BEHIND THE TIMES: WHERE TRADEMARK LAW AND CROWDFUNDING DISCONNECT

By: Zach Fountas

The Value of Trademarks

In an increasingly digital age, it is not surprising that a company’s most valuable property may in fact be intangible. A trademark is a word, name, or symbol used to identify a source of goods or services and differentiate them from goods or services of competitors. Though trademarks originated as a way to identify the source of goods, and therefore, the quality of the product, they have evolved to have their own independent value as brands. Nike’s “swoosh” is a prominent trademark consumers look for when they want to purchase a quality sweatshirt. The logic is simple; Nike –  a leading clothing manufacturer – has established goodwill with consumers by consistently selling quality products. By putting the trademark “swoosh” on their products, a consumer purchasing that product does so with a preexisting understanding of the product’s quality.

However, if the extent of a trademark’s value is identifying who produced the good, then why is a lower quality sweatshirt with the words “Harvard University” across the chest often the same price as a Nike sweatshirt? Harvard, unlike Nike, is not known for its textiles nor did the university manufacture the sweatshirt. Why then does the value of the sweatshirt increase when a Harvard trademark is added? The value increases because today branding is business and an association or affiliation with a famous brand has value independent of the quality or source of the goods.

In a world of constant advertising and a need for yearly growth only brand name recognition, and the loyalty accompanying it, can ensure the success of an emerging company. According to the market-research company Millward Brown, brand equity accounts for at least 30% of the value of companies listed on the S&P 500 index. This isn’t surprising. According to investsnips.com, McDonald’s – among the most successful brands in American history – has a stock price around $150, while competitors like Jack in the Box and Wendy’s have stock valuations of around $85 and $17 respectively. The value discrepancies are not because McDonald’s has burgers that are twice the quality of Jack in the Box or nearly nine times better than Wendy’s. The discrepancies rest largely on the customer loyalty developed by McDonald’s over the past 60 years.

So, Let’s Trademark Our Brand!

With such a significant value, it is important to register your trademark as soon you can. As noted here, early registration of your mark prevents others from using the same or similar mark for their products and begins the process of brand recognition. Applications for registering a federal trademark fall under 15 U.S. Code §1051(a) which requires:

1.      The trademark must be filed for by the person or entity that actually controls the quality of the goods and services.

2.      The applicant must specify what type of entity and the citizenship or domicile.

3.      That the mark is used in commerce.

The third element, “use in commerce” is difficult for many startups to meet, particularly those relying on crowdfunding campaigns. The Trademark Manual of Examining Procedure §901.1 (TMEP) defines use in commerce as a “bona fide use of a mark in the ordinary course of trade, and not made merely to reserve a right in a mark.” It further states that the mark must be placed on the goods, containers, displays or otherwise associated with the goods and that the goods must be sold or transported in commerce. Unfortunately, 70 years after the enactment of the Lanham Act, businesses no longer have the luxury of a sheltered slow and steady growth towards prominence, unthreatened by competitors from every corner of the country. As a result, trademarks need to be secured as soon as possible.

The Crowdfunding Problem        

Crowdfunding has become a staple strategy of many emerging companies in an attempt to create, or corner, a market before competitors have a chance to draw consumers away. Emerging companies that utilize crowdfunding as a way for validating their product concept, and raising the necessary capital to deliver the product, have a problem. The product they are advertising needs a name, the name needs to stay the same from when they advertise the product on a platform such as Kickstarter to the time it is delivered to backers, and that name needs to be a unique brand to build around. Ideally, a company could trademark the name once their Kickstarter campaign webpage was up and running. The TMEP §904.3(i) states that:

A web page that displays a product can constitute a “display associated with the goods” if it:

1.      contains a picture or textual description of the identified goods;

2.      shows the mark in association with the goods; and

3.      provides a means for ordering the identified goods.

Unfortunately, as lizerbramlaw.com notes, this does not satisfy the second requirement of “use in commerce” defined earlier in this blog. In addition to a display associated with the goods bearing the trademark, the goods themselves must be “sold or transported in commerce” as stipulated in §901.1 of the TMEP. Further, TMEP 904.03(i)(D) expressly stipulates that the USPTO must reject specimens of displays on beta websites – a website displaying a preliminary version of a product or service – if there is no “evidence of use of the applied-for mark in commerce.” As discussed earlier, use in commerce requires a bona fide use, which generally eliminates prototypes from being evidence of use of the applied-for mark.

As a result, it is unlikely that a Kickstarter campaign would constitute actual use in commerce. Ignoring, for the moment, whether a successfully funded Kickstarter campaign could be argued to be a pre-sale of a product and thus “in commerce”, we should first consider campaigns that are just beginning. As described in Kickstarter’s FAQs, pledges to campaigns that are unsuccessful are refunded to backers. Therefore, until a campaign is successful and meets its capital raising goal, there is no actual agreement between the company and the backers to exchange funding for a product. Without outstanding performance required on both sides (payment on one side, delivery of product on the other), no sale has truly occurred, let alone commerce.

Even if a project on Kickstarter is backed and has met its fundraising goal, it is still uncertain as to whether the pledges in connection with the product idea and desired trademark have been constructively “sold in commerce” as a presale. In fact, lawyers focused on the legal issues surrounding crowdfunding video games bemoan the fact “that the USPTO does not consider a successful crowdfunding campaign to be a use in commerce.”

Does Filing an Intent-to-Use Solve the Problem? 

Rather than filing for a trademark currently in use, emerging companies using crowdfunding could file their desired mark under 15 U.S. Code §1051(b) with an intent to use the mark. In this respect, a company may essentially reserve a mark prior to its use in commerce. However, intent to use (ITU) filings, instead of actual use filings, have additional costs, both monetary and non-monetary. There are more filing fees with an ITU application since applicants must pay to amend their filing to allege use once the product is in commerce. Also, until the applicant has used the mark in commerce and alleged that use to the USPTO, there is no right to sue for trademark infringement.

            Although filing an ITU application helps an emerging company that is trying to get off the ground through crowdfunding, it is not a perfect solution. Notwithstanding the additional monetary costs inherent in an ITU application, the protection only extends the time for a company to demonstrate use in commerce by approximately 9 months, unless the USPTO grants an extension. After filing the ITU, the USPTO will issue a Notice of Allowance (NOA) within 12 weeks if no party files an opposition. Once the NOA has issued, the applicant has 6 months to file an additional Statement of Use, certifying that the mark has been used in commerce. Failure to do so will result in the abandonment of the trademark filing.

Conclusion

            It is clear that filing an intent-to-use application can buy emerging companies some time in their quest to secure a trademark, but it is not long. Companies that want security in knowing their mark will be registered (absent issues regarding protectable subject matter, distinctiveness, and functionality) must plan ahead. Prior to debuting a mark on a crowdfunding campaign, a company should consider the length of time their campaign will be open to meet its fundraising goal, and how quickly after the closing of a successful campaign the company can produce and send its first shipment of product. If the timeline for such a feat is shorter than 9-months, the company should file for a trademark under intent-to-use. If the projected timeline is longer, the company must consider whether they believe they could successfully receive an extension from the USPTO, or whether they want to hold off on debuting their mark in association with the goods until a later date.