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The Harvard Journal of Law & Technology recently released its Fall 2010 issue, now available online.  Aaron Perzanowski, author of “Unbranding, Confusion, and Deception” has written an abstract of his article for the Digest, presented below.

- The Digest Staff

JOLT Print Preview: Unbranding, Confusion & Deception
Aaron Perzanowski

Unbranding is the practice of eliminating or selectively reducing the use of a brand in response to unfavorable consumer opinion. Faced with the reality of a deeply damaged brand, many firms seek a fresh start. Rather than take steps to repair their public image, they create a new one. Although unbranding threatens to confuse and mislead consumers about the source and characteristics of goods and services, the legal remedies available to consumers to address these harms are limited.

When a brand suffers from strong negative consumer perceptions, it transforms from a valuable asset to a major liability. Just as brands can function as repositories of consumer goodwill, reflecting favorable public sentiment, they can also represent badwill, negative associations in the minds of consumers. Given the expense of jettisoning an established brand and launching a new one, unbranding is generally a rational strategy only when an existing brand is deeply and widely unpopular, perhaps because the firm has produced dangerous products or engaged in illegal activities. Tellingly, BlackwaterPhilip Morris, and WorldComm have all employed unbranding strategies in recent years.

In another recent example, American International Group (AIG) turned to unbranding in the wake of the 2008 financial crisis as investment banks and other Wall Street firms found their brands circling the drain. As the recipient of the largest private federal bailout in U.S. history, AIG became known as a “zombie company,” “synonymous with the credit market freeze and subsequent economic meltdown.” AIG’s then-CEO Edward Liddy offered a dire prognosis for his firm’s brand, stating “the AIG name is so thoroughly wounded and disgraced that we’re probably going to have to change it.” Liddy’s predictions soon became reality. In order to distance itself from the AIG brand, AIG Financial Advisors, one of the firm’s broker-dealers, rechristened itselfSagePoint Financial in January of 2009. This switch is troubling because it lessens the likelihood that consumers will correctly connect SagePoint’s services to the beleaguered AIG, a firm many consumers would prefer to avoid.

Trademark law, because of its focus on ensuring the integrity of source indicators in order to reduce search costs and protect consumers, is one obvious option for addressing the potential harms of unbranding. But even though the dominant theoretical justifications for trademark law support efforts to control unbranding and prevent the consumer confusion that it creates, the handful of courts to analyze unbranding through the lens of trademark law have demonstrated striking insensitivity to the potential harms unbranding strategies impose on consumers, competitors, and the market broadly.

That insensitivity is largely a reflection of structural features of trademark law that render it incapable of adequately addressing the problem of unbranding. Most fundamentally, trademark law is primarily concerned with potentially confusing uses of a mark by a firm other than the trademark owner. Trademark law is well-suited to identify and prevent inter-brand confusion, but it is much less adept at dealing with intra-brand confusion — a firm’s misuse of its own brand in a manner likely to confuse consumers. As a result, confusing uses of a firm’s own marks are largely unregulated by trademark doctrine. To the extent trademark law does address a firm’s confusing use of its own mark, its traditional remedial mechanisms of abandonment and refusal to register are of limited value in the unbranding context. Abandonment of the old mark is often precisely the goal an unbrander is trying to achieve. And while an inability to register the new mark denies the unbrander some important benefits, marginal deterrence is unlikely to dissuade a firm that has already chosen the drastic path of unbranding.

Trademark law aside, federal unfair competition law offers two more promising avenues for addressing unbranding: the Lanham Act’s false advertising provision and the Federal Trade Commission’s power to regulate deceptive advertising practices. Section 43(a) of the Lanham Act creates a private right of action for false advertising. In addition, section 5 of the Federal Trade Commission Act (“FTCA”) empowers the FTC to prevent unfair or deceptive practices in commerce. Because both of these provisions directly address intra-brand deception, they avoid the fundamental limitation of trademark doctrine. Nonetheless, the rubrics of false advertising and deceptive practices face their own hurdles.

First, although courts have recognized that a mark can serve as a vehicle for false advertisement, they have applied that reasoning only to descriptive marks. But many of the names adopted by unbranders — SagePoint, Altria (formerly Philip Morris), Xe (formerly Blackwater) — are suggestive, arbitrary, or fanciful. These new marks are not misleading because they explicitly misdescribe product characteristics, but because they implicitly distance the firm’s offerings from its former identity, an identity that over time has come to stand for a number of descriptive attributes in the minds of consumers. To the extent section 43(a) and the FTCA hinge on a mark that misrepresents the product on its face, they are of limited use in preventing deception caused by unbranding.

But neither statutory text nor precedent demand such a narrow reading. Courts must simply acknowledge that even inherently distinctive marks have the capacity to mislead consumers about product attributes and qualities. Trademark law recognizes that confusion is likely when products sold under an established mark are materially altered because the merchant is taking advantage of consumer expectations they created. Likewise, false advertising law should recognize that even arbitrary and fanciful marks convey discrete factual claims about a product to consumers. If the public is defrauded by the use of the same old mark on a substantially different product, the public might just as easily be defrauded by the use of a substantially different mark on the same old product.

Second, neither section 43(a) nor the FTCA provides consumers a cause of action to challenge false or deceptive marketing. The Lanham Act has been interpreted to allow competitors, but not consumers, to sue a false advertiser. The FTCA, by contrast, grants the FTC enforcement authority but creates no private cause of action. Since consumers lack standing under either regime, the choice between the Lanham Act and the FTCA is, in part, a choice between relying on competitors or the FTC to protect the best interests of consumers.

There are good reasons to suspect the FTC would serve as a better proxy for the interests of consumers. The interests of consumers harmed by false advertising  and the competitors of a false advertiser are likely to diverge in a number of important scenarios. Competitors acting as vicarious avengers, for example, have little incentive to challenge false or misleading claims that are pervasive within an industry. More benignly, any single competitor may lack the financial incentive to challenge false advertising in a crowded market.  Since the percentage of sales attributable to false advertising that will be captured by the plaintiff is uncertain and likely small, even a guarantee of success on the merits would likely be an insufficient incentive for litigation. In short, the economic interests of competitors are largely disconnected from the harms suffered by consumers. Unlike competitors, whose interests may be less than perfectly aligned with those of consumers, the FTC is charged with defending the public interest. Although institutional constraints limit the FTC’s ability to challenge many instances of deceptive unbranding, it is better positioned to protect consumers against the harms of unbranding.

Posted On Feb - 18 - 2011 Comments Off

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