Rowan Forster, Author at The Fashion Law

Early last month, Harvard Business Review published an interesting intellectual property-related article, in which declared that Tesla Motors CEO and SpaceX founder-slash-CEO Elon Musk “doesn’t care about patents.” The article’s authors Michael Heller and James Salzman followed up on this attention-grabbing assertion by asking, “Should you?” The opening lines of the article very much set the tone, “Ownership seems straightforward in business: Get a patent or copyright when you create something. Charge for its use. Avoid ambiguity about who owns what.”

Heller and Salzman argue, however, that “much of this wisdom is wrong,” and in fact, the “world’s savviest businesses already know this,” which is presumably why HBO tolerates theft, SpaceX forgoes patents (and Tesla has taken a stance on this, too), and Airbnb started operating without even knowing whether its product offering was legal. With this in mind, Heller and Salzman introduce the idea of “ownership engineering,” which they define as “creating value by managing how products and services are owned,” and they dive into three ownership engineering strategies, namely, tolerating theft, foregoing ownership, and leaning into ambiguity.

Tolerating theft – HBO chose not to pursue people who were using the passwords of others and thereby, “stealing” content. Instead, the entertainment titan decided to let the unauthorized usage grow the brand and create an affinity for the product. Microsoft did the same with its software in China, with Bill Gates saying, “As long as they’re going to steal it, we want them to steal ours … they’ll get sort of addicted and then we’ll somehow figure out how to collect sometime in the next decade.”

Gates’ logic prevailed, as China now accounts for 10 percent of the company’s annual revenue. The authors even suggest that this thinking has application in the luxury goods market (where both widespread trademark protections and counterfeiting prevail), citing a study that showed that 40 percent of people who bought counterfeit luxury goods ultimately went on to buy the genuine version later.

Foregoing ownership – The authors go on to assert that the basis for legal ownership is misplaced, and that there are substitutes available, such as secrecy, which appears to be the route being taken by Musk, who says, “We essentially have no patents. Our primary long-term competition is China. If we published patents it would be farcical because the Chinese would just use them as a recipe book.” There is also the “first-mover advantage.”

Leaning into ambiguity – Finally, the authors argue that legal clarity as to ownership is less important than many believe. Ownership ambiguity, the authors assert, creates “legitimate and valuable business opportunities.” They point to Uber, which started a business where car owners charge people for conveying passengers, and Airbnb, which launched a company that enables apartment owners charge holiday-goers, as examples of this; neither had a clear legal framework at the outset.

With the foregoing assertions in mind, should brand owners throw protections to the wind and follow in the footsteps of Mr. Musk? Not necessarily. While there may be arguments in favor of this approach, there are those that weigh against it. A recent joint report of the European Patent Office (“EPO”) and the European Union Intellectual Property Office (“EUIPO”), for instance, asserts that businesses with at least one registered patent, design or trademark have an average of 20 percent higher revenue per employee than businesses without any of those rights. And actually, while a 60 percent premium exists for entities that have a combined portfolio of patent, trademark, and design rights, of these three types of intellectual property rights, the EPO/EUIPO found that patents pay the greatest dividends. Specifically, the EUIPO and EPO found that “greatest effect” in terms of value was demonstrated by companies that own at least one patent, which resulted in a 36 percent increase in revenue per employee. These figures appear to establish a clear link between intellectual property ownership and commercial success.

(It is also worth noting that while SpaceX may not be seeking out patent protections for its various innovations, it is not disavowing iP protections across the board, as it has been protecting other assets, such as its uses of the SpaceX name, as indicated by filings with trademark offices across the globe.)

Ever since the Venetians granted exclusivity to the Murano glass makers in the 15th century, we have been granting time-limited monopolies (generally 20 years for patents) to inventive people. There is simply no doubt that the system of monopoly protection in exchange for information has played a significant role in technological progress. Much of this progress has been good – we see it now more than ever with COVID-19 vaccines (although admittedly there is controversy as to whether these patents should be suspended in this time of crisis). The Harvard Business Review article is, without doubt, an interesting read, but does not tell the whole story about the merit of the different intellectual property protections.

Rowan Forster is an Executive in ENSafrica’s Intellectual Property department. He specializes in the drafting, filing and prosecution of patent and design applications, and in trademark filing and prosecution in various jurisdictions.

Two recent trademark stories are worth discussing. The first – which centers on British multinational retailer Marks & Spencer – is significant because it clearly demonstrates that a trademark is more than merely an indicator of source, it is also a saleable asset, and in many recent examples, the primary asset at the center of an M&A transaction. The second scenario – which considers the implications of brand extensions – is similarly noteworthy in that it suggests that the strength of companies’ trademarks may be far more robust than we think they are.

The first story involves well-known London-based retailer Marks & Spencer, which, like many other retailers, has been hit by a COVID-induced shopping slump, causing its clothing sales to fall by almost 25 percent in the 13 weeks leading up to December 26. (Despite such a marked drop, there is one type of clothing that is still doing quite well in these days of remote working: pajamas/loungewear.)

Against that background and in order to help ease its enduring woes by bolstering “its efforts to sell a wider selection of brands online, a strategy that will pit it directly against its larger FTSE 100 rival, Next,” according to the Guardian, M&S announced on January 11 that it would acquire English fashion brand Jaeger Retail Limited, which had been in liquidation. Curiously, both M&S and Jaeger Retail were founded in 1884, although only one of these old-timers has been able to keep going.

Addressing the acquisition, which was expected to close by the end of January, an M&S spokesman said, “We have set out our plans to sell complementary third-party brands … to accelerate our transformation and turbocharge online growth … in line with this, we have bought the Jaeger brand.” M&S has, in fact, not only bought the Jaeger brand, but it has also bought a number of other brands, including Early Learning Centre, Nobody’s Child and Ghost London, in furtherance of this same aim.

An M&S spokesman was quoted in January as saying that the company was “in the final stages of agreeing to the purchase of product and supporting marketing assets from the administrators of Jaeger Retail Limited.” The reference to “product” presumably refers to a limited amount of Jaeger stock, and while the term “supporting marketing assets” is not defined but presumably refers to trademark registrations. What is quite clear from the news of the parties’ deal is that M&S is not taking on the Jaeger shops or concessions, thereby, putting the Jaegar brand at the center of the transaction.

In other words, what M&S has acquired is the “Jaeger” trademark – and presumably, a number of related marks, as well – which it will apply to an array of goods, namely, apparel. As such, the trademarks will serve as assets that the company believes will produce a revenue stream – i.e., a valuable business asset.

A robust and flexible asset

The second recent news report refers to the concept of brand extension, or in other words, the practice of taking an existing brand and using it in relation to goods or services other than those for which it has been used in the past. Many companies look to – and ultimately, benefit from – various brand extensions because they enable brands to enter into new market categories, thereby, introducing new revenue streams. But while such endeavors bring opportunities for increased brand use, companies generally do not undertake brand extensions lightly.

In fact, before undertaking a brand extension, brand owners are encouraged to consider various issues, such as: The business case: is there money to be made? The legal issues: is the brand (name, logo) available in respect of the extended goods or services (this will be determined by way of a clearance search, something that can be an expensive exercise)? Protection: if the trademark is available, should it be registered for those goods and services (cost will often play a role here)? Reputation: is there any risk that the extension will dilute or tarnish the brand as it currently exists?

The last question is a particularly compelling one for consumer-facing companies. In a recent article for MarketingWeek, entitled, “Damaging brand image is rarely harmful because it matters so little,” marketing expert Mark Ritson suggests that companies may be completely overthinking things on the reputation front, and in fact, brands are far more robust than we like to give them credit for. With that in mind, Ritson suggests that most consumers may not really care about things like brand image or values. He cites examples, such as Ben & Jerry’s, which started out as a purveyor of dog food before becoming an uber successful ice-cream company; and Porsche, which took considerable flak from consumers when it first brought out its monster 4×4, only to now sell more off-road vehicles than sexy sports cars.

In Porsche’s case, it was synonymous for decades with two things, “sports cars and performance.” Its Cayenne model, which it introduced in 2002, “was neither,” according to Ritson. Since the now-90-year old Porsche had firmly established itself as the maker of exquisitely designed and engineered sports cars, a push towards SUVs was challenging initially. “Porsche’s entry into the SUV category would surely undermine its sports car credibility and perceptions of performance, and ultimately taint the brand,” Ritson asserted, “Or would it?”

“When we published the plan that Porsche would develop and sell an SUV, [our] core fan base could not believe it,” Klaus Zellmer, CEO of Porsche Cars North America, said in an interview last year. “They would say, ‘That’s not my brand anymore.’” Yet, almost 20 years later, the Cayenne is Porsche’s best-selling car of all time, and the automaker’s bigger models continue to sell across the board. SUVs, for example, made up more than two-thirds of Porsche’s U.S. sales in 2019. Consumers ultimately were persuaded.

Ritson’s somewhat depressing conclusion is two-fold. One, “The business of brand management is very risk-averse. We use words like ‘tarnish’ or ‘damage’ whenever we see a brand deviate from the strict trajectory that its positioning and brand image dictate,” but, he states, “time after time, almost without exception, these deviations do not result in destruction.” And second, in the age of Trump, “what people think of you is far less important than the more brutal objective of getting people to think about you.” Leaving aside the fact that the age of Trump is over, there is, nonetheless, food for thought here for companies and the length at which they can extend their valuable brands.

Elon Musk Doesn’t Care About Patents. Does That Matter?

The Trademark: A Saleable, Robust and Surprisingly Flexible Asset

A robust and flexible asset