Advertising and the Public Interest: Legal Protection of Trade Symbols

Brown, Ralph S., Jr., The Yale Law Journal

"The protection of trade-marks is the law's recognition of the psychological function of symbols. If it is true that we live by symbols, it is no less true that we purchase goods by them. A trademark is a merchandising short-cut which induces a purchaser to select what he wants, or what he had been led to believe he wants. The owner of a mark exploits this human propensity by making every effort to impregnate the atmosphere of the market with the drawing power of a congenial symbol. Whatever the means employed, the end is the same--to convey through the mark, in the minds of potential customers, the desirability of the commodity upon which it appears. Once this is attained, the trademark owner has something of value. If another poaches upon the commercial magnetism of the symbol he has created, the owner can obtain legal redress." Frankfurter, J., in Mishawaka Rubber & Woolen Mfg. Co. v. S.S. Kresge Co.(1)

The law of trade symbols is of modern development, largely judge-made and only partly codified.(2) Its impetus comes from the demands of modern advertising, a black art(3) whose practitioners are part of [1166] the larger

army which employs threats, cajolery, emotions, personality, persistence and facts in what is termed aggressive selling. Much aggressive selling involves direct personal relationships; advertising depends on the remote manipulation of symbols, most importantly of symbols directed at a mass audience through mass media, or imprinted on mass-produced goods. The essence of these symbols is distilled in the devices variously called trade-marks, trade names, brand names, or trade symbols. To the courts come frequent claims for protection, made by those who say they have fashioned a valuable symbol, and that no one else should use it. Very recently, for example, the vendors of Sun-Kist oranges lost a court battle to prevent an Illinois baker from selling Sun-Kist bread.(4) The highest court, in its most recent encounter with a like case, upheld the power of a manufacturer of robber footwear to prevent the use of a red circle mark by a seller of rubber heels, which the plaintiff did not manufacture.(5)

In these cases, a choice of premises and techniques is still open. One set of premises, which seems to subsume Justice Frankfurter's felicitous dictum, recognizes a primary public interest in protecting the seller who asks the court to enjoin "another [who] poaches upon the commercial magnetism of a symbol he has created." This expansive conception merits critical attention. Are all forms of poaching forbidden? Should they be, consistent with another premise? This one asserts, in the words of Judge Frank, "the basic common law policy of encouraging competition, and the fact that the protection of monopolies in names is but a secondary and limiting policy."(6) The legal ties which bind together some apparently inconsistent decisions may be found, but not simply in an indiscriminate prohibition of poaching, nor yet in a presumption in favor of competition, no matter how compelling. Rather, courts move from these and other premises to refinements of doctrine.

It is proposed here to seek, in the milieu in which trade symbols are created and used, for data underlying both premises and dogma. This will require an independent evaluation of the institution of advertising. What do we get for the three billions of current annual outlay?(7) Do [1167] we want it? Unfortunately, there is little consensus as to what values advertising serves. Its votaries have poured their most skillful symbols back in the soil from which they sprang.(8) Its detractors, maddened by the success of this propaganda, would purge Radio City with fire and sword.(9) One thing the examination will reveal is that what appear to be private disputes among hucksters almost invariably touch the public welfare. We shall therefore be concerned to ask, when courts protect trade symbols, whether their decisions further public as well as private goals.

I. TRADE SYMBOLS AND THE ECONOMICS OF ADVERTISING

The principal reason for advertising is an economic one(10)--to sell goods and services. We can describe this process, and its economic effects, with relative confidence,(11) compared to the obscurity which [1168] surrounds the psychological, cultural, or other social consequences of modern advertising. These may turn out to be more portentous than the affairs of the market-place. But the materials are uncollected or unrefined. In this survey we can only drop a handful of problems into a footnote.(12) The reader must make his own judgments from his own observations, remembering, as we turn almost exclusively to economic discussion, that man does not live by bread alone.

Informative and Persuasive Advertising

The buying public submits to a vast outpouring of words and pictures from the advertisers, in which, mingled with exhortations to buy, is a modicum of information about the goods offered. From the point of view of the economic purist, imparting information is the only useful function of advertising.(13) A perfect market demands a perfect enlightenment of those who buy and sell. One of the many imperfections of the real world is that, absent advertising, most buyers would have to go to a great deal of trouble to discover that is offered for sale.(14) To the extent that the blandishments of sellers inform buyers what is to be bought, and at what price, advertising undoubtedly helps to quicken the stream of commerce.(15)

[1169] Most advertising, however, is designed not to inform, but to persuade and influence,(16) What is the occasion for such tremendous outlays on persuasion and influence in a well-ordered economic system? If we consider first the total stream of production and consumption, persuasive advertising seems only to consume resources that might be put to better use producing more goods and services. It does not increase total demand, it only increases wants. Effective demand arises, not from what we would like to have, but from the purchasing power of the community created by its productive power. We consume what we produce, and no more. Considering the economic welfare of the community as a whole, to use up part of the national product persuading people to buy product A rather than product B appears to be a waste of resources.

Perhaps advertising helps to produce more, if it goads people to work longer and harder.(17) At first blush, this seems a moral and salutary prescription. On second thought, one realizes that more work and more goods means less leisure. Are we interested only in greater possessions? In its own right, and as a time to consume the fruits of labor, leisure is highly prized. Somehow a balance has to be struck between work and play, but the degree of discontent which the advertisers can create is not the way to do it.(18)

[1170] In any case, there is a system for multiplying both goods and leisure which has been in operation for some time with some success. It consists of putting savings to work in the form of machines, and is called capitalism, or the Industrial Revolution, or whatever label is politically pleasing. If the process of capital investment is at all affected by advertising, that relationship is far more important to explore than the unsatisfactory proposition that advertising increases production by making people work more.

Any possible connection between advertising and capital investment is especially worth pursuing, because the new economics has taught us that if the rate of additions to or replacements of capital equipment declines, total production and income will also decline, and to a much greater extent. The level of production is a function of the level of investment, and the level of investment is a function of the expectations of enterprisers.(19) People do not start new businesses or expand old ones unless they think they see a profit in it, and that is where advertising comes in. To pursue the relation between persuasive advertising and profits, we shall have to make our way through the thickets of monopolistic competition and the slough of mass-production cost economies. Whatever profit advantages advertising offers spring chiefly from these two sources. Only after exploring them can we consider whether profits, so derived, facilitate the total flow of investment.

Market Control and Differentiation

How does the privilege of an entrepreneur to spend money on advertising increase the likelihood of profit at all, in a system described by its proponents as one of free competition? The competitive system, after all, postulates many sellers offering uniform products to many buyers. For any good, at a given time, there is a single market price, at which any seller can sell all he chooses to produce, i.e., all that it is profitable for him to produce. In a pure economy, advertising outlays (except for information to make the market more nearly perfect) would only add to the costs, and decrease the profit, of any firm.(20)

It is easy to escape from this dilemma by reminding ourselves that pure competition is descriptive only of an ideal, not of the real world.(21) [1171] We have long since settled for such compromise goals as "workable" competition,(22) which take account of the fact that actual markets are a blend of competitive and monopolistic elements, reflecting the unwillingness of men of business to sell at prices impersonally determined. The term "monopolistic" means only the acquisition of any degree of control over a market, either as regards price or entry.(23) Most entrepreneurs strive to achieve some degree of control, for it enables them to have a price policy directed at maximizing profits, instead of leaving all to the chances of a competitive market.(24) They seek to escape from competition in two principal ways: (1) By dominating the market, either through a loose or close-knit combination of firms, or by the growth of a single firm. Examples are steel,(25) shoe machinery,(26) aluminum.(27) The main drive of the antitrust laws is to retard this trend.(28) (2) By differentiating their products, in order to carve out a separate market in which demand, price, and output can be manipulated within limits to be discussed.(29) The main drive of advertising is to facilitate this latter form of control.

[1172] The process may be exemplified by the familiar case of cigarettes, which shows clearly how differentiation serves to increase the price of an advertised article, relative to the prices of substitutes.(30) Taking the industry as a whole, heavy advertising may first make consumers more willing than they would otherwise be to pay the prices set for cigarettes, and to forego such alternative satisfactions as cigars, candy, and sodas. Thus the total consumer outlay for cigarettes may be increased, to the benefit of both advertising and non-advertising manufacturers.(31)

Benefit to the advertiser alone comes with the preference he is able to establish for his brand over unadvertised brands. If this preference translated into price is more than the outlays on advertising required to accomplish the persuasion, differentiation is profitable. How profitable it is for the advertised brands of cigarettes is indicated by the price policy of the leading companies in the thirties. During the period of greatest rivalry with what were then ten-cent cigarettes, the Big Three could maintain a three-cent difference in retail price per pack and still hold unadvertised competition in check. The cost of advertising was not more than a cent a pack; the tobacco used in the standard brands cost about half a cent a pack more than that in the economy brands. Thus less than a cent and a half in costs brought in three cents in revenue.(32) The famous blindfold tests raised doubts whether smokers could actually tell one brand from another, even as between standard and economy brands.(33) But, from the point of view of the advertiser as well as that of the economist, whether the differentiation is real or spurious does not affect the result.(34) The only necessity is for buyers [1173] to believe that there is a difference, and to be willing to pay to satisfy the preference created for the advertised product. Their willingness establishes the degree of market control.

Even if the main drive of advertising is to decrease competition, what about the frequent fierce rivalry between advertisers? Is that not competition? Emphatically, it is not, in any economically useful sense of the word. The only kind of competition contemplated by the major cigarette manufacturers is competition for a higher degree of monopoly power, for a larger share of a market which is already insulated from the price competition of non-advertisers.(35) The uniformity of price among advertised products like cigarettes is not the uniformity of a perfectly competitive market. It is a price set by price leadership or by tacit agreement among a few sellers, and it is high enough for the advertisers to spend large sums in attempting to divert customers from one another. If the number of advertising sellers is large, as is the case with medicines,(36) there may be no uniformity of price. But the differences reflect the varying exploitation by each seller of his differentiated market, and only rarely the incidence of price competition. What price a competitive market would bring is suggested for almost any drag by the spread between the advertised product and its unheralded chemical equivalent. The standard example is aspirin; in 1938 an ounce of acetylsalicylic acid at wholesale cost $.13; an ounce of Bayer Aspirin, $.75. Other advertised brands trailed after Bayer.(37)

[1174] In between the extremes of industry organization (few sellers, one product; many sellers, many products) lies a gamut of permutations; but the common element, wherever there are successful advertisers, is a trend away from one or more characteristics of a competitive market.(38)

The achievement of profitable differentiation by persuasive advertising is not an automatic process. Attempts by firms or industries to do so have often failed.(39) Borden concludes that if demand in general for the product is declining, advertising cannot reverse the trend. Cigars are a standard example. Further, there are still many goods so defiantly homogenous that not all the ad-man's magic can persuade the public that one brand is different from another. Sugar is a case in point; the producers, unable to achieve monopoly power through advertising, turned to conspiracy.(40) At the other extreme, some articles--for example women's dresses or fresh vegetables--flaunt their differences so self-evidently that attempts to establish brand preferences are practically useless. In between is a wide range in which artful or blatant persuasion can compound from a few real differences a dizzy variety of brands, each with its loyal band of buyers(41) whose demand schedules have been mesmerized into inelasticity. The competition to create such a monopolized market is often so fierce that, as will be shown, brands jostle for attention and their effects sometimes cancel out.

But the histories of a host of consumers' goods--packaged foods, [1175] cosmetics, kitchen appliances, to mention only a few major fields--are proof that it does pay to advertise, that it pays in higher prices and higher profits than if the product was in undifferentiated competition with like products in a competitive market.

Unit Cost Economies

Another supposed major advantage is that advertising, by increasing sales, enables the firm to reach lower unit costs, resulting from the increased efficiency of large-scale operation, and from the spreading of fixed costs over a greater number of units.(42) The attainment of output compatible with lowest costs will be automatic in a classically competitive market.(43) However, we accept the facts of life. In a differentiated market, like that for soap, advertising may run to twenty per cent or more of the manufacturer's selling price(44) and to multi-million annual expenditures by single companies.(45) A soap manufacturer who wants to sell soap either accepts a very low price in the face of extreme brand preferences,(46) or commissions a set of soap operas. As the result of advertising he may get a share of the market which approaches the most efficient capacity of a soap factory. Aside from the unfortunate [1176] fact that little material is available on the optimum size of plants, soap or otherwise,(47) there is even less to suggest that advertising is directed toward achieving any such level of sales. In theory, the producer bent on maximizing profits will, under conditions of monopolistic competition, tend to hold down output short of most efficient capacity. In practice, he may not know what his most profitable output is, and, if advertising has opened the market sufficiently, may produce far beyond the point either of maximum profits or of lowest average costs.(48) In any case, the extreme diversity of possible and actual cost situations makes generalization especially difficult. Even if it were possible to construct accurate cost curves for some sample cases, the question would still remain whether any economies achieved by an increase in production exceeded the selling costs(49) incurred by advertising (or other aggressive selling devices). Borden decided that the evidence is inconclusive.(50) As a general proposition, then, we cannot say that advertising increases profits (or reduces prices) by decreasing costs, though it may do so in some instances.

One special case of importance is that of a product in an early stage of development, with very limited sales. Its price almost invariably decreases as large-scale production is achieved. If the good is one which is extensively advertised, it is argued that advertising is responsible for the increase in sales and therefore for the decrease in price. The mechanical refrigerator is a conspicuous example.(51) Such instances ignore the possibility that demand for a meritorious product might spring from its merits. No one doubts that hand-made refrigerators cost more than mass-produced refrigerators, and that a volume of demand was necessary to make mass-production feasible. Did advertising create the demand? Or was it advertising plus the desirability of the product, plus the improvements in quality, reliability, etc., that one expects from time and effort? It is worth noting that once strong brand preferences had been created in the refrigerator field, the remarkable [1177] price reductions that had marked the development period came to an end, and from about 1933 to 1940 prices were relatively stable, though sales continued to increase. In the latter year, with the market at the old prices pretty well saturated, the introduction of "stripped-down" models touched off another round of price competition, unfortunately terminated by war and inflation.(52)

That advertising (or aggressive selling generally) may speed up the growth in demand for mechanical refrigerators or any other innovation is not doubted. The refrigerator caught on in a decade, while our rode forebears might have gone without ice cubes for a generation. Such acceleration is presumably a good in itself, and is a legitimate boon to the investor. Business men, advisedly, take short views. A project which will pay off its development costs in five years is more attractive in an unstable world than one requiring ten, even if the long-run profit prospect is the same for both. Both the information and influence functions of advertising help a new venture catch on, and thus shorten the period of uneconomic small-scale production. In the growth stage, they may, besides rapidly enlarging demand, increase its elasticity, so that the market will respond rewardingly to price reductions.(53)

Advertising and Investment--Conclusions

The catalytic action of advertising on new enterprises brings us back to a point of departure: the question whether advertising stimulates capital goods outlays. Profit, we know, is the bait for investment; and competition involves uncertainty. Without, for the moment, questioning these incomplete axioms, let us consider a hypothetical prudent capitalist who proposes to launch a new washing machine. He faces, among others, two major hazards: consumers may not know they want it, and competitors may crowd in and sell it cheaper than he would like. Advertising can solve both problems. First, it can stimulate demand for the product--the new, electronic, waterless washing machine. Second, it can develop a secondary demand for the promoter's own brand--the new Synchro-Dyne electronic waterless washing machine; accept no substitutes. So far as the advertising describes something new it serves, as we have seen, a function useful to both seller and community. The probability of protected profits, however, is the major attraction to the entrepreneur. A differentiated brand, like a patent, a secret process, control over distribution channels or control of raw materials, is a safeguard against the risks of competition. All these devices may encourage investment by those who are [1178] able to take advantage of …

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Publication information: Article title: Advertising and the Public Interest: Legal Protection of Trade Symbols. Contributors: Brown, Ralph S., Jr. - Author. Journal title: The Yale Law Journal. Volume: 108. Issue: 7 Publication date: May 1999. Page number: 1619+. © 2009 Yale University, School of Law. COPYRIGHT 1999 Gale Group.

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