Walking Through Mine Fields by Greg Weisman
Remember Catchit, Stubbies, Hardwear, Unitryb, or Natural Born Carvers? Dig up an old ASR tradeshow directory from fifteen or even just five years ago, and it’s tantamount to an obituary for brands gone belly up or (even worse) now sold exclusively “downstairs.” Of course, should you run into one of the former owners of one of those labels, they’ll never concede defeat, inevitably responding with the classic, “Dude, we’re still huge in Japan.” Sure you are.
The truth is, labels come and go all the time. Regrettably, few start-ups seek legal advice from inception. Legal fees are quite expensive, but like paying an accountant to do your taxes correctly or having the car dealer rather than your buddy change your oil, the investment is well worth it.
While it takes a lot of expertise, determination, and sometimes luck to become the next Volcom or Hurley, there are a host of mistakes that can ground a fledgling brand before it ever takes flight. Here are a few of the more common mistakes new brands make, culled from the decade or so I’ve spent representing the action-sports industry.
Planning To Avoid Litigation Despite relatively low barriers to entry, starting a brand is still far more complicated than setting up a lemonade stand. Even a simple start-up is a full-scale, full-service, design, manufacturing, and global distributing enterprise. There are all sorts of common scenarios that can lead to litigation, and for a small brand, the cost associated with relatively minor legal fees could potentially turn the lights out.
Just take the basics of the manufacturing process for example: Processing raw yarn into a finished garment is a melody of dozens of individual moving parts that must all synchronize in perfect rhythm to result in defect-free product that is received on time at the agreed landed price. Each step in the process can fail at a moment’s notice. Without a war chest of money to support a legal battle against overseas vendors that are for all practical purposes immune to legal threat, even a small pothole can send a new brand skidding out of control—and that’s before getting any product out of the warehouse.
Rest assured that no matter what pocket stitch you choose for your denim, Levi’s will send you a “cease & desist” demand with a litigation threat. Rest assured that someone else has already registered your mark in Japan and you’ll have to sue to get it back. Rest assured that every other top-level URL domain name suffix you don’t register for your brand will be cyber squatted upon by others. It all happens—especially to labels that start to demonstrate success.
The reality is that the cost of litigation—not to mention the administrative headache of flying around the country for depositions and court hearings—can quickly suck dry all of a burgeoning business’ available cash flow. Litigation in California is easily a six-figure enterprise, and that’s before paying damages. If you find yourself mired in litigation that’s discovery intensive (employment cases such as sexual harassment claims are notorious examples), the bill can easily be in excess of $50,000 per month. Only the large labels with in-house counsel can afford that bill, and they know it.
The goal is to fly under the litigation radar for the first several years, and that can only be achieved by seeking counsel from your attorneys, accountants, and other business advisors in advance, and making strategic decisions for your business that result in limited and anticipated risk.
Choose Your Trademarks Carefully Trademarks are the most valuable asset owned by an apparel label. In fact, coming up with a name, logo, and slogan is one of the most important decisions a new business can face. The problem is that initial selection of a mark is often not dealt with in the manner befitting its paramount importance. Trademarks are actually ranked in one of four categories, depending on their ability to be “distinctive” of goods and services. The strongest marks are “coined” phrases, which are words that don’t exist anywhere else in language and that are created for the sole purpose of conjuring up a new brand. Think Exxon, Kodak, or Pepsi. These are “coined” or “fanciful” words that have been invented for the sole purpose of selling goods. Using a fanciful mark means there’s little risk that the mark will be weakened or diluted by other users.
The next category of marks are so-called “arbitrary” marks, which are words that exist in the English language, but have nothing to do with the particular goods or services on which the mark is used. For example, Mustang for automobiles, or Monster for an energy drink. By using a word that, while existing in society, doesn’t readily suggest an association with the product being promoted, the brand owner creates distinctiveness that separates the product from others.
The next strongest group of marks are so-called “descriptive” marks, which are generally weak marks and as such are discouraged. These are marks that describe the goods being offered or some quality thereof, such as California Pizza Kitchen. By merely hearing the name, consumers have at least a vague idea of what types of goods or services are sold at each of those establishments. The problem is that no one can really lay legal claim to “own” a word, and there may be dozens of other “pizza kitchens” or restaurants associating with California in the area. This creates inherent dilution in the chosen mark and even a potential for consumer confusion. In fact, “descriptive” marks are only capable of protection if they attain “secondary meaning” in the minds of consumers, which is a legal term of art meaning that consumers readily identify that particular name or slogan with the brand owner. As a practical matter, the U.S. Patent And Trademark Office will refuse to register a descriptive mark unless it receives satisfactory evidence of “secondary meaning” in the minds of consumers.
The final category of marks are so-called “generic” marks, which are merely the common names of the products themselves, and as such generally not capable of creating trademark protection absent a strong showing of secondary meaning. An example would be a computer store called “The Computer Store.”
The problem is that people are predisposed to select marks that are descriptive of the goods or services. The popular thinking is that the selection translates to some level of free advertising by inherent word association. If you hold yourself to the public as the “Malibu Clothing Company,” it’s pretty obvious what you do and where you are, but you now have a weak mark. This practice should be discouraged. Take the time to coin a word.
Keep It Simple If you think that naming and registering one trademark seems like more work than anticipated, just imagine doing multiple trademarks. Despite the complications, businesses launch new sub-brands and slogans all the time. As a business counselor, the practice drives me crazy, because there’s generally little foresight that goes into a lot of these decisions. If a business owner stopped to consider the cost and consequences of launching a new mark or brand, my experience tells me that they would act much more circumspectly. Let’s examine why.
The essence of trademark law is “source identification.” This is the basis upon which trademark rights are created. What this means is that when consumers hear a particular word or phrase, they immediately associate it with a particular company, and only that company. Selecting multiple trademarks to describe various (sometimes not even distinct) functions of a business can dilute the overall brand equity by shifting attention away from the primary or “house” mark (the main business name).
There are legitimate reasons to spin off a new brand name, but it should be done infrequently and only where there’s real value in brand segmentation—most especially for start-ups. Take Nike, for example. With the exception of the Air models, the Tiger Woods brand, and its new Jumpman 23 line, it’s basically stuck with the same four letter name and Swoosh logo for nearly 30 years. While on the topic, it is also best to stick with a particular font or typestyle for your mark and be consistent in its use.
Many businesses like to use multiple tag lines or slogans. This practice can be dangerous. Each time a business makes a “trademark” usage of a new slogan or name, it runs the risk that this new mark infringes someone else’s rights. Remember, because litigation defense places such a catastrophic economic burden on a new business, it needs to be avoided at all costs. For this important reason, simplification is usually best.
Another practical reason for minimizing use of multiple marks is out-of-pocket cost. Trademark searches and registrations are expensive, particularly in multiple jurisdictions. Few companies can allocate the necessary cash to protect multiple marks, and inevitably there’s always a dispute with some other party down the road. Japan and South America are each notorious regions for trademark “pirates” who register your mark and try to sell it back to you. The goal should be to have one strong “house mark” with an established record of unblemished use, that is, use without infringement claims.
Stay Local At First Trademark rights are jurisdictional. Rights created by use in the United States end at the border. Interestingly, the United States is one of the few countries in the world where one doesn’t need to register a mark to create trademark rights. Most other jurisdictions require a brand owner to obtain a registration in that country before any rights are created.
New businesses are always flattered when a potential distributor or customer offers to purchase goods for resale in another country. The catastrophic danger in jumping into such a relationship is not taking the time to see what other trademark users exist in that jurisdiction. Even a few “spot” sales to another country can result in a business being sued for infringement. There’s nothing worse than being enticed by the prospect of a few extra bucks and getting slapped with an infringement suit from somewhere in Europe.
Each time you do business in a foreign jurisdiction, you are subjecting your business to being sued there, and if you think litigation in California is expensive—and it is—just imagine having to pay a foreign attorney to have each legal document translated to English and having to travel halfway around the world to attend a hearing.
Prudent brands only conduct business abroad after doing due diligence into the trademark rights that exist in that foreign jurisdiction—and have the financial resources necessary to defend any claims which may arise, just in case. There are exceptions, but for a start-up it’s often much more expensive to terminate a relationship with an overseas distributor than the marginal value of sales that distributor or territory would ever generate.
Clearly, there’s no one perfect recipe for brand success. There are a host of perils all new apparel businesses face, scores of them not mentioned in this article (like the ever-increasing risk of class-action wage/overtime and related employment claims now clogging the courts). If the foregoing leaves you with but one pearl of wisdom, it should be to act proactively in talking to your lawyers, accountants, and business advisors. Each business or marketing decision has a legal effect that should be considered with foresight and not in hindsight.