COVID-19 and Bottom-Line Impacts in Trademark Litigation: A Q&A with Joel Steckel

The immediate economic impacts of the COVID-19 pandemic extend beyond their most visible manifestations in the shutting of businesses and the dramatic rise in unemployment. A more subtle consequence that has arisen in the marketplace pertains to companies’ reputations. Brands and the public’s perception of them are impacted not only by a firm’s own actions but also by the actions of other market players.

One example is that of 3M, a highly reputable company whose enormous product portfolio includes health care products and personal protective equipment (PPE). In April 2020, 3M filed a complaint alleging that, in reselling 3M-brand N95 respirators at exorbitant markups, another company engaged in “unlawful price-gouging, fake offers, counterfeiting, and other unfair and deceptive practices” (3M Co. v. Performance Supply LLC). 3M argued that the defendant’s actions “trade off the fame of the 3M brand and marks” and “undercut the integrity of the marketplace and constitute an ongoing threat to public health and safety.” 3M has filed similar litigation in several states to protect its marks against other alleged bad actors.

To explore the issues around negative effects on consumers’ brand perception in more depth, Principal Rene Befurt and Manager Anne Cai spoke with Analysis Group’s academic affiliate Joel Steckel about the complexities involved in quantifying harm in trademark litigation. Dr. Steckel, a professor of marketing at the NYU Stern School of Business, has consulted, testified as an expert witness, and conducted modeling and analysis in numerous cases involving antitrust, damages assessment, trademarks, marketing and branding strategy, forecasting, and the statistical analyses of market response.

What kinds of trademark issues do you see being raised by the pandemic?

Early on, when the country first started dealing with the substantial demand for items such as protective gear and hand sanitizer, we expected that some pandemic-related trademark issues might arise. With the big traditional suppliers unable to keep up with the unexpected demand, it was no surprise to see attempts by other players to capitalize on trusted brands’ reputations, or to use their products to engage in price-gouging. I think it is fairly obvious that both issues can substantially impact traditional suppliers’ brands and their key associations, such as trust, quality, and the like.

Consider the lawsuits that 3M filed to protect its reputation. One of 3M’s concerns was that unauthorized actors would trick the state officials who were awarding PPE contracts into believing that they were purchasing 3M’s products from an authorized distributor, at prices that were 500% to 600% above 3M’s list price. Is there a reason for concern that consumers’ associations would change towards the negative? It’s a reasonable question.

I have no involvement with any of the 3M cases, so my opinions are based solely on publicly available information. That said, I think such cases exemplify some of the specific issues involved with trademark dilution, which is an area I have focused on in my own research.

What are the critical issues that you see?

I see the question of whether brands are being slowly eroded by losing certain associations that took companies decades to establish in consumers’ minds as being critical. I should first note that trademark dilution is different from outright infringement, where a company might be accused of counterfeiting or stealing another company’s mark. Dilution litigation is not about a counterfeit product, but rather about how the association of a famous mark with a similar mark affects the perception of the famous mark. 3M’s complaint expresses the issue as a dilution of what it called the “distinctive quality” of the famous 3M marks, and so the marks’ established selling power would be (in their terms) “whittled away.” Indeed, the language in the Trademark Dilution Revision Act of 2006 calls for consideration of impairment of “distinctiveness.”

To stay with the 3M example, 3M claims that its marks stand for high quality and “the strictest quality-control standards,” and that the defendant’s pricing erodes those associations. Determining the extent, and consequently quantifying the value, of that erosion is a very complex undertaking, maybe even more so than estimating, say, lost sales from infringing behavior. You have to come up with a solid methodology for determining changes in the value of a brand, one which can meet a court’s rigorous standards.

By the way, 3M has publicly announced that it will donate any damages, including attorneys’ fees and costs, to COVID-19 charities. To me, that is another signal that one of 3M’s central concerns is protecting its brand, and the brand’s perception by the public.

 

How do you go about estimating the harm done to the value of an intangible asset, such as a brand or trademark?

My colleagues and I have looked into this question in our research on methodologies for assessing the effects of trademark dilution, and in particular dilution by blurring. Dilution by blurring occurs when the use of one trademark similar to another impairs the distinctiveness of the other mark. Judge Richard Posner characterized this as the allegedly diluting trademark causing consumers to pause for a moment to identify to which entity the mark refers.

In our research, we wanted to move beyond the initial question of whether or not a consumer associates a particular product with a particular mark. We were more interested in how we might accurately assess the degree to which certain associations with a brand are weakened – or increased, for that matter. Again, 3M would likely prefer to avoid being associated with raising prices by 500% at the most inopportune moment – this certainly is not how the company portrays itself in the public spotlight.

As it turns out, measuring the strength of brand associations is not trivial. While it may be relatively straightforward to establish that a specific association exists with a different mark or with different attributes, determining the impact of that association on consumer decisions is more difficult.

In that regard, what have companies in trademark litigation done to try to establish impairment?

Starting a few decades ago and stretching into more recent times, researchers employed response-time studies to provide evidence of impairment. In these studies, subjects are shown pairs of image-based or text-based associations between a brand and a product or an attribute. Subjects in the control group are just shown valid or well-documented associations – for example, associating Mercedes-Benz with the product group “cars,” or with key characteristics such as quality, dependability, or price.

Subjects in the test group are shown the same associations, plus additional associations that may dilute the established associations, like associating Mercedes-Benz with toothpaste as well as with cars. The theory is that dilution can be established if subjects in the test group take measurably longer to respond after being exposed to the additional associations.

The problem with such a nontrivial process is that any number of things can open the door to methodological critiques. For example, a slowing down in response time perhaps reflects a weakened brand association, or it simply may be a surprise effect. It is challenging to control for such unwanted influences, and our research has shown that some response-time studies that were considered reliable by many in the academic community were actually flawed.

This is where academia and litigation are very similar. To pass muster in court, you have to show that your tests were conducted with rigorous controls so that the results can’t be attributed to any factors other than the ones in question. But that’s hard to do.

So we developed two alternative methodologies using Likert scales to measure how strongly, rather than how quickly, an attribute or characteristic is associated with a trademark. A very simplified explanation is that we are comparing test groups to control groups in terms of whether their ranking of associations, on a scale of 1 to 5, for example, changes after being exposed to potentially diluting content or a control.

We believe these methodologies can provide a simplified but methodologically sound basis for determining whether diluting ads reduce consumers’ associations between a brand and key attributes, in contrast to testing just for the presence of those associations. And one of the methodologies is designed to directly quantify whether the associations in question measurably affect consumers’ preferences and intent to purchase the targeted brand. That is a critical consideration when trying to place a value on the alleged harm.

Does this approach have implications for the growing number of trademark cases being filed over pandemic-related actions?

As I mentioned earlier, the Trademark Dilution Revision Act of 2006 states that dilution by blurring should incorporate consideration of the impairment of the distinctiveness of the famous mark, not just whether a junior mark is associated in consumers’ minds. But one of the most difficult questions is, how do you do that in a way that will stand up to scrutiny in court?

We believe that our methods are more reliable tests of association strength, and that courts can use these to make a more nuanced determination of whether association actually leads to dilution. It will be interesting to see if these kinds of methods will come to have even wider utility in trademark cases in the aftermath of the pandemic. ■