A True Work - in - Progress . I Have Sketched Out

A panoply of retailer practices, such as advertising loss leaders or marketing house brands, take advantage of third party trademarks to increase the retailer’s profit. In a sense, trademark owners create spillover benefits for these retailers (I call these benefits “brand spillovers”). This Article examines the phenomenon and legal treatment of brand spillovers. In general, retailers have not been held liable for capitalizing on brand spillovers. Yet, from a theoretical perspective, arguably retailers get a “free ride” from the positive externalities of brand spillovers. On that basis, perhaps trademark owners should be allowed to reinternalize those benefits. However, retailers’ efforts also reduce consumer search costs, creating social benefits. Thus, it would be a mistake to constrain retailers from capitalizing on brand spillovers. Like retailers, online intermediaries may use brand spillovers to reduce consumer search costs. As a result, search engines, adware vendors and other online intermediaries should be legally treated like retailers and not held liable for reducing consumer search costs. INTRODUCTION In a typical trademark enforcement campaign, a trademark owner pursues competitors and counterfeiters, but never retailers. Retailers appear to escape as the blameless bystanders in trademark disputes. This is ironic because typically retailers are the power player in distribution chains. Far from being passive intermediaries, retailers control—and sometimes manipulate— consumer behavior to increase the retailers’ sales. Among other techniques, retailers routinely and actively capitalize on what I call “brand spillovers.” A brand spillover occurs when a trademark owner generates consumer interest in a trademarked product but third parties (retailers or other manufacturers) capture additional revenue from this interest. This process has four steps: 1. A trademark owner promotes a trademarked offering. 2. This promotion instigates consumers to search for the trademarked offering. * Assistant Professor, Santa Clara University School of Law, and Director, High Tech Law Institute. Email: [email protected]. Website: http://www.ericgoldman.org. I appreciate the comments of the participants at the Law & Society Association 2005 Annual Meeting. 3. In the course of the consumer’s search, retailers present other products to the consumer that compete with or complement the trademarked offering. 4. Consumers purchase these other products, creating incremental profits for the retailers (and perhaps third party manufacturers). Some of these purchases will be diversionary in that they replace sales of the trademarked offering; other purchases simply will be new purchases that are proximately attributable to the trademark owner’s marketing efforts. Retailers capitalize on brand spillovers in many ways, but retailer sales of “house brands” provide a good illustrative example. Frequently, retailers offer house brands side-by-side with branded products, using evocative trade dress and comparative statements. Through the products’ physical adjacency, consumers searching for the branded products see the house brand, which some of those consumers purchase instead of the branded products. In turn, house brands typically yields higher margins for the retailer than the branded products, so this brand spillover process increases retailers’ profits. Unquestionably, retailers “use” third party trademarks to generate these brand spillover benefits. Further, this “use” creates positive externalities for the retailers, giving retailers (and other manufacturers) a free ride on trademark owners’ work. Arguably, then, such behavior might be appropriately sanctioned through doctrines like trademark infringement or unfair competition. Yet, despite the ubiquity of retailer practices that capitalize on brand spillovers, my research has not yielded a single case where these retailer practices (without other defects, like confusing trade dress) have been deemed trademark infringement or unfair competition. In fact, there appears to be wide consensus that such retailer practices are normal and legitimate, and I have had difficulty finding cases where trademark owners even sued retailers at all. In contrast, trademark owners have shown little reluctance suing online intermediaries, such as search engines and adware vendors, for activities that capitalize on brand spillovers. The legal treatment of online intermediary behavior is not yet settled, but some early precedents have been very unfavorable to the intermediaries. There are several reasons why the law of physical product adjacency may not be extensible online, but this Article will provide a normative framework to explain that, in fact, retailers and online intermediaries perform identical functions for consumers of lowering consumer search costs. In turn, these transaction cost reductions improve consumer and social welfare, so it would be a mistake to attempt to reinternalize brand spillover benefits to trademark owners. [Description of Parts]. I. BRAND SPILLOVERS IN RETAIL CONTEXTS A. Retailers as Power Players in the Distribution Chain Retailers are often assumed to be passive intermediaries between manufacturers and consumers. Typically, neoclassical economists assume that intense inter-retailer competition forces them to become passive agents for effectuating consumer demand, effectively making the retailers invisible in the distribution chain. 1 House brands are a retailer’s generic version of a well-known branded product. House brands are also referred to as “store” brands or “private label” brands. This assumption is wrong. Retailers are hardly passive intermediaries between manufacturers and consumers. 1. Retailers’ Leverage Over Manufacturers With respect to manufacturers, retailers often have significant leverage over manufacturers. Retailers control the manufacturer’s access to consumers. If the retailer decides not to carry the manufacturer’s goods, the manufacturer may lose significant sales opportunities. As a result, in some retailing sectors, manufacturers “compete” to be carried by retailers. Thus, large retailers like Wal-Mart or Costco can act as “kingmakers;” their decision to carry a product can propel its manufacturer to a market leadership position, and their decision to drop a product can doom its manufacturer. Also, retailer selling space is typically fixed in the short run, so retailers attempt to maximize its allocation to produce the highest return. Retailers’ placement decisions affect manufacturer sales—eye-level placement generates more sales than placement on the bottom shelf; and placement in displays at aisle ends generates more sales than placement in the middle of aisles. Thus, competition for prime shelf space allows some retailers to charge manufacturers extra for certain types of placement. In some cases, retailers can charge “slotting fees” that do not vary with sales volume. 2. Retailers’ Control Over the Consumer Experience In many cases, retailers have substantial or complete control over the consumer’s shopping experience. A retailer’s goal is to generate more sales from each consumer, so retailers engage in a variety of techniques designed to change consumer behavior, such as positioning products to generate impulse purchases or to direct consumer interest in a way that maximizes sales. Retailers are also notorious for seeking ways to increase the amount of time that consumers spend in their stores, under the theory that consumer spending increases as a function of the time spent in store. From a branding perspective, the retailer, not the manufacturer, has the direct frontline interaction with the consumer. Thus, the retailer’s choices and behavior can significantly shape the consumer’s perceptions of the brand. For example, retail salespeople can set consumer expectations and steer consumers towards or away from specific purchases. Other ways that retailers can affect consumer perceptions include: • retailer advertising. Retailers frequently advertise manufacturers’ products. In some cases, manufacturers provide “co-op” funds to retailers to defray the cost of such advertising (which partially benefits the manufacturer by stimulating demand for the manufacturer’s products). 2 This becomes less true when the manufacturer sells direct-to-consumers. In some industries, direct sales to consumers are the norm. In other industries (such as groceries), they are the exception. In many cases, manufacturers’ direct-to-consumers sales alienate retailers, who legitimately view such sales as a threat to the retailer’s intermediation (a phenomenon sometimes called “channel conflict”). In response, retailers may weaken support for the manufacturer or drop the manufacturer altogether. 3 Over 20,000 new grocery products are debuted each year. See Food Institute Report. However, a typical grocer adds only about Y new products each year. [CITE] [http://www.findarticles.com/p/articles/mi_go1545/is_200209/ai_n7194706 – 30,000 new products annually compete for total SKUs of 25,000 at average grocery store] 4 A classic example is when grocers places children-oriented cereals on lower shelves—i.e., at eye level for