplace.

Alden Abbott

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I am a Senior Legal Fellow at the Heritage Foundation. I write on antitrust, domestic and international regulatory policy, and law and economics. I am an Adjunct Faculty Member at George Mason Law School.

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