Daniel Klerman. Trademark Dilution, Search Costs, and Naked Licensing 1 Trademark Dilution, Search Costs, and Naked Licensing Daniel Klerman USC Law School Abstract Trademark dilution needs to be rethought to ensure that it enhances social welfare. Blurring should only be considered harmful when it increases consumer search costs. The fact that a trademark calls to mind two different products should not itself be considered actionable. Blurring only causes real harm when it interferes with consumers’ ability to remember brand attributes. The Coase Theorem suggests that anti-dilution statutes will not block beneficial, non-competing uses of a mark, because, if transactions costs are low and the use is socially beneficial, the trademark owner will license the use. Unfortunately, the “naked licensing” rule, which forbids unsupervised licenses, adds unnecessary transactions costs and blocks potentially beneficial uses. Some commentators think free riding is or should be the essence of dilution. If free riding causes no harm – no consumer confusion, no blurring, and no tarnishment – then it is socially beneficial and should be allowed.Daniel Klerman. Trademark Dilution, Search Costs, and Naked Licensing 2 Trademark Dilution, Search Costs, and Naked Licensing Daniel Klerman* September 23, 2005 Speaking for a unanimous court, Justice Stevens’s opinion in Victor’s Little Secret1 held that plaintiffs in dilution cases must prove “actual dilution,” which most courts and commentators interpret as requiring proof of “actual harm.”2 The opinion said relatively little, however, about the nature of dilutive harm or how it is to be proved. This article argues that Victor’s Little Secret should spur litigants, experts, judges, and academics to think more deeply about the harms dilution may cause. In particular, it argues (a) that blurring should only be considered harmful when it increase consumer search costs, (b) that the rule against “naked licensing” should be relaxed to encourage beneficial but potentially dilutive licensing, and (c) that free-riding should not be considered actionable. Blurring occurs when a single trademark denotes products made by different firms. It will be argued, however, that this phenomenon in and of itself is not harmful. Blurring is only harmful when it interferes with consumers’ ability to remember information about products and brands and thus increases search costs. Many commentators opposed the creation of the dilution cause of action, because they thought it would forbid socially beneficial uses of trademarks by non-competing firms. The Coase Theorem, however, suggests that, if transactions costs are low, such beneficial uses will still occur, because the trademark owner and non-competing user will negotiate a licensing agreement. The “naked licensing” rule, however, has long forbidden licensing without quality supervision by the trademark owner.3 This doctrine increases the costs of licensing and thus impedes potentially beneficial non-competing * Professor of Law and History, USC Law School, University Park MC-0071, Los Angeles, CA 90089-0071, [email protected]. The author thanks Clarisa Long, Jonathan Lee, Tom Lee, Mark Lemley, Douglas Lichtman, Maureen Morrin, Richard Posner, Jennifer Urban, Jerry Varthielil and participants in the Jurisprudence of Justice Stevens Conference for comments, criticism, and assistance. 1 Moseley v. V Secret Catalogue, 537 U.S. 418 (2003). 2 See, e.g., Nissan Motor Co. v. Nissan Computer Corp., 378 F.3d 1002, 1110 ((9th Cir. 2004) (“Injunctive relief is available …. if … there is actual harm to the trademark owner, Moseley v. V. Secret Catalogue…”); Four Seasons Hotels and Resorts B.V. v. Consorcio Barr, 267 F. Supp. 2d 1268, 1332 (S.D. Fla. 2003) (interpreting Moseley as “requiring evidence of actual harm”); David J. Franklyn, “Debunking Dilution Doctrine: Toward a Coherent Theory of the Anti-Free-Rider Principle in American Trademark Law,” 56 Hastings L. J. 117, 166 (2004-2005) (“the United States Supreme Court has made matters worse by ruling that dilution requires proof of actual harm.”); Meredith Blaise Switzer, “Annual Survey of Caselaw: Intellectual Property,” 26 U. Ark. Little Rock L. Rev 933, 933 (2004) (“The Supreme Court reversed the Sixth Circuit and held that a trademark dilution plaintiff must show actual harm…”); Stacey L. Dogan and Mark A. Lemley, “Trademarks and Consumer Search Costs on the Internet,” 41 Houston L. Rev. 777, 790 n. 42, 826 (2004) (interpreting Victor’s Little Secret as “requiring actual harm.”) 3 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition, §§ 18:42 & 18:48 (2005); Rudolph J. Kuss, “The Naked Licensing Doctrine Exposed: How the Courts Interpret the Lanham Act to Require Licensors to Police their Licensees & Why this Requirement Conflicts with Modern Licensing Realities and the Goals of Trademark Law,” 9 Marq. Intell. Prop. L. Rev 361 (2005); Kevin Parks, “’Naked’ is not a Four-Letter Word: Debunking the Myth of the ‘Quality Control Requirement’ in Trademark Licensing,” 82 Trademark Rep. 531 (1992).Daniel Klerman. Trademark Dilution, Search Costs, and Naked Licensing 3 uses. While the rule may have some justification as applied to competitive or related uses, where there is a danger of consumer confusion, there is no comparable justification for application of the doctrine to non-competitive, unrelated uses. Some commentators have suggested that free-riding is the essence of dilution, either in theory or in practice.4 The diluting user is taking advantage of the original, famous mark’s goodwill without consent or compensation, and, they argue, this free-riding should be actionable dilution. Nevertheless, if the second user is not in any way harming the senior user5 – increasing search costs, tarnishing the senior user’s reputation, or causing some other injury – the second use is socially beneficial and should be allowed. Part I provides some brief background on trademark dilution and Victor’s Little Secret. Part II analyzes blurring. Part III discusses how the naked licensing doctrine impedes beneficial licensing transactions. Parts IV and V analyze the tarnishment and free riding theories of dilution. I. Background Trademarks can be violated in two different ways: by infringement and by dilution. Trademark