EU Trade Mark Law and Product Protection: A Comparative Analysis of Trade Mark Functionality

Brancusi, Lavinia Book EU Trade Mark Law and Product Protection: A Comparative Analysis of Trade Mark Functionality Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Brancusi, Lavinia (2024) : EU Trade Mark Law and Product Protection: A Comparative Analysis of Trade Mark Functionality, ISBN 978-1-003-37604-0, Routledge, London, https://doi.org/10.4324/9781003376040 This Version is available at: https://hdl.handle.net/10419/290378 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ EU Trade Mark Law and Product Protection This book employs scholarly analysis to ground practical tools for applying the EU Trade Mark law (EUTM) functionality refusal grounds to address business needs when registering trade marks consisting of product characteristics. The study comprehensively examines the absolute grounds for a refusal of registration of functional signs under EUTM. It interprets the functionality refusal grounds through objective tests, focusing on the pro-competition rationale of denying trade mark exclusivity on product features that are technically or aesthetically important for competitors’ ability to trade in alternative products. The work takes a comparative approach looking at the US trade dress functionality doctrine, and a law and economics perspective on the role of trade marks and brands in the marketplace. It explores how competition rules related to market definition and the substitutability of products, as well as marketing and design findings related to branding and aesthetics, could be integrated into the legal assessment of EUTM functionality. The volume will be of interest to academics and researchers working in the areas of Intellectual Property Law, Trade Mark and Design Law, EU Law, Comparative Law, and Branding. Lavinia Brancusi is Adjunct Professor at New Technologies Law Centre, Institute of Law Studies, Polish Academy of Sciences in Warsaw, Poland. She holds law degrees from the University of Warsaw, Faculty of Law (master, dr. iur.) with an award-winning doctoral dissertation in design law. Her research interests cover cumulative protection in intellectual property, with a specific focus on product protection, functionality in trademark and design law, as well as the interface between IP and competition rules, especially in relation to brands. EU Trade Mark Law and Product Protection A Comparative Analysis of Trade Mark Functionality Lavinia Brancusi LONDON AND NEW YORK First published 2024 by Routledge 4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2024 Institute of Law Studies, Polish Academy of Sciences The right of the Institute of Law Studies, Polish Academy of Sciences to be identified as author of this work has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. The Open Access version of this book, available at www.taylorfrancis .com, has been made available under a Creative Commons Attribution 4.0 license. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Brancusi, Lavinia, 1977author. Title: EU trade mark law and product protection : a comparative analysis of trade mark functionality / Lavinia Brancusi. Other titles: European Union trade mark law and product protection Description: Abingdon, Oxon ; New York, NY : Routledge, 2023. | Includes bibliographical references and index. Identifiers: LCCN 2022061735 | ISBN 9781032446318 (hardback) | ISBN 9781032452289 (paperback) | ISBN 9781003376040 (ebook) Subjects: LCSH: Functionality (Trademark law)—European Union countries. Classification: LCC KJE2768 .B7359 2023 | DDC 346.404/88—dc23/eng/20230406 LC record available at https://lccn.loc.gov/2022061735 ISBN: 978-1-032-44631-8 (hbk) ISBN: 978-1-032-45228-9 (pbk) ISBN: 978-1-003-37604-0 (ebk) DOI: 10.4324/9781003376040 Typeset in ITC Galliard Pro by codeMantra Publication financed under the program of the Minister of Science and Higher Education under the name “DIALOG” in the years 2019–2023 as part of the project “Excellence in Legal Research. Promoting Polish Achievements in the Area of Legal Sciences Abroad” implemented under the leadership of Celina Nowak by the Institute of Law Studies of the Polish Academy of Sciences. To my husband Jan Contents Acknowledgements ix Introduction: how to deal with functionality in trade mark law in a practical way 1 1 The legal framework of trade marks’ functionality in the EU 18 2 ‘La raison d’être’ of functionality in the EUTM: a tool for balancing interests between legal exclusivity and enhancing competition 39 3 The US legal framework of functionality doctrine: areas of convergence with EU law 64 4 Functionality within the framework of law and economics: competition concerns against protecting functional trade marks 87 5 Categories of signs falling within the scope of EUTM functionality refusal grounds 153 6 Technical functionality 191 7 Generic functionality: signs resulting from the nature of goods 247 8 The functionality of signs giving substantial value to goods 267 9 Conclusions 321 Index 335 4 Introduction interoperability with products of different origins demonstrates the absence of convergence between the functionality rules of EU trade mark and design law, at least with regard to some particular industries.17 Certainly, design rights are limited in time, and so legal exclusivity appears to affect market competition less severely than in the case of trade marks. This is one of the reasons that the book focuses on trade mark law, whilst restricting the discussion of design rules to details which help frame the main theme. In addition, Lego has strategically registered other kinds of trade marks which cover important elements of toy sets or features of the packaging. One such example is a figurative trade mark displaying a black-and-white brick, drawn with yellow contours on a red background, which was unsuccessfully challenged upon absence of distinctive character for reasons of realistic representation of the interlocking brick.18 Another interesting registration was a two-dimensional figurative mark that involved a one-knob brick represented in black and white as a rhombic shape and a half-oval shape set above – the attempt of invalidation due to functionality failed.19 The case of Lego’s threedimensional shape of a manikin with protrusion on the head and holes in its feet is interesting for several reasons. Trade mark registration was sought for the toy figure, although design rights were also available. Serious functionality objections challenged the basic structure of the manikin as resulting from the nature of designated goods, however the registration was successfully maintained, despite the fact that the CJEU had implemented a restrictive approach towards this type of functionality.20 Another recent attempt to cancel the registration of a quasi-identical shape of a manikin without protrusion for reasons of functionality also failed.21 These few examples show that the practice of relying on trade marks that combined several design features (graphics/colour or shape elements) was a shrewd business manoeuvre because such trade marks were more easily registered and defended against cancellation. Lego’s story is instructive not only for demonstrating how mindful entrepreneurs cover their most valuable core assets (here: product appearance + interoperability/connectivity effects = modular system) by means of various layers of intellectual property rights (trade marks, patents, designs, unfair competition, copyright). It also shows the persistent pressure from competitors who wish to freely exercise technical solutions available in the public domain in order to trade similar products. In reality, competitors wished to get closer to Lego’s market position, which was built on a renowned product. Lego invested time and money into delivering products of consistent quality, which 17 There are more differences between these two types of regulation which the book touches further upon. 18 EUTM 106948, EUIPO BoA R-690/2014-4. 19 CTM 13745476, EUIPO Cancellation No. 14148 C of 27 November 2018. 20 CTM 50450, T-396/14, C-452/15. 21 CTM 50518, EUIPO cancellation no. C 44791 of 1 July 2020. Introduction 5 was expensive. Should rivals get a share of Lego’s success? They would argue that the ability to trade alternatives, some compatible with Lego’s system, would exert market pressure to lower the price of the final products (toy sets) which ultimately lies in the interest of consumers. Who deserves more attention? Intuition suggests that solving the conflict between the interests of right-holders and competitors, let alone consumers, is not easy and involves balancing and prioritizing competing goals. One possible legal tool to address this issue is represented by the functionality provisions of trade mark law. The book will discuss the purpose of this regulation in detail, and how it may be effectively applied. At this point it is worth noting that concerns about the anti-competitive effects of ‘monopolizing’ product features under trade mark protection are not a feature unique to the EUTM. Many other legislations worldwide have adopted similar policies and rules pertaining to functional signs. For reasons that will be explained further, this book benefits extensively from examining the US functionality doctrine and practice. 2. Is functionality a pressing problem that requires (distinct) attention? Functional trade marks are occurring at an increasing rate in the practice of the EUTM in recent years. Each new case strikes from a surprising angle and generates a great deal of vigorous debate among scholars and in the courts. One possible reason for this situation lies in the expansion of new categories of signs, those that fall outside the traditional realm of words and graphics, and which businesses seek to use and register as trade marks.22 This trend seems attributable to ever-more sophisticated branding strategies that build on important product features, appealing to a wide range of sensorial experiences. As will be discussed in Chapters 4 and 8, interdisciplinary research is developing an integrated approach to what may represent product value in the eyes of consumers, and how emotional experience becomes an essential indicator of consumer satisfaction. Product interaction involves much more than visual stimuli, triggering the specific consumer emotions that designers and marketers seek to steer. Businesses know how stimulating sound, touch, taste, and smell may be, and how employing a complete sensory experience as part of product launches or shopping activity may influence consumer awareness and the purchase decision.23 For these reasons, the issue of monopolizing aspects 22 Irene Calboli, Martin Senftleben (eds.) The Protection of Non-Traditional Trade Marks: Critical Perspectives (OUP 2018). For a recent critique, Irene Calboli, ‘Non-Traditional Trademarks as Barriers to Competition, Innovation and Creativity: What if Their Protection Could Be Effectively Limited in Practice’ in Gustavo Ghidini, Valeria Falce (eds.) Reforming Intellectual Property (Elgar 2022) 1. 23 Carlos Velasco, Charles Spence (eds.) Multisensory Packaging: Designing New Product Experiences (Palgrave Macmillan 2019). For a legal study acknowledging the significance of 6 Introduction of sensorial experience based on non-traditional trade marks, as part of the ‘way of doing business’ by a given entrepreneur, raises actual legal concerns. Generally, it is not yet a settled rule that non-traditional signs may easily perform the basic function of a trade mark, that of distinguishing the commercial origin of goods or services. Registration of such trade marks has generally faced a variety of legal obstacles, which in the most common cases range from unclear subject-matter to a lack of distinctiveness. These matters have been extensively scrutinized in the legal doctrine.24 Less attention, however, has been paid to the separate invalidity ground that pertains to functionality. Although similar provisions were present in the national legislation of several EU countries, harmonization of the EUTM has led to the need to develop uniform methods of assessment, following a diversification of case-law. The recent EUTM reform has reshaped the functional provisions by rendering them more suitable for challenging the status of non-traditional trade marks. Analysing the different aspects of legal interpretation to define the scope of functionality set out in the EUTM may, thus, provide the primary and most straightforward reason for writing this book. Under the EUTM, conferring autonomous interpretation to functionality provisions, that is, separately from the assessment of distinctive character (and related grounds, such as descriptiveness and genericness), should be an easy task. In practice, though, it has turned out to be difficult for a number of reasons. First of all, in the pre-harmonization period, as international conventions did not explicitly address functionality, the legislation in European countries dealt with it autonomously in various ways. In most cases the registration of what appeared to be a functional sign was denied either because of a general incapacity of distinguishing goods/services, or for the absence of a distinctive character assessed in relation to the designated goods/services. Even when harmonization took place at the EU level, for many years afterwards certain specificities of pre-reform practice still lingered in the way courts understood the issue of functional signs and the application of dedicated legal provisions. For this reason Chapter 1 looks into some aspects of international and national legislations that are relevant to the regime of EUTM functionality. neuropsychology findings on consumer behaviour and purchase decision, Annette Kur, ‘Brand Symbols, the Consumer, and the Internet’, Max Planck Institute for Innovation & Competition Research Paper No. 16-01, athttps://ssrn.com/abstract=2721740, 4–6. More in Chapter 8.3.1. 24 Anette Kur , Martin Senftleben, European Trade Mark Law: A Commentary (OUP 2017), Lionel Bently, Brad Sherman, Dev Gangjee, Phillip Johnson, Intellectual Property Law (5th ed. OUP 2018); William Cornish, David Llewelyn, Tanya Aplin, Intellectual Property: Patents, Copyright, Trade Marks and Allied Rights (8th ed. Sweet & Maxwell 2013), Jeremy Phillips, Trade Mark Law: A Practical Anatomy (OUP 2003); Ryszard Skubisz, Prawo z rejestracji znaku towarowego i jego ochrona: Studium z zakresu prawa polskiego na tle prawnoporównawczym (reprint Stowarzyszenie Naukowe Pro Scientia Iuridica Lublin 2018). Introduction 7 Another difficulty for the functionality assessment results from the way the sign consisting of product features was filed – how it was indicated and (graphically) represented. Applicants have strategically disguised the real nature of such signs by relying on other trade mark categories (e.g. figurative, position, colour) which could more easily acquire registration, mostly under the test of distinctive character. It is true that many signs falling under the functionality radar are a combination of functional/non-functional features. However, EUTM functionality prohibitions only apply under the condition that the sign at issue consists ‘exclusively’ of functionally determined features. This means that assessment of a composite sign requires weighing some features against the others and using certain, objective, criteria to reach a decision in a situation when the assessment remains a matter of degree. In addition, the issue of trade mark categorization and its legal effects is determined by the framework of the registration proceedings, and especially by the scope of freedom the examiners/courts enjoy with regard to the evidence used to interpret the filed subject-matter. The interpretation of the subject-matter has direct consequences in choosing the absolute refusal grounds upon which a given application is examined. Chapter 5 looks into the intricacies of identifying the subject-matter of functionality prohibitions, and the difficulty of keeping the functionality assessment separated from the distinctiveness path. Last, but not least, the CJEU’s jurisprudence has implemented a rule that both the absolute grounds for refusal related to distinctiveness and functionality should be interpreted through the lenses of ‘public interest’. This is not a normative notion, but a jurisprudential one. The difficulty is found in the situation that the term ‘public interest’ has captured various meanings over time25 and fails to clearly separate not only the sphere of application of the refusal pertaining to descriptiveness or genericness or (absence of) distinctiveness, but also the realm of these three refusal grounds from functionality ones. Chapter 2 looks into the development of the ‘public interest’ criterion for the purposes of these absolute refusal grounds, whilst justifying why functionality objections should remain the object of a separate assessment prior to any distinctiveness matters. 3. The purposes of functionality and the interests at stake The story of Lego is a good illustration of how various IPRs have been used, sequentially or simultaneously, in order to protect the same or complementary product features, which represent an important market asset. This phenomenon of so-called ‘overlaps’, that is, cumulative protection, which strengthens 25 Ilanah Fhima , ‘The Public Interest in European Trade Mark Law’ (2017) 4 IPQ 311; Antoon Quaedvlieg, ‘Shapes with a Technical Function: An Ever Expanding Exclusion?’ (2016) 17 ERA Forum 101; Jeremy Philips, ‘Trade Mark Law and the Need to Keep Free’ (2005) 36(4) IIC 389. 8 Introduction the market position of a business undertaking and collides with competitors’ interests, lies at the core of the teleological foundation of the functionality doctrine. As noted above, a decision denying trade mark protection to a functional sign under the EUTM should be underlined/guided by specific reasons of ‘public interest’. One way of understanding the latter notion centres on the goal of achieving a clear demarcation between the different limited regimes (patents, utility models, designs), with functionality performing the role of a cutting tool to separate them. Another complementary approach focuses on the negative impact of a trade mark’s registration on market competition due to the possible monopolization of product features.26 As parts of Chapter 2 demonstrate, EUTM practice to date has tried to accommodate these two approaches in various proportions. There are still queries around whether the concept of public interest is a common one, good for all types of functionality, or whether separate approaches better fit the technical as opposed to the aesthetic kind of functionality. Chapters 6 to 8, individually addressing the interpretation of EUTM functionality provisions, argue that achieving the rigid and formalistic clear-cutting goal is unsustainable/unfeasible in most cases, whilst adopting a flexible solution – focused on situations of unfair competition advantages and product features needed to compete effectively – represents a viable and reachable option. The rationales underpinning the functionality rules represent a point where the EUTM and US legal systems seem to converge. Different approaches have been advanced in the USA, for example under the terms of a ‘right to copy’ as opposed to ‘a need to copy’, in order to justify the decision to confer protection upon, or deny it to, a trade mark that has been deemed functional.27 Some theories, following the ‘law and economics’ approach, accentuate the negative economic impact, including higher societal costs, that results from trademarking functional signs – these findings are of interest for EUTM practice. These aspects are discussed in Chapter 3 and parts of Chapter 4. A recent trend in the US functionality doctrine has been evaluating multiple interactions between functionality rules across different IP regimes. There are voices advocating for a ‘holistic’ view on the way functionality rules may help to rebalance the IP system vis-à-vis the negative effects of overlapping rights.28 From its side, the 26 Estelle Derclaye, Matthias Leistner, Intellectual Property Overlaps: A European Perspective (Hart Publishing 2011); Anna Tischner, Kumulatywna ochrona wzornictwa przemysłowego w prawie własności przemysłowej (Warszawa C.H. Beck 2015). 27 For a seminal work: Graeme Dinwoodie , ‘The Death of Ontology: A Teleological Approach to Trademark Law’ (1999) 84 Iowa Law Review 611. See also Mark P McKenna, ‘(Dys)functionality’ (2011) 48 Hous L R 823. 28 Christopher Buccafusco, Mark Lemley , ‘Functionality Screens’ (2017) 103 Virginia Law Review 1293; Mark McKenna, Christopher Sprigman, ‘What’s In, and What’s Out: How IP’s Boundary Rules Shape Innovation’ (2017) 30 Harv. J. L. & Tech. 491; Christopher Buccafusco, Mark Lemley, Jonathan S. Masur, ‘Intelligent Design’ (2018) 68 Duke Law Journal; Caitlin Canahai, Mark McKenna ‘The Case Against Product Configuration Trade Dress’ in Introduction 9 CJEU has recently elaborated upon the meaning and purpose of functionality rules in trade mark, design, and copyright law,29 although refraining from adopting a uniformed, systemic interpretation and solutions. Some European scholars have suggested the introduction of a ‘harmonised exclusion’ for threedimensional objects – under design, trade marks, and copyright rules – with the common denominator being those cases restricting market competition.30 This approach is worth consideration as a long-term goal, however, for the time being the author considers that it is worth trying to apply competitionrelated criteria, at least within the regime of trade mark functionality. At various points this book will discuss aspects in which EUTM functionality rules differ from those of EU design law. Due to space restrictions, and also due to lack of explicit legal grounds, functionality issues in the copyright law of European countries remain beyond the scope of this book. As noted earlier, the product features that are usually captured by functionality rules are needed by business entities that wish to effectively compete and trade in alternative offers. If such features cannot be legally copied – because they are covered by legal exclusivity on behalf of one entity – producers must ‘design around’ them, a process which may adversely impact the cost and quality of their offer. Still, even in cases where a different appearance is found for a product of similar functionality, a competitor may be uncertain whether their solution lies within the boundaries of the freedom to operate, or if they will risk infringement claims from the owner of the functional trade mark. Concerns about litigation and its impact on economic viability may lead competitors to abandon plans for manufacturing such alternatives. For this reason, one of the concerns most often articulated by the judiciary regarding the EUTM is that functional trade marks may heavily reduce competition by substitution. However, no specific tools, meaning here specific factors of assessment, have so far been formulated to evaluate this impact. An avenue which this book seeks to explore is whether a market-orientated test, such as is applied in the US functionality doctrine, and focused primarily on the availability of substitutable goods, may also be applicable in the EUTM. This kind of assessment ties into the analysis of the effects registration of functional signs may have upon market competition. The ‘law and economics’ analytical approach to trade marks has generally emphasized the beneficial, pro-competitive role of trade marks as source-identifiers that reduce consumer search costs for goods/services corresponding to their preferences and incentivize right-holders to invest in product quality and develop goodwill in the Graeme Dinwoodie, Mark Janis (eds.) Research Handbook on Trademark Law Reform (Elgar 2021) 137. 29 C-395/16 Doceram v. CeramTech, EU:C:2018:172; C-237/19 Gömböc v. Szellemi, EU:C:2020:296; C-833/18 SI and Brompton Bicycle v. Chedech, EU:C:2020:461. 30 Uma Suthersanen, Marc Mimler, ‘An Autonomous EU Functionality Doctrine for Shape Exclusions’ (2020) 69(6) GRUR Int 567. 10 Introduction firm.31 However, functional trade marks appear to involve anti-competitive effects that have seen much less exploration in the legal doctrine. For instance, using functional marks on goods/services in trade, especially in the initial period when they may be deprived of distinctive character, risks increasing consumer search costs. Later on, at the stage when a functional sign may become registered, it increases the costs for competitors when putting substitutable products on the market, and could involve additional societal costs, such as the threat of intimidating litigation. Functional signs may be employed – often in correlation with other IPRs – as leverage tools conferring competitive advantages that strengthen the market position of rights holders. Concerns should be raised by the issues of product features that may be used in synergy with patents and/or branding strategies, or as indispensable assets for products in interrelated markets, especially for standardisation and compatibility needs. The situation where a functional sign has developed into a brand – a powerful commercial asset that reduces the interchangeability of products on the demand side and becomes a barrier to entry for potential suppliers – appears even more problematic. All these aspects are the focus of several sections in Chapter 4, which concludes with an argument that functional trade marks ought to be evaluated upon the criterion of alternative products (substitutes). The extent of product substitutability, consumer choice, and consumer switching capabilities is captured by the concept of ‘market definition’.32 This concept is analysed both from a competition law standpoint in Chapter 4, as well as looking at how it has been analogically applied in the US functionality practice (Chapters 3 and 6 to 8). The aim is to explore how such criteria may be successfully implemented upon EUTM functionality grounds. The author is aware of the possible critical argument that an assessment based on product substitutability brings too much flexibility and uncertain outcomes, whilst one using functionality as a cutting tool to prevent overlapping rights (i.e. trademarking items already patented or covered by utility models or design rights) would apparently bring clearer results. However, as Chapter 6 demonstrates with regard to technical functionality, in practice the marketplace is full of products with a blend of functional and nonfunctional elements, and in most cases there is no perfect correlation between the subjectmatter of a functional trade mark and that of a patent/utility model. Functionality assessments will necessarily involve subjective points of argument, especially that EUIPO (European Union Intellectual Property Office) examiners and European courts enjoy broad competence to freely assess facts. Any examination will have to scrutinize the structure of the sign at hand and 31 William Landes, Richard Posner, ‘Trademark Law: An Economic Perspective’ (1987) 30 The Journal of Law & Economics 265. 32 Instead of many: Herbert Hovenkamp, Mark D. Janis, Mark A. Lemley, IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law, volume I Supplement 2009. Introduction 11 decide on the following issues: which features are the ‘most important’ vs. ‘less important’; which ones are ‘functional’ vs. ‘non-functional’; what the weight of non-functional features is within the overall combination of features in order to ultimately rule whether a sign consists ‘exclusively’ of functionally determined features. These points of subjective assessment lead to the situation where there is a range of products of different appearance and incorporating similar functionality that may be relevant for conferring/denying trade mark protection. For these reasons, Chapter 6 aims at construing a test based on equivalents in terms of product appearance and function. Additionally, this test should integrate some of the competition factors introduced by Chapter 4 in order to establish whether such equivalent products are also substitutable in terms of consumer choice and the manufacturing capabilities of competitors. Along similar lines, aesthetic functionality also involves difficult and imprecise points of assessment. First of all, there is a central conflict between the interests of a right holder to invest in and protect a trade mark that acquires and enhances recognition/reputation33 – which meet also the needs of brandedorientated consumers – vis-à-vis the interests of competitors in keeping (aesthetically) functional features unprotected and in the public domain. EUTM jurisprudence has not yet found a stable way of fixing this balance of interests. In addition, the catalogue of criteria suggested by the CJEU to assess aesthetic functionality does not indicate how to weigh various sources of value in order to identify those giving substantial value to goods and link them to specific product features. Chapter 8 looks into the details of the legal assessment and complements it with input drawn from aesthetics research. This aims to reveal the complex reality that surrounds designing a product that brings ‘value’ in the eyes of consumers and stimulates their purchase motivation.34 Because the notion of ‘value’ has multiple meanings and trade marks lie at the core of branding strategies, the marketing view of brands and consumer perception and co-creation of brands – as discussed by Chapter 4 – represents another piece of information useful for understanding aesthetic functionality. A point that the CJEU has to date left unsolved, yet where future practice will demand clarification, relates to the identification and quantification of a distinct value of reputation, especially when a trade mark generates attractiveness for customers stemming from branding strategies. Summing up all these problematic issues, assessment of aesthetic functionality will always reach a point of subjective interpretation and weighing criteria against one another. For these reasons the author considers that the most practical solution, tailored also to market realia and including consumer preferences, is to apply a multi-factor test which combines the CJEU’s guidance with the US approach focused on competitive need and measured by the extent of alternative, substitutable products. 33 Andrew Griffiths, An Economic Perspective on Trade Mark Law (Elgar 2011). 34 Ilanah Fhima, ‘Consumer Value as the Key to Trade Mark Functionality’ (2022) 85(3) Modern Law Review 661. 12 Introduction EUTM functionality also includes a distinct prohibition pertaining to product features resulting from the nature of goods. In practice, certain features falling within this category may be interpreted as also fulfilling utilitarian purposes according to the prohibition of technical functionality, or, differently, as bringing substantial value to goods in light of aesthetic functionality. As the intent of the EUTM legislator was to preserve the autonomy of the functional prohibition of signs resulting from the nature of goods, and the CJEU’s guidance has also shaped its scope to cover what may be termed as ‘generic’ functionality, this book discusses generic functionality separately in Chapter 7. The possibility of generic functionality overlapping with other refusal grounds is notable, however, the author considered it useful to find a legal interpretation that is not a complete break with the current CJEU’s acquis, and that has better chances of being applied in practice. An important caveat is needed: for reasons of easy reading, the author primarily employs the terms ‘technical’ and ‘aesthetic functionality’, also to facilitate the parallel with US law, assuming that generic functionality is somehow split in-between the two. When it needs to be specifically identified, with explicit reference to ‘signs resulting the nature of goods’ under the EUTM, the book uses this normative phrase or the term ‘generic functionality’. 4. How should the functionality of trade marks be explored? The usual path for conducting a legal analysis of the aforementioned topics would follow the line of European case-law and explore the different schools of thought. However, as most of the advanced legal tests focus on how functionality may prevent overlapping rights, this may be too restrictive and could lead to insufficiently constructive results. At this point, taking a comparative look35 at the US functionality doctrine, especially as applied in relation to trade dress, may cast new light on methods of assessing functionality that could also work for the EUTM system. US functionality practice is rich, complex, and non-uniform, due to the common law system and the US federal structure.36 There is an impressive amount of litigation, covering a wide range of product features, from a range of industries. Legal solutions have of necessity followed business needs and provided flexible answers. This may be helpful for enabling the EUTM to formulate better tests to address the diversity of functionality cases still to come, especially with regard to new types of non-traditional marks. Following the idea of applying a functionality test based on the criterion of alternative products, the need to assess the extent and closeness of substitutes requires product delineation, in other words identifying the relevant product 35 Graeme Dinwoodie (ed.) Methods and Perspectives in Intellectual Property (Elgar 2013). 36 Instead of many: Graeme Dinwoodie and Mark Janis , Trade Dress and Design Law (Aspen Publishers 2010). Introduction 13 and its possible alternatives. Some US functionality rulings have dealt with this issue.37 This triggers the consideration of whether taking a competition (US: antitrust) perspective on a product’s substitutability may also be of use in trade mark functionality practice. Indeed, one tool traditionally applied to explore the issue of market dominance/power for competition purposes is ‘market definition’. As previously indicated, this concept ties into the availability of substitutable goods, understood as the possibility and willingness of customers to switch to alternative products in the case of a price increase. Exploring the usefulness of such a comparative approach constitutes another purpose of this book. Some concerns may arise over whether comparative analysis is an accurate method of legal interpretation, especially given that it occurs at two different levels, that is, between the US and EUTM on functionality trade mark rules, and between competition rules and trade mark law. However, US trade mark law is based on the economic theory that trade marks are pro-competitive, which justifies the reference to interdisciplinary arguments. In addition, as functionality cases must balance the public interest against the private interests of trade mark holders, the author finds it useful to formulate criteria of assessment that reflect, as much as possible, market realities and the needs of all stakeholders. A necessary caveat is that this book can only cover certain aspects of US functionality practice and competition law with potential relevance to the EUTM, and those are subjectively chosen by the author. Another objection to a test based upon the availability and closeness of substitutes would be that it seemingly requires timeand money-consuming evidentiary efforts, which could be an unnecessary waste of resources, a burden on the courts, and may see litigation limited to wealthy entities. However, technological advancement fosters enormous possibilities for using artificial intelligence (AI) within administrative/judiciary proceedings – for instance, patent offices worldwide are using AI to assess the similarity of signs versus similarity of goods/services, or to verify the accuracy of the designated product category.38 More importantly, in the online market space AI is used to guide consumers to make accurate choices by listing recommended alternatives from different brands, which the system sees as substitutes. These examples show how AI has already been applied to huge collections of market data in search of similar/substitutable products. Looking further ahead, AI capabilities may be used within functionality assessment to integrate evidence on the availability of equivalents with data about the competition environment of the product market. Chapters 4, 6 and 8 will look further into the evidence needed to assess functionality. 37 Mark McKenna, ‘Is Pepsi a Really Substitute for Coke? Market Definition in Antitrust and IP’ (2011–2012) 100 Geo. L.J. 2055. 38 Dev Ganjee, ‘Eye, Robot: Artificial Intelligence and Trade Mark Registers’ in Niklas Bruun, Graeme B. Dinwoodie, Marianne Levin, Ansgar Ohly (eds.) Transition and Coherence in Intellectual Property Law (CUP 2021) 178. 20 The legal framework of trade marks’ functionality in the EU (ii) the shape, or another characteristic, of goods which is necessary to obtain a technical result; (iii) the shape, or another characteristic, which gives substantial value to the goods. The addition of the term ‘another characteristic’ appears to extend the previous scope of functionality to colours per se or a combination thereof. However, the change may also encompass various types of product features, which has a significant impact on the protection of non-traditional trade marks (Chapter 5).47 This is because from the point of enactment, EU functionality has also aimed to prevent the registration of functional signs upon proofs of acquired distinctiveness.48 Functionality has been in a critical setting towards other refusal grounds (i.e. relating to undistinctive, descriptive or generic signs) ever since. EU practice is still grappling to find a viable demarcation between these different legal bars(Chapter 2). For ease of reading, a few issues require introduction and clarification. The second functionality provision may be termed as ‘technical functionality’, whilst the third one, ‘aesthetic functionality’. Closer inspection reveals some tangency both between technical and aesthetic functionality, individually taken, and the first functionality prohibition of signs determined by the nature of goods. However, the book follows the traditional structure with three distinct chapters (6 to 8). One reason to do this is that the CJEU (Court of Justice of the European Union) has consequently upheld the autonomy of each functionality prohibition.49 Registration may be denied on more than one refusal ground, however each must apply fully. Hybrids or combinations of elements from different refusal grounds are not allowed. To properly understand the significance functionality bears, the implementing regulations which accompanied the aforementioned regulations50 must also be considered. The reformed Implementing Regulation No 2017/143151 initiated technological developments to facilitate the registration of non-traditional trade marks (such as motion, multimedia). It was replaced by Implementing Regulation No 2018/626 (EUTMIR),52 currently in force. 47 Bently et al. (n 24) 963–964. 48 This rule resulted from a contrario interpretation of the provision of Art. 3(3) of First Directive and Art. 7 (3) of First Regulation, which enabled acquired distinctiveness to overcome other absolute grounds for refusal, save for functional signs. The amended EUTM maintained it. 49 Case C–205/13 Hauck …, EU:C:2014:2233, paras 39–43. 50 The implementing regulations mostly deal with registration proceedings, control, and communication with OHIM/EUIPO. 51 Commission Implementing Regulation (EU) 2017/1431 of 18 May 2017 laying down detailed rules for implementing certain provisions of Council Regulation (EC) No 207/2009 on the European Union trade mark [2017] OJ L 205/39. 52 Commission Implementing Regulation (EU) 2018/626 of 5 March 2018 laying down detailed rules for implementing certain provisions of Regulation (EU) 2017/1001 of the European Parliament and of the Council on the European Union trade mark, and repealing Implementing Regulation (EU) 2017/1431 [2018] OJ L 104/37. The legal framework of trade marks’ functionality in the EU 21 Landmark EUTM functionality cases have emerged from the practice of the CJEU. The court represents the highest appeal instance with competences over substantive and procedural matters embodied in any EU regulation and/ or directive. Concerning trade marks, one field of control covers the registration and invalidation of EUTM by EUIPO. The intermediary steps of review constitute the EUIPO’s Board of Appeal (BoA), and, next, the General Court (previously known as the Court of First Instance, CFI). The CJEU only hears appeals on points of law. Separately, the CJEU has competence for issuing preliminary rulings on matters of interpretation of EU law, embedded both in regulations or directives, following referrals submitted by national courts.53 A typical scenario is that a court or an administrative body (the Patent Office), when hearing a case based on provisions of national law subject to EU harmonization, may stay the proceedings and seek guidance from the CJEU. In this case its interpretation would be binding, and effective not only inter partes, but also for future cases dealing with that provision in a similar context. Several important cases on functional signs followed this path, although the lion’s share came via registration/invalidity proceedings of EUTM/CTM. 1.2. Functionality rules within international conventions Prior to EUTM harmonization, the functionality of trade marks was not explicitly addressed by any international convention dealing with matters of substantive law. The following part discusses the relevance of the Paris Convention with regard to the registration of non-traditional marks (such as three-dimensional), and the introduction of minimal standards of trade mark protection by the TRIPS Convention. An interesting issue is the compliance of trade mark regulations to general objectives and principles set forth in the Art. 7 and 8 of TRIPS, by exploring the possible application to functional signs. 1.2.1. Paris Convention initiating IP protection Amongst the principles governing different aspects of industrial property, the Paris Convention for the Protection of Industrial Property of 188354 introduced the ‘telle quelle’ rule in relation to trade marks. It stipulated that a trade mark duly registered in the country of origin must be accepted for filing in another contracting country; the latter would apply their own registration rules, yet, if registration was accepted, the sign had to be protected ‘as is’ (fr. ‘telle quelle’), cf. Art. 6.55 The filing could be opposed if the sign was con53 See Art. 267 of Consolidated version of the Treaty on the Functioning of the European Union [2012] OJ C 326/ 47. 54 https://wipolex.wipo.int/en/text/287780 55 Sam Ricketson, The Paris Convention for the Protection of Industrial Property (OUP 2015) paras 12.10–25. 22 The legal framework of trade marks’ functionality in the EU trary to public order and morality.56 There was no definition of a trade mark, categories of eligible signs, or any requirement for protection. Each member state enjoyed the autonomy to determine their conditions for registration, yet were prevented from discriminating against foreign applicants, who could invoke the application of the same rules of domestic legislation as for national applicants, according to the principle of ‘national treatment’.57 Although historically the rationale behind ‘telle quelle’ was to overcome an impediment of Russian law which only allowed signs depicted in Cyrillic characters58 to be registered, concerns later arose about the scope of the ‘telle quelle’ privilege. Was it related only to the external appearance/form of a sign, or did it also encompass the content/meaning conveyed by that sign?59 The latter would have addressed the requirements of protection, inter alia distinctive character, to facilitate the registration of trade marks via the ‘telle quelle’ rule in countries where national fillings of such signs were not successful. A recent historical analysis of conference documents, including session minutes, argued that the explicit lack of consensus of contracting members over the notion of (protectable) trade mark, together with the autonomy of individual countries over the content of filings, especially the freedom to deny protection to non-distinctive signs, suggested that shapes, and generally non-traditional marks, were left outside the application of Paris Convention.60 An earlier commentator noticed that interpretation of the ‘telle quelle’ rule concerned rather registration of simple numbers or letters, surnames, and geographical names, whilst shapes, that is, three-dimensional objects – set in contrast to two-dimensional pictorial representations – were listed as controversial subject-matter.61 The ‘telle quelle’ principle was not an instrument for harmonizing the trade mark notion; therefore, if a member state would not accept a three-dimensional object as a trade mark, there should be no obligation to register and protect it, notwithstanding the possibility of an earlier registration in another country (of origin).62 The example offered in this context was Germany, which tended to deny registration of shapes via the public order and morality interdiction.63 The Washington revision of 1911 brought important additions – in fact exceptions – to the ‘telle quelle’ principle, namely a catalogue of legal grounds 56 Art. 6 in fine. 57 It is one of the fundamental principles intr oduced by Paris Convention of 1883 (Art. 2) to apply to all categories of industrial property rights defined by the act. 58 Anette Kur, ‘Markenrecht’ in Eichmann, Kur (eds.) Designrecht. Praxishandbuch (1st ed. 2009 Nomos) 185 fn 352. 59 Ricketson clearly reads this principle in relation only to the ‘form of the mark’, ibidem (n 55) para 12.14, 538. 60 Ng-Loy Wee Loon, ‘Absolute Bans on the Registration of Product Shape Marks. A Breach of International Law?’ in Calboli, Senftleben (n 22) 150–160. 61 G.H. Bodenhausen, Guide for the Application of Paris Convention for the Protection of Industrial Property (BIRPI Geneva 1969) at www.wipo.int/edocs/pubdocs/en/intproperty/611/ wipo_pub_611.pdf 6quinquies section A (b) 108, also fn 1. 62 Bodenhausen, ibidem 6quinquies section A (e) 111. 63 Bundespatentgericht, ruling of 29/4/1965, case No 4 W (pat) 632/641965, GRUR Int, 1965, 508. The legal framework of trade marks’ functionality in the EU 23 which allowed a member state to deny or invalidate a trade mark registration. Apart from the initial public order clause – which some scholarship64 perceived as adequate grounds to deny protection to functional signs – it inserted a prohibition on signs infringing the rights of third parties, and of signs deprived of a distinctive character or containing product information. The latter would nowadays fall under the ambit of descriptive and customary signs. The legal doctrine perceives this catalogue as the result of ‘compromise rather than of deliberate law-making’65 by arguing that the effectiveness of the ‘telle quelle’ upon these provisions could not overcome the differences in domestic practice. This provision was discussed during subsequent revisions,66 and after the Lisbon conference (1958), it was enshrined as Art. 6quinquies Section B,67 a version maintained unmodified by the Stockholm treaty. Section B(2) carried possible implications of functional signs. It covered trade marks consisting ‘exclusively of signs or indications which may serve, in trade, to designate the kind, quality, quantity, intended purpose, value’. Drawing a parallel here, ‘kind’, ‘quality’, ‘quantity’ may suggest signs resulting from the nature of goods, whilst ‘intended purpose’ may cover features performing a technical function, and ‘quality’ and ‘value’ relate to aesthetic functionality. However, such an analogy brings little benefit in light of harmonized EUTM. This part of Art. 6quinquies Section B became the object of refusal grounds distinct from functionality, set forth in Art. 3(1)(b)–(d) of First Directive and Art. 7(1)(b)–(d) of First Regulation, and subsequently amended. 1.2.2. The TRIPS68 convention and global standards Following the Paris Convention, other treaties – currently governed by WIPO – contained more administrative provisions than substantive law, with none of them explicitly touching upon functionality. The Madrid Agreement (1891, with revisions) and Madrid Protocol (1995) organized the international 64 Martin Senftleben, ‘Public Domain Preservation in EU Trademark Law’, 2013 Trademark Reporter 784–786. 65 Anette Kur , Martin Senftleben, ‘International Protection’ in Kur, Senftleben (n 24) para 2.46 (quotation) – 2.48. 66 Other confer ences were held at Hague (1925), London (1934) Lisbon (1958) and Stockholm (1967), www.wipo.int/treaties/en/ip/paris/ 67 Bodenhausen indicated that this conference ruled over the limitative character of refusal/ invalidity grounds, i.e. member states could not apply other grounds to block the ‘telle quelle’ principle, Bodenhausen. Ibidem 6quinquies section B and C (c) 114, fn 4. However in disputes arising over Art. 15(2) of TRIPS Agreement (below) – which indirectly refers to the refusal grounds of Paris Convention – the panels in cases United States: Section 211 Omnibus (2002) WT/DS176/AB/R and European Communities-GI. (2005) WT/DS174/R decided that WTO members may invoke other refusal grounds, which implied that the Paris Convention list is not ‘limitative’, see Lisa Ramsey, ‘Reconciling Trademark Rights and Free Expression Locally and Globally’ in Daniel Gervais (ed.), International Intellectual Property. A Handbook of Contemporary Research (Elgar 2015) 359. 68 Agr eement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), as amended 23 January 2017 www.wto.org/english/docs_e/legal_e/31bis_trips_01_e.htm 24 The legal framework of trade marks’ functionality in the EU registration scheme, whilst the Trademark Law Treaty (1994) also dealt with administrative procedures. The Singapore Treaty on the Law of Trade Marks (2006) was first to recognize the category of ‘non-traditional marks’ (visible and non-visible).69 This paved the way for changing the trade mark definition through the EUTM reforms, together with enabling the filling of nontraditional signs. The TRIPS Agreement of 1995 represents the most important piece of international regulation covering the aspects of substantive IP law. This convention encapsulated the tension between the need for free trade, and the barriers resulting from embedding intellectual property rights (IPRs) in traded goods – a certain level of barriers was accepted in the negotiations.70 This was the minimum level of IP protection, introduced as a supplement to the Paris and Berne Convention71 standards. Member states enjoyed a degree of autonomy of implementation and also the possibility to increase that level, provided that such changes did not contravene the Agreement (here including the general objectives and principles inserted in the text as a tool for balancing rights and duties for higher public interest goals72). 1.2.2.1. TRIPS’ definition of a trade mark and functional signs As regards trade marks, Art. 15(1) TRIPS adopted a functional definition of protectable subject-matter, identified as ‘any sign, or any combination of signs’ which is ‘capable of distinguishing the goods or services of one undertaking from those of other undertakings’. A list of examples followed, including figurative elements, combinations of colours and any combination of such signs, yet shapes/product configuration or colour per se were not mentioned.73 Members were allowed to make registration contingent upon the capability of signs to be visually perceptible – an exclusion no longer relevant following the reformed EUTM, which abolished the requirement for 69 Full texts at www.wipo.int/treaties/en/ 70 Susy Frankel , ‘Some Consequences of Misinterpreting the TRIPs Agreement’, 2009 WIPOJ No 1, 39–40 http://papers.ssrn.com/abstract=1862672 71 Berne Convention for the Protection of Literary and Artistic Works of 1886, https://wipolex. wipo.int/en/treaties/textdetails/12214 72 Art. 7 TRIPS indicates amongst the objectives ‘the promotion of technological innovation’ and ‘transfer and dissemination of technology’ and a ‘balance of rights and obligations’. To achieve the objectives, Art. 8 indicates that ‘members may, in formulating or amending their laws and regulations, adopt measures necessary to protect public health and nutrition …’ (1), whilst measures may also be needed as to ‘prevent the abuse of intellectual property rights by right holders or the resort to practices which unreasonably restrain trade or adversely affect the international transfer of technology’ (2). 73 Earlier drafts of these pr ovisions, such a 1987 US proposal or a 1988 EC proposal, mentioned accordingly a ‘distinctively shaped three-dimensional object’ and ‘the shape of goods or of their packaging’, see UNCTAD –ICTSD Resource Book on TRIPs and Development (CUP 2010) 219–220, https://doi.org/10.1017/CBO9780511511363 The legal framework of trade marks’ functionality in the EU 25 graphical representation. Pursuant to Art. 15(2) TRIPS, members were also free to refuse registration on other grounds on condition of the conformity of those grounds with the Paris Convention of 1967. In addition, Art. 15(1) TRIPS dealt with signs without inherent distinctiveness, allowing registrability by effect of acquiring distinctiveness through use. This rule has diverged into different national approaches. The EU adopted uniform criteria of assessment for all types of signs, although consumer perception is said to perceive product features differently, which has rendered the registration of non-traditional marks difficult (Chapter 5).74 The USA has adopted the rule that product configuration – in contrast to product packaging – cannot be inherently distinctive, registration being possible only with acquired distinctiveness/secondary meaning (Chapter 3).75 TRIPS did not address functionality, yet, the question remains of whether the introduction of such a refusal ground by a signatory would be consistent with the treaty. The absence of explicit reference to shapes in Art. 15(1) TRIPS did not deny their status as eligible subject-matter. Prof. Gervais noted that the omission was due to the difficulty of reaching a consensus over a common list of exemplary signs accepted by all signatories.76 Further clarification was brought by the WTO Appellate Body’s decision in United States: Section 211 Omnibus77 which differentiated between the sign ‘capable of’ and ‘eligible for’ registration cf. Art. 15(1) TRIPS, which translated into the obligation to introduce the functional definition into domestic legislation, and a situation imposed on members to ‘register automatically’ such signs.78 The latter situation was not intended by TRIPS. One scholar gave the example of Singapore’s legislation, which comprises functional exceptions pertaining to shapes, according to the discretion given by Art. 15(2) TRIPS.79 Wee Loon argued that, assuming the Paris Convention did not cover product shapes, the Singaporean prohibition of functional shapes was compliant with Art. 15(2) TRIPS. Another lenient interpretation of Art. 15 TRIPS held the view that without explicit discrimination, purely functional signs were registrable upon proof of acquired distinctiveness.80 It is worth recalling that TRIPS introduced 74 For the CJEU unifor m distinctiveness standard see: Linde (C-53/01), Winward (C-54/01) Rado (C-55/01), EU:C:2003:206. 75 Wal-Mart Stores, Inc. v. Samara Brothers, Inc, 529 US 205 (2000); by contrast, earlier Two Pesos, Inc. v. Taco Cabana, Inc. 505 US 763 (1992). 76 Daniel Gervais, The TRIPS Agreement: Drafting History and Analysis (4th ed. Sweet & Maxwell 2012) 319. 77 (2002) WT/DS176/AB/R, at: https://docs.wto.org/dol2fe/Pages/SS/directdoc. aspx?filename=Q:/WT/DS/176ABR.pdf&Open=True 78 (2002) WT/DS176/AB/R, 155. 79 Wee Loon (n 60) 163–164. 80 Nuno Pires de Carvalho, The TRIPS Regime of Trademarks and Designs (4th ed. Wolter Kluwer 2019) paras 15–49. The author seemingly links functionality with the lack of arbitrary appearance to be dealt within the distinctiveness criterion, an issue also relevant for sounds, scents, taste, see paras 15–44. 26 The legal framework of trade marks’ functionality in the EU a standard of minimum obligations, whilst Art. 1(1) TRIPS allowed members to go beyond that standard and confer more extensive protection, provided that it complies with TRIPS.81 This flexibility may be interpreted as meaning that signatories can decide upon the conditions of protecting shapes, including functional ones. In another context, Prof. Gervais argues that ‘finding a ceiling – [i.e. the “maximum levels of protections” disputably fixed by TRIPS, addition LB] – absent a clear obligation to limit protection in the text’ is difficult to sustain, provided, for instance, a case of barriers to legitimate trade.82 Mutatis mutandis, denying or accepting the protection of (functional) shapes has arguably remained within the competence of signatories. 1.2.2.2. Trade marks in the context of Arts. 7 and 8 TRIPS A complementary query is whether there is any relevance of the general principles laid down in Art. 7 and 8 of TRIPS for matters related to trade marks functionality. This touches upon the public interest policy underlying the functional provisions (Chapter 2). One way of understanding it is as a means of preventing overlaps between different IPRs that may impair competition, such as simultaneous or subsequent cumulation between patents and trade marks protection with regard to technical subject-matter. There is ample literature discussing the political genesis and importance of Art. 7 and 8 of TRIPS in the multinational context of balancing the interests of developed countries– focused on the strengthening of IPRs, especially copyright and patents, justified by a need to incentivize creators and innovation – with the interests of less developed countries targeting access to basic assets via exceptions and limitations to IP rights, fair licensing schemes and so on.83 Leaving aside legal controversies around the mandatory or non-mandatory character of these general provisions and the way they were implemented in (or neglected by) the WTO debates, as well as suggestions for a better application, most cases concerned vital public sectors (such as health and food) with issues of access to essential medicines, protection of plant varieties, or fair use privileges. Trade marks fall under the ambit of public health measures set within the scope of Art. 8 TRIPS in the case of the Australian Tobacco Plain Packaging Act of 2011 81 Gervais (n 76) 174–175. 82 Ibidem 175. 83 Reading TRIPS in the perspective of trade liberalization, Professor Frankel noted: The ‘TRIPS Agreement is a balance of rights and a balance of goals to protect intellectual property for the benefit of trade but not for its distortion. The TRIPS Agreement’s minimum standards are the basis on which individual states develop their intellectual property laws, and are the methods by which states can achieve the intellectual property balance domestically’ – Susy Frankel, ‘The WTO’s Application of “the Customary Rules of Interpretation of Public International Law” to Intellectual Property’, 4 VUWLRP 2/2014, at http://ssrn.com/abstract=795986, 42. Consult Peter Yu, ‘The Objectives and Principles of the TRIPs Agreement’ (2009) 46(4) Hous. L. Rev. 979, https://scholarship.law.tamu.edu/facscholar/457 The legal framework of trade marks’ functionality in the EU 27 (TPP). This Act prohibited the appearance of trade marks (including colours and other eye-appealing elements) on tobacco packaging, with the exception of brand names, as a measure intended to decrease the attractiveness and sales of tobacco products, and increase the significance of graphic health warnings.84 The TPP Act raised complaints from several countries under the WTO Dispute Settlement Process regarding trade restrictions and violation by Australia of TRIPS trade mark obligations, and after eight years of disputes, a final decision was reached in 2020.85 The Appellate Body confirmed that the TPP measures were not more trade-restrictive than necessary to fulfil the legitimate objective, that is, reducing the use of, and exposure to, tobacco products.86 They were held consistent with justified encumbrances to trade mark rights that a Member may provide under Art. 20 TRIPS – here the Panel read Art. 8 TRIPS as conferring ‘useful contextual guidance’ for the interpretation of the term ‘unjustifiably’ in Art. 20 TRIPS.87 The Panel acknowledged the legitimate interests of a trade mark owner in using their mark in the course of trade, however, the balance was tilted in favour of the significant societal interest of ‘public health’ reflected by Art. 8(1) TRIPS, which allowed members to pursue this and adopt measures that may affect IPRs, if there was sufficient support for the resulting encumbrance.88 In addition, the Panel held that TPP was not inconsistent with Australia’s obligations under Art. 16(1) TRIPS – the objection was that TPP affected the ability to maintain distinctiveness of trade marks. The Panel’s reasoning was that Art. 16(1) TRIPS did not establish a positive right to use a registered trade mark on behalf of its owner, but only a (negative) right to prevent infringement by unauthorized third parties, and this was not abolished by the TPP.89 Although distinct from a European perspective, the Panel’s approach showed how the minimum acceptable standards of TRIPS had to accommodate different perspectives on the nature of trade mark rights that reflected the specifics of the legislation in each member state. 84 www.legislation.gov.au/Details/C2011A00148 85 Australia – Certain Measures Concerning Trademarks, Geographical Indications and Other Plain Packaging Requirements Applicable to Tobacco Products and Packaging – Appellate Body reports and Panel reports – Action by the Dispute Settlement Body WT/DS435/28 WT/DS441/29 – 2 July 2020, at: www.wto.org/english/tratop_e/dispu_e/cases_e/ ds441_e.htm 86 Reports of the Appellate Body, WT/DS435/AB/R; WT/DS441/AB/R, at https://docs.wto. org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/DS/435ABR.pdf&Open=True 87 Reports, ibidem 6.625–6.659. The WTO’s approach to the role and meaning of Art. 8 TRIPS followed the views expressed earlier by Susy Frankel and Daniel Gervais, ‘Plain Packaging and the Interpretation of the TRIPS Agreement’ (2013) 46 Vanderbilt Law Review 1149, 1202–1206. 88 Reports, ibidem 7.11–3. By contrast, Professors Frankel and Gervais advocated for a cautious decision, with regard to the impact on other IPRs (n 87) 1213–1214. 89 Repor ts, ibidem 6.558–6.619, 7.7–10. Convincingly and critically about the negative-right arguments, Frankel and Gervais (n 87) 1178–1198. The authors opined: ‘the context of negative rights does not preclude there being some positive rights and interests to register and use a trademark’ (1197). 28 The legal framework of trade marks’ functionality in the EU As concerns the other contexts of using Art. 7 and/or 8 TRIPS with possible relevance for trade marks, Professor Gervais read Art. 7 TRIPS as an instrument to restore balance when the benefits of an IPR neglected the public interest of promoting innovation and enhancing the dissemination of technology.90 This view concerned over-extending patent protection with the effect of stifling competition, a concern that may also arise in cases of trademarking items covered by lapsed patents. In the context of investment agreements, Professor Frankel argued against the strategy of right holders claiming expropriation of investment (such as revocation/invalidation of patent rights) upon alleged standardization of IP protection via international agreements (e.g. TRIPS), whereas these aspects remained within the flexible boundaries of domestic laws, safeguarded by the object and purpose of those treaties.91 It was emphasized that TRIPS aimed more than protecting private rights, as the availability and dissemination of creativity and innovation, and the transfer of technology – for example with regard the affordability and availability of medicines – represented additional goals belonging to the object and purpose of TRIPS.92 Again, these arguments could mutatis mutandis apply against the use of trade mark protection to monopolize items that should otherwise fall into the public domain. The issue of overlapped copyright protection, too long for certain type of works, was also examined through the perspective of Art. 7 and 8 TRIPS;93 the more this may concern trade marks due to their possible termless prolongation. Derclaye and Leistner concluded that although the goal of reducing the negative impact of cumulative protection on market competition could a fortiori match the policies of Art. 7 and 8 TRIPS, general application of these provisions to any issue of overlap would be too ‘far-reaching’ a solution, thus application on a case-by-case basis would be more appropriate.94 There are also voices that pleaded for the inclusion of the right to freedom of expression within the ambit of this balance, with a special focus on cases of restrictions of free speech through trade mark overprotection.95 Interestingly, Advocate General Campos Sanchez-Bordona in the Brompton case96 (conc. copyright protection to a bicycle featuring technical function) 90 Gervais (n 76) 231–233. 91 Susy Frankel , ‘Interpreting the Overlap of International Investment and Intellectual Property Law’ (2016) 19 Journal of International Economic Law 121, 122, 129 referring Eli Lilly and Company v The Government of Canada, UNCITRAL, ICSID Case No. UNCT/14/2. 92 Frankel, ibidem 135. 93 Derclaye, Leistner (n 26) 25–27. 94 Ibidem 28. 95 Ramsey, ‘Reconciling Trade Marks …’ (n 67) 354–356; Lisa Ramsey, ‘Free Speech and International Obligations to Protect Trademarks’ (2010) 35 Yale Journal of International Law 445–447. 96 C-833/18 SI and Brompton Bicycle v Chedech, Opinion AG Campos ECLI:EU:C:2020:79, paras 37–39. The legal framework of trade marks’ functionality in the EU 29 discussed the principle of IP cumulation with direct reference to Art. 7 TRIPS and emphasized the differences in goal between industrial property protection (patents, industrial designs) and copyright. He warned against using ‘disproportionate’ copyright protection as a ‘brake on the system for protection of industrial property’ – the AG (Advocate General) opted to deny protection to the bicycle’s appearance due to the technical necessity.97 However, the CJEU did not follow the AG’s arguments and refrained from making any reference to the issue of IP overlaps or TRIPS.98 Similarly, in the Dyson case,99 which concerned the attempt to register a transparent bin of a multiply shaped configuration, AG Léger mentioned Art. 7 TRIPS, yet the CJEU100 focused only on the general (i.e. in abstracto) incapacity of that kind of sign to be a source identification. 1.2.2.3. Some concluding thoughts Summing up, TRIPS did not contain explicit grounds for refusal or invalidity in relation to functional signs. Their trade mark eligibility remained within the autonomy of national legislations; it was generally accepted, unless the capability of being an indicator of origin was questioned. The real obstacle to registering shapes and other non-traditional signs was contained in the distinctiveness requirement, tested in concreto in relation to chosen goods/ services, with prohibitions formulated by Art. 6quinquies of Paris Convention. The fact that functionality was not mentioned as a refusal ground by Paris Convention– although reasons of order public could be invoked – sheds some doubt on its compatibility with the treaty.101 It remains an open question whether Art. 7 and 8 of TRIPS may constitute additional grounds that could sustain and strengthen the importance of functionality within the regime of exclusive rights, as a means of limiting legal exclusivity for the beneficial effects of public interest, and more specifically of market competition. The recent emphasis by AG in Brompton of the need for ‘proportionality’ when setting the boundaries between industrial property and copyright in terms of cumulative protection, ‘so as to prevent the excessive protection of the latter from leaving the former devoid of substance’,102 anticipates future developments in this area. 97 Ibidem para 39. 98 C-833/18 Brompton, ECLI:EU:C:2020:461. 99 C-321/03 Dyson v. Registrar of Trade Marks, Opinion AG Léger ECLI:EU:C:2006:558, para 94. 100 C321/03 Dyson, ECLI:EU:C:2007:51, para 45. 101 Perceiving a certain incompatibility, Professor Kur considers functionality a vulnerable ground to deny protection according to the telle quelle rule, see Kur, ‘Absolute grounds for refusal’ in Kur, Senftleben (n 24) para 4.172. 102 C-833/18 Opinion ECLI:EU:C:2020:79, 45. 36 The legal framework of trade marks’ functionality in the EU and 4.2.1.3.), but is an option currently unavailable for trade marks. When it comes to details, another difference from trade marks (Chapter 5) is that design functionality applies to product features taken individually, and does not always affect the whole design/product appearance.135 It requires a distinct type of assessment.136 Summing up, EU design law is construed so as to capture and protect functional products, whilst the functionality rules operate restrictively and incidentally. Their main purpose is not to deprive an entire design of protection, but rather to ‘adjust’ its scope of protection in case of conflict with similar products. There are similarities to trade mark functionality, however the range and significance of differences is visible. Even as regards the shared anti-monopoly rationale, the risk of over-extending legal exclusivity over product features is lessened in the case of designs, which are subject to temporal constraints.137 The above discussion advocates for caution when applying analogical interpretations between trade mark and design functionality rules. Additionally, as design functionality cannot ensure channelling the technical subject-matter to patents or utility models, there is still space for overlaps between trade marks, designs, and patents or utility models. Bibliography Bainbridge, D., ‘Smell, Sound, Colour and Shape Trade Marks: An Unhappy Filtration’ (2004) 3 JBL 220 Beier, F.-K., ‘Basic Features of Anglo-American, French and German Trademark Law’ (1975) IIC 300 Bently, L., Sherman, B., Gangjee, D., Johnson, P., Intellectual Property Law (5th ed. OUP 2018) Bodenhausen, G. H., Guide for the Application of Paris Convention for the Protection of Industrial Property (BIRPI Geneva 1969) at www.wipo.int/edocs/pubdocs/en/ intproperty/611/wipo_pub_611.pdf Bornkamm, J., ‘Harmonising Trade Mark Law in Europe’ (1999) 3 IPQ 284 Brancusi, L., ‘Article 8’ in Gordian Hasselblatt (ed.) Community Design Regulation. Article-by-Article Commentary (2nd ed. Hart 2018) 140 Brancusi, L., ‘Designs Determined by the Product’s Technical Function: Arguments for an Autonomous Test’ (2016) 38(1) EIPR 23 135 For a design to be entir ely invalidated, EUIPO requires that all its dominant features are prohibited upon one (or both) functional provisions: EUIPO Design Guidelines – Examination of Design Invalidity Applications, 5.3.1 https://euipo01app.sdlproducts. com/1004805/904777/designs-guidelines/5-3-1-rationale 136 Lavinia Brancusi, ‘Designs Determined by the Product’s Technical Function: Arguments for an Autonomous Test’ (2016) 38(1) EIPR 23. As discussed in Chapter 5, the assessment of trade marks addresses a sign as a whole whilst balancing the functional/non-functional elements in order to conclude whether the sign consists ‘exclusively’ of shape or other product characteristics defined by the functional prohibitions. 137 EU registered designs are protected for at most 25 years and unregistered for three years. The legal framework of trade marks’ functionality in the EU 37 Calboli, I. ‘Non-Traditional Trademarks as Barriers to Competition, Innovation and Creativity: What If Their Protection Could Be Effectively Limited in Practice’ in Gustavo Ghidini, Valeria Falce (eds.) Reforming Intellectual Property (Elgar 2022) 1 Calboli, I., Senftleben, M. (eds.) The Protection of Non-Traditional Trade Mark: Critical Perspectives (OUP 2018) Carani, C. (ed.), Design Rights: Functionality and Scope of Protection (2nd ed. Kluwer Law International 2022) de Carvalho, Nuno Pires, The TRIPS Regime of Trademarks and Designs (4th ed. Wolter Kluwer 2019) Derclaye, E., Leistner, M., Intellectual Property Overlaps: A European Perspective (Hart Publishing 2011) Derclaye, E. (ed.), The Copyright/Design Interface (CUP 2018) Elmslie, M., ‘The New UK Trade Marks Bill’ (1994) 16(3) EIPR 119 EUIPO Design Guidelines – Examination of Design Invalidity Applications, at: https://guidelines.euipo.europa.eu/1934976/1786993/designs-guidelines/ examination-of-design-invalidity-applications Frankel, S., ‘Interpreting the Overlap of International Investment and Intellectual Property Law’ (2016) 19 Journal of International Economic Law 121 Frankel, S., ‘Some Consequences of Misinterpreting the TRIPS Agreement’, 2009 WIPOJ No 1, 39–40 http://papers.ssrn.com/abstract=1862672 Frankel, S., ‘The WTO’s Application of “the Customary Rules of Interpretation of Public International Law” to Intellectual Property’, 4 VUWLRP 2/2014, at http:// ssrn.com/abstract=795986 Frankel, S., Gervais, D., ‘Plain Packaging and the Interpretation of the TRIPS Agreement’ (2013) 46 Vanderbilt Law Review 1149 Gervais, D., The TRIPS Agreement: Drafting History and Analysis (4th ed. Sweet & Maxwell 2012) Gielen, C., ‘Harmonisation of Trade Mark Law in Europe: The First Trade Mark Harmonisation Directive of the European Council’ (1992) 14(8) EIPR 262 Helbling, T., ‘Shapes as Trade Marks? – The Struggle to Register Three Dimensional Signs: A Comparative Study of United Kingdom and Swiss Law’ (1997) IPQ 421 Hennig-Bodewig, F., Ruijsenaars, H., ‘Alternative Protection for Product Deigns: A Comparative View of German, Benelux and US Law’ (1992) 23 IIC 655 Horton, A., ‘Design, Shapes and Colours: A Comparison of Trade Mark Law in the United Kingdom and the United States’ (1989) 11(9) EIPR 315 Kur, A., ‘Harmonization of the Trademark Laws in Europe – An Overview’ 1997 IIC 1 Kur, A., ‘Markenrecht’ in Eichmann, Kur (eds.) Designrecht. Praxishandbuch (1st ed. 2009 Nomos) 134 Kur, A., Levin, M., ‘The Design Approach Revisited: Background and Meaning’ in Annette Kur, Marianne Levin, Jens Schovsbo (eds.) The EU Design Approach: A Global Appraisal (Elgar 2018) Kur, A., Senftleben, M., European Trade Mark Law: A Commentary (OUP 2017) Levin, M., ‘Recent Developments in Nordic Design Protection’ (1988) IIC 616 Ramsey, L., ‘Reconciling Trademark Rights and Free Expression Locally and Globally’ in Daniel Gervais (ed.) International Intellectual Property: A Handbook of Contemporary Research (Elgar 2015) Ramsey, L., ‘Free Speech and International Obligations to Protect Trademarks’ (2010) 35 Yale Journal of International Law 445–447 38 The legal framework of trade marks’ functionality in the EU Ricketson, S., The Paris Convention for the Protection of Industrial Property (OUP 2015) Sanders, A.K., ‘Some Frequently Asked Questions About the 1994 UK Trade Marks Act’ (1995) 17(2) EIPR 67 Sambuc, T., ‘Zur Schutz (un)fähigkeit von Produktgestaltungen als Ware oder Ausstattung’ (1989) GRUR 54 Schovsbo, J., Dinwoodie, G.B., ‘Design Protection for Products that Are “Dictated by Function”’ in Annette Kur, Marianne Levin, Jens Schovsbo (eds.) The EU Design Approach: A Global Appraisal (Elgar 2018) 142 Senftleben, M., ‘Public Domain Preservation in EU Trademark Law’, 2013 Trademark Reporter 784 Senftleben, M., The Copyright/Trademark Interface: How the Expansion of Trademark Protection is Stifling Cultural Creativity (Wolters Kluwer 2021) Seville, C., EU Intellectual Property Law and Policy (Elgar 2018) Stone, D., European Union Design Law: A Practitioners’ Guide (2nd ed. OUP 2016) Strowel, B., ‘Benelux: A Guide to the Validity of Three-dimensional Trade Marks in Europe’ (1995) 17(3) EIPR 154 Ströbele, P., ‘Registration of New Trademark Forms’ (2001) IIC 162–169 Tischner, A., Kumulatywna ochrona wzornictwa przemysłowego w prawie własności przemysłowej (Warszawa C.H. Beck 2015) Tritton, G., Intellectual Property in Europe (2nd ed. Sweet & Maxwell 1999) Wee Loon, N.-L., ‘Absolute Bans on the Registration of Product Shape Marks: A Breach of International Law?’ in Calboli, Senftleben, The Protection of Non-Traditional Trade Marks: Critical Perspectives (OUP 2018) 147 UNCTAD-ICTSD Resource Book on TRIPs and Development (CUP 2010) Yu, P., ‘The Objectives and Principles of the TRIPS Agreement’ (2009) 46(4) Hous. L. Rev. 979, https://scholarship.law.tamu.edu/facscholar/457 2 ‘La raison d’être’ of functionality in the EUTM A tool for balancing interests between legal exclusivity and enhancing competition Since the enactment of EUTM, ‘public interest’ has become the key notion placed at the core of interpreting any functional provision. This is not a normative concept,138 and it is distinct from the grounds of public policy or morality. As developed by CJEU, ‘public interest’ has dynamically embodied various meanings over time. Before dealing with functionality cases, the CJEU laid down the principle that other absolute grounds for refusal, that is descriptiveness, genericness, and (absence of) distinctiveness, should be interpreted though the lenses of ‘public interest’. A chronological discussion explores how the concept of ‘public interest’ defined the scope of assessment of these three refusal grounds (2.1.). The second part focuses on the CJEU’s understanding of ‘public interest’ for functionality purposes, with regards to both technical/utilitarian and appealing subject-matter (2.2.). The third part sets functionality within the broader perspective of other refusal grounds and explores whether and to which extent they may attenuate the effects of trade mark overprotection (2.3). This chapter argues that functionality serves as a useful ex ante obstacle against overlapping rights – however, as ‘public interest’ does not represent a clear-cut criterion for delineating functionality from other refusal grounds, functionality needs to preserve its autonomous legal status and assessment. 2.1. Public interest at the core of other grounds for refusal of registration The following part examines how the criterion of ‘public interest’ has been applied to the assessment of the refusal grounds pertaining to distinctiveness, descriptiveness, and customariness which are currently set in Art. 4(1)(b)–(d) 138 Fhima, ‘The Public …’ (n 25) 311. For a broader discussion of a multivalent concept of ‘public interest’ across various IPRs, ‘composed of distinct and differentiated identities and needs’, Karen Walsh et al., ‘Intellectual Property Rights and Access in Crisis’ (2021) 52 IIC 379, 380, 383. DOI: 10.4324/9781003376040-3 40 ‘La raison d’être’ of functionality in the EUTM TMD139 and Art. 7(1)(b)–(d) EUTMR.140 The analysis will show the overlap and lack of consistence as concerns the interpretation of this criterion across these three legal provisions. Such shortcomings will shed light on why public interest cannot be a reliable factor for delineating the scope of refusal grounds related to distinctiveness/descriptiveness/genericness from that of functionality, discussed separately in part 2.2. 2.1.1. Setting the scene In earlier years of EUTM jurisprudence, the relationship, hence intersection, between functionality grounds and a lack of distinctive character was not just a matter of theory. Functionality operated mostly as a subsidiary ground to sustain the absence of distinctive character, which constituted the main legal ground invoked to deny protection. Functional components of a sign either demonstrated commonness/standardisation for that type of goods or were too weak to ensure distinctiveness.141 Other voices pointed to the redundancy of functional provisions, and even suggested their deletion, as long as distinctiveness grounds seemed to suffice.142 The argument was that functional features that must remain free for use to other traders cannot identify the commercial origin of goods/services of one undertaking. At some point the CJEU separated the sphere of application of functionality, by giving it priority over matters of distinctive character. The Court also made clear that even if functionality was overruled in casu, other absolute grounds may still play a part.143 However, functionality had its own specific purposes, mingling anti-monopoly concerns with delineating between various IPRs and being quite a restrictive subjectmatter: it was confined to shapes. By contrast, the other refusal grounds could cover any sign that matched the basic definition of an eligible sign.144 As mentioned in 1.1., the extended scope of functional exclusions to any product characteristic has already blurred the lines between other categories of 139 Previously Art. 3 (1) b)–d) of the First Directive. 140 Registration is denied to trade marks ‘devoid of any distinctive character’ (b); ‘which consist exclusively of signs or indications which may serve, in trade, to designate the kind, quality, quantity, intended purpose, value, geographical origin or of the time of production of the goods or of rendering of the service, or other characteristics of the goods or service’ (c); or ‘which consist exclusively of signs or indications which have become customary in the current language or in the bona fie and established practices of the trade’(d). 141 Ar naud Folliard-Monguiral, David Rogers, ‘The Protection of Shapes by the Community Trade Mark’ (2003) 4 EIPR 173–175, referring to BoA EUIPO’ decisions in cases R 70/1998-2; R 142/1999-1; R 563/1999-1; R 272/1999-3; R 74/1998-3 (followed by GC judgment T-122/99). 142 David T. Keeling, ‘About Kinetic Watches, Easy Banking and Nappies That Keep a Baby Dry: A Review of Recent European Case-law on Absolute Grounds for Refusal to Register Trade Marks’ (2003) 2 IPQ 137–138; Helbling (n 105) 419. 143 C-53/01 to C-55/01 Linde, Winward, Rado, EU:C:2003:206, paras 45, 66–67. 144 These were abstract capabilities to distinguish goods/services and graphical representation. ‘La raison d’être’ of functionality in the EUTM 41 signs that were previously tested on distinctiveness. Recently, whilst discussing the rationale of functionality, the Advocate General (AG) in the Louboutin case referred per analogiam to the concept of public interest established by the CJEU for evaluating distinctiveness of colours or a combination of colours. He noted the similar goal of keeping undistorted competition, expressed there by a ‘general interest in not unduly restricting the availability of colours’.145 Also in the context of refusal grounds pertaining to descriptiveness and genericness, the CJEU has frequently articulated an availability need towards signs, raising anticompetitive concerns. This calls here for an examination of how public interest has been interpreted for the purpose of these legal bars, where the differences between them lie, and how this may affect the possible overlap with functionality. 2.1.2. A vexing overlap between grounds related to distinctive character The concept of public interest has raised serious doubts in relation to the notions of distinctiveness, descriptive character, or customariness of a sign. The issue depends on the way these three provisions are mutually interrelated. Is descriptiveness or customariness a mere exemplification of the lack of distinctive character, or does each have autonomous status? Do they share, up to a certain point, the same public interest policies, or do different reasons call for denying trade mark protection in each case? From literal interpretation, there is a strong argument implying the subsidiary status of descriptiveness or customariness towards distinctive character, which stems from the provision related to acquired distinctiveness. The provision of Art. 4(4) TMD (Art. 3(3) of First Directive) indicates that acquired distinctiveness may help overcome not only a lack of inherent distinctiveness (b), but also other refusal grounds set out in paras c) and d), namely descriptiveness or customariness. From a logical and practical perspective, a descriptive or generic sign is also without distinctive character, although there may be signs devoid of distinctive character that do not match the other two legal bars.146 This shows a clear sphere of overlap between these three grounds, where a principal role is played by the notion of distinctive character, earning the term of a ‘catch-all’ or ‘umbrella’ provision. Although it has not completely eliminated any possibility of interference, the CJEU has consequently tried to enforce the principle that each legal ground is independent from the others, has its own sphere of application, and reveals a separate, discrete notion of public interest. However, such a formalistic approach tends to be problematic, and even incoherent, as the following remarks will demonstrate. 145 C-163/16 Louboutin, EU:C:2017:495, para 43–47 referring to C-104/01, Libertel, EU:C:2003:244, paras 54, 60, and C-49/02 Heidelberger Bauchemie, EU:C:2004:384, para 41. 146 Michael Handler, ‘The Distinctive Problem of European Trade Mark Law’ (2005) 27(9) EIPR 307–310. 42 ‘La raison d’être’ of functionality in the EUTM 2.1.2.1. Public interest and descriptiveness The leading case in this area was Windsurfing Chiemsee, concerning the trade mark registration of a geographical name (i.e. a Bavarian lake).147 The CJEU defined the rationale of Art. 3(1)(c) of First Directive148 as ‘preventing such signs from being reserved to one undertaking’ so that ‘may be freely used by all, including as collective marks or as part of complex or graphic marks’.149 This need to remain available to other traders was justified not only because such a sign carries information on quality or other goods’ characteristics, but because it may positively ‘influence consumer tastes’ through an association between goods and ‘a place that may give rise to a favourable response’.150 The CJEU adopted an enlarged view to encompass not only signs that currently function with a descriptive meaning in the mind of relevant consumers, but also signs that have such a capacity and where ‘it is reasonable to assume that such an association may be established in the future’.151 Such a pro-future interpretation was supported by the wording of the provision of Art. 3(1)(c) which employed the term ‘may serve’, although the fact that the legislator had used different forms (and tenses) for the refusal grounds set in paras b) to d) did not constitute sufficient proof of deliberate law-making.152 The core issue of public interest consisted of CJEU’s rejection of the German doctrine (Freihaltebedürfnis – in translation, ‘a need to keep free’) for the interpretation of the descriptiveness requirement. The CJEU distanced itself from the national registrability standards of EU members. An unwritten but settled principle of German practice was to deny registration for a certain type of signs (e.g. colours, numerals, personal and geographical names) if competitors’ interests showed that there was a ‘real, current and serious’ requirement of availability for that sign.153 Similarly, in UK law a sign that was in fact fully 147 Joined cases C-108/97 and C-109/97 Windsurfing Chiemsee …, EU:C:1999:230. The CJEU gave guidance on preliminary questions asked by the Regional Court of Munich hearing an infringement case. 148 Currently Art. 4(1)(c) TMD. 149 Windsurfing, ibidem para 25. 150 Windsurfing, ibidem para 26. 151 Windsurfing, ibidem paras 30–31. 152 Philips ‘Trade Mark Law …’ (n 25) 396. 153 Availability was assessed in relation to the goods/services described in the filing for registration; the risk of impairing competition could not be simply hypothetical, although future risk supported by current accurate data was also accepted; the need must have been important. In case of a refusal of registration based on this principle the administrative organ did not proceed with assessing distinctiveness, but it asked the applicant to produce the evidence of distinctive character and lack of availability imperative; more Reinhard Ingerl, Christian Ronke, Markengesetz (C.H. Beck 2010) §8, 92, 197, 209–215; Georg Fuchs-Wissemann, ‘Absolute Schutzhindernisse’ in Friedrich Ekey, Achim Bender, Georg Fuchs-Wissemann (eds.) Markenrecht. Band 1 (Markengesetz und Markenrecht ausgewählter ausländisher Staaten) (C.F. Müller 2014) §8, paras 11–15; Detlef von Schultz, ‘Absolute Schutzhindernisse’ in Detlef von Schultz (ed.) Kommentar zum Markenrecht (Deutscher Fachverlag 2012) §8, 105–120. ‘La raison d’être’ of functionality in the EUTM 43 distinctive could be refused registration if it belonged to a type of mark where public interest (leaving them free to other traders) stood against conferring a commercial monopoly to one entity. Such a sign could not match the unwritten concept of ‘legal distinctiveness’, established in the jurisprudence of pre-Directive days, and then considered removed by the EUTM and the new case-line, including Windsurfing.154 As concerns the threshold of acquiring distinctiveness through use, the Court did not permit any differentiation in standards because of a presumed availability requirement, here the example of a geographical name needed by other undertakings. The CJEU specifically declined any reference to a predetermined percentage, such as above 50 per cent of recognition (trade acceptance) of the sign as badge of origin among consumers, a criterion that German practice usually required in a proportion determined by the need to keep free.155 In subsequent years, the Windsurfing guidance has been developed to encompass signs consisting of descriptive words, which were not necessarily ‘exclusively descriptive’ according to the actual conditions of use.156 For the refusal ground to operate, it sufficed that one ‘possible’ meaning of the term composing the mark may designate a product characteristic, and it concerns not only present interests, but also potential competitors who may wish to use that sign in a descriptive manner.157 Similarly, it is not required that the sign should be the only way of designating the product characteristics at issue, although opinion could equally take the contrary position, namely that various ways of conveying the same information may represent proof of lack of descriptiveness.158 It was also irrelevant whether the characteristic at issue had secondary importance rather than being ‘commercial essential’.159 This refusal ground was also found suitable for three-dimensional signs (shapes), independently of the possibility to invoke one of the functional exceptions.160 Another case concerning the colour and shape of a container used for liquid detergent marked the point where objections of descriptiveness (and functionality too) extended to the packaging of goods without an intrinsic 154 Angela Fox, ‘Does the Trade Mark Harmonisation Directive Recognize a Public Interest in Keeping Non-distinctive Signs Free for Use?’ (2000) EIPR 1, 4 quoting a judgment of 1913 in W&G du Cros Ltd. Application, 1913 RPC 660, 672 where it was stated that distinctiveness of a mark ‘must … depend upon whether other traders are likely, in the ordinary course of their business and without any improper motive, to desire to use the same mark, or same mark nearly resembling it, upon or in connection with their own goods’. 155 C-109/97 Windsurfing paras 41–52. 156 C-191/01 OHIM v. Wm. Wrigley Jr. Company (conc. word DOUBLEMINT), EU:C:2003:579, paras 32–35; C-363/99, Koninklijke KPN Nederland v. Benelux-Merkenbureau (conc. word ‘Postkantoor’) EU:C:2004:86, paras 55–58. 157 Recently in joint cases T-117/18 to T-121/18, Agencja Wydawnicza Technopol v. EUIPO, EU:T:2019:447, paras 26–59. 158 Fhima (n 25) 313. 159 Seville (n 39) 295. 160 C-53/01 Linde EU:C:2003:206, paras 69–77. 44 ‘La raison d’être’ of functionality in the EUTM shape, such as granules, powder, or liquids.161 Although the CJEU proclaimed a territorial limitation of the relevant public to the country where registration is sought,162 registration of descriptive shapes may create barriers to legitimate free trade, a critical issue amongst TRIPS signatories. An interesting case concerned an attempt to register the shape of a soft cake in Germany, known in the former USSR under the standardized name of ‘Zefir’ cake – the Düsseldorf Court of Appeal was sensitive to the risk of undue monopolization and denied registration on bad faith grounds.163 2.1.2.2. Public interest and genericness Another refusal ground set out in Art. 3(1)(d) of the First Directive164 deals with trade marks that consist exclusively of signs that have become customary in contemporary language, or in the bona fide and established practices of the trade for defining an entire class/genus of products, such as the terms ‘BSS’ (an abbreviation for ‘balanced salt solution’ used by ophthalmologists) or ‘kornspitz’ (a type of roll).165 This problem mostly concerns word marks; however, practice has shown that a combination of graphics and colours – a red rose design used for England rugby shirts166 – may also fall foul of this provision. Shapes also may become generic, for instance, a rectangular box. More examples are discussed in Chapter 7, which deals with product features resulting from the nature of goods. This type of functionality intersects clearly with generic signs. Although a general interest in keeping generic signs free for use of other traders could also be placed at the core of this registration bar,167 the CJEU has focused on the incapability of such signs to properly perform the source identification function of a trade mark.168 Without denying a possible overlap 161 C-218/01 Henkel KGaA v. Deutsches Patentund Markenamt, EU:C:2004:88, paras 33, 44. 162 This means that a descriptive or generic term in a given language may be registered in another EU country where the language is not spoken C-421/04 Matratzen Concord v. Hukla Germany, EU:C:2006:164. 163 Anke Moerland, ‘The Registration of Descriptive Terms in International Trade’ in Christopher Heath, Anselm Sanders, Anke Moerland (eds.) Intellectual Property Rights as Obstacles to Legitimate Trade? (Wolters Kluwer 2018) 85–94 referring to the German court’s dec. of 31 December 2002 in case 20 U 120/02) at 92–93, fn 83. 164 Currently Art. 4(1)(d) TMD. 165 C-192/03 Alcon Inc. v. OHIM, ECLI:EU:C:2004:587; C-409/12, Backaldrin Österreich The Kornspitz Company v. Pfahnl Backmittel, ECLI:EU:C:2014:130. 166 Case RFU and Nike v. Cotton Traders, 2002 ETMR 861, mentioned by Cornish et al. (n 24) 726, at fn 265. 167 See opinions of AG Colomer in C-404/02 Nichols plc v. Registrar of Trade Marks, ECLI:EU:C:2004:30, para 43 in fine; and AG Jacobs C-329/02P SAT.1 SatellitenFernsehen GmbH v. OHIM, ECLI:EU:C:2004:143, para 23. 168 C-517/99 Merz & Krell …, ECLI:EU:C:2001:510, paras 24–28. The mark at issue was the word ‘Bravo’ filed for ‘writing implements’. It was also irrelevant whether such a sign was used as an advertising slogan, an indication of quality or an incitement to purchase (paras 40–41). ‘La raison d’être’ of functionality in the EUTM 45 with descriptive signs, it was held that customary signs may only designate the goods/services at issue, understood so as to convey a looser link with them.169 Importantly, and by contrast with descriptiveness, the timeline for assessing customariness does not consider potential developments, that is, whether traders in the future will still need such generic features. The CJEU asks for proof that the sign has already gained a generic meaning. Another difference, this time against US law, is that a trade mark found generic under US law can never be registered/protected,170 whereas in the EU acquired distinctiveness renders a customary sign registrable. 2.1.2.3. Public interest and distinctiveness The main refusal ground pertaining to lack of distinctive character embedded in Art. 3(1)(b) of the First Directive171 raises most of the criticisms about inadequate and incoherent interpretations of the notion of ‘public interest’. In earlier years of CJEU practice, this ground was frequently invoked together with objections of descriptiveness and/or customariness and/or even functionality. The effect was frequently confusing legal argumentation, which could be regarded as a consequence of the overlapping nature of these provisions.172 However, the CJEU has emphasized the autonomous character of the distinctiveness requirement, reflected also by a separate understanding of the public interest rationale, which was read in direct connection with the essential function of a mark. Trade marks devoid of distinctive character are denied protection because of their incapacity to guarantee consumers the specific origin of the marked products by enabling them to distinguish the goods/services of one entity from those of another without any risk of confusion.173 This principle was set apart from the interpretation of public interest adopted for descriptive signs.174 More precisely, in relation to most of the signs (words, figurative, 169 Bently et al . (n 24) 1004 refers to AG Opinion in Merz & Krell ECLI:EU:C:2001:40, para 50 which implied that the term ‘designation’ did not mean a description or a specific degree of association between sign and goods/services. 170 Rochelle Cooper Dreyfuss, ‘Expressive Genericity: Trademarks as Language in the Pepsi Generation’ (1990) Notre Dame L. Rev. 397 http://scholarship.law.nd.edu/ndlr/vol65/ iss3/1; Lisa Ramsey, ‘Descriptive Trademarks and the First Amendment’, San Diego Legal Studies Paper No 06–13, May 2005 http://ssrn.com/abstract=728572 1006–1008; 1021– 1024; Steven Weber, ‘Trademarks and Genericness: Loss of a Mark to the Public Domain through Its Transformation into a Generic Term’ (1990) 17 W. St U. L. Rev. 415. 171 Currently Art. 4(1)(b)TMD. 172 In practice the fact that the judiciary body laid down arguments related to legal grounds formerly unmentioned in the plea raised procedural objections over impairing a party’s right to a fair hearing, more Keeling, ‘About Kinetic Watches …’, 140–145. 173 C-102/77 Hoffmann-La Roche v. Centrafarm EU:C:1978:108; Joined Cases C-456/01 P and C457/01 P Henkel v. OHIM EU:C:2004:258, para 48; C-329/02 P SAT.1 SatellitenFernsehen GmbH v. OHIM, paras 25–28 and 36. 174 This issue of inter relation was not obvious; for instance AG Colomer in C-102/07 Adidas AG and Adidas Benelux BV v. Marca Mode CV & others, opined that the principle of 52 ‘La raison d’être’ of functionality in the EUTM substitute feature). … It would result in the trade mark proprietor obtaining a significant advantage which would have an unfavourable effect on the structure of competition on the market concerned’.203 The same approach was extended to aesthetic functionality. The technical functionality rationale set out in the Philips and Lego judgments was re-affirmed in the Gömböc case204 (concerning a self-righting toy shape) – however, the CJEU did not develop the topic of public interest, but restrained itself to matters of legal interpretation (Chapters 6–8). Interestingly, in the parallel Brompton case (concerning the copyrightability of a bicycle with technical features covered by an expired patent) AG Campos Sanchez-Bordona amply discussed IPR overlaps and the role that functionality exclusion should play towards trade marks, designs and copyright.205 The AG clearly favoured a holistic view of functionality across IP regimes, similar to a noticeable trend in US scholarship (Chapter 3.3.). In Brompton AG’s suggestion was to analogically apply on copyright grounds the trade mark functionality guidance of Philips and Lego, 206 whilst noting the congruence between trade marks and design functionality rules.207 Again, the CJEU did not elaborate on these aspects, yet future practice will enhance the meaning and purpose of functionality across the IP system. 2.2.2. The uplifting of aesthetic functionality The legal bar pertaining to shapes, or other product features, giving ‘substantial value’ to goods has created the most controversial case-law to date. This is not only because of difficulties in implementing objective assessment criteria, but also because of the impossibility of conferring a rationale which can achieve coherence within the IP structure and match the market conditions of consumer purchase decisions. Due to the legislative influence of Benelux (1.3.1.), it is worth examining how the Benelux preparatory acts explained the purpose of this exclusion. The aim was ‘to impose a certain limitation to the possibility that trade mark protection coincides with the protection that it can be derived from copyright or design rights. … When considering the nature of goods, this “attractiveness value” is of major importance, the chosen shape cannot be eligible for the protection as trademark.’208 Aesthetic functionality was not targeted to exclude all cumulation between trade marks and 203 C–205/13 Hauck, Opinion, EU:C:2014:322 paras 57–58. 204 C-237/19 Gömböc v. Szellemi, EU:C:2020:296, paras 25–26. 205 C-833/18, Brompton Bicycle, Opinion EU:C:2020:79, paras 39–45, 47–56. 206 Ibidem paras 66–76. 207 The seminal r uling interpreting functionality in EU design law was C-395/16 Doceram, EU:C:2018:172. 208 Explanator y Memorandum to Benelux Uniform Trade Mark Law, as quoted by Charles Gielen, ‘Substantial Value Rule: How it Came into Being and Why it Should Be Abolished’ (2014) 36(3) EIPR 165. ‘La raison d’être’ of functionality in the EUTM 53 copyright/designs – a thing hardly sustainable today in view of the range of protectable subject-matter and the requirements of protection of design and copyright law – instead it was intended to operate restrictively under specific circumstances.209 Such circumstances relate, on one hand, to the category of goods for which the sign is used, and, on the other hand, to those factors which determine an increased value (read attractiveness) in consumer eyes. The criteria for assessing aesthetic functionality are discussed in more detail in Chapter 8, whilst the remarks below touch upon the way CJEU has understood its rationale over the years. Starting with the recent Gömböc case, the CJEU read the rationale of aesthetic functionality through the lens of competition – the benefits from the attractiveness of a product should not belong to a single undertaking, otherwise it ‘would distort the conditions of competition on the market concerned’.210 The aim of separating trade marks from designs/copyright was recognized, yet clearly downplayed. The Gömböc shape had already enjoyed design protection. However, the CJEU acknowledged the coexistence and autonomy of designs and trade marks, by noticing that there was no hierarchy in-between and no blanket prohibition on subsequent trade mark protection.211 This reasoning concurs with the rationale of EU design protection (1.4.), which is not to cover aesthetic creations, as shown by the EUIPO database. Therefore, a prior design does not say much about the ‘substantial value’ of a product to imply aesthetic functionality of trade marks. The Gömböc judgment tilts the balance in favour of a pro-competition approach, although in the early years the CJEU/GC considered using aesthetic functionality as a means of preventing the cumulation of rights. One of the first GC decisions concerned the pencil shaped Bang & Olufsen loudspeaker. The GC did not offer a distinct explanation for the rationale underlying the aesthetic functionality provision and instead took the view that it was the same as for technical functionality.212 The reference to the AG opinion in Philips, that is, the need for delineation between trade marks and other time-limited forms of protection, served to formulate its purpose generally and vaguely as ‘to prevent the granting of a monopoly on those shapes’.213 209 For accepting the imminence of overlaps between trademarks and copyright/designs , see Alison Firth, ‘Signs, Surfaces, Shapes and Structures – The Protection of Product Design Under Trade Mark Law’ in Jan Rosén (ed.) European Intellectual Property Law (Elgar 2016) 289; Estelle Derclaye, ‘Overlapping Rights’ in Rochelle Dreyfuss, Justine Pila (eds.) The Oxford Handbook of Intellectual Property (OUP 2018) 632–641; Craig Mende, Belinda Isaac, ‘When Copyright and Trademark Rights Overlap’ in Neil Wilkof, Shamnad Basheer (eds.) Overlapping Intellectual Property Rights (OUP 2012) 138–144. 210 C-237/19 Gömböc, para 40. 211 Ibidem paras 51–55. 212 T-508/11 Bang & Olufsen v. OHIM, EU:T:2011:575, para 64. 213 Ibidem paras 65–66. 54 ‘La raison d’être’ of functionality in the EUTM Later on, the Hauck judgment reaffirmed the anti-cumulation rationale, adding further guidance that aesthetic functionality may encompass products performing both aesthetic (decorative) and ‘other essential functions’ (practical) – the in casu chair’s ergonomic construction was highly valued by consumers.214 The CJEU’s broadening of aesthetic functionality to products with multiple functions was a confirmation of the AG Szpunar Opinion, which focused on preventing an ‘unfair market advantage which does not result from competition based on price and quality’, but resulting from an enhanced attractiveness of goods that ‘strongly influence consumer preferences’.215 An important issue that to date has not been properly dealt with by the CJEU concerns how reputation (goodwill) attached to a trade mark may impact the finding of aesthetic functionality. In the opinion to the Louboutin case, AG Szpunar expressed the view that the characteristics of goods linked to the reputation of a trade mark – which would raise consumer appeal even in case of an unattractive shape per se – should not be factored to determine the substantial increase of value in the eyes of consumers.216 This would permit keeping the scope of aesthetic functionality within reasonable limits, so as not to collide with other important interests of a trade mark holder, namely building a trade mark’s goodwill. The CJEU in Louboutin did not address this topic either, although it would have been interesting to see if their position had changed over time. In an earlier case concerning the three-dimensional appearance of a stitching motif applied to a pair of jeans – considered a ‘shape’ for the purpose of this provision – the referral submitted to the CJEU asked whether the attractiveness of a shape could derive from the recognition of a trade mark.217 The facts were such that intensive advertising campaigns had ensured great commercial success for the trousers because of their association with the reputed trade mark ‘G-Star’, although the latter mark did not form part of the shape. The CJEU avoided considering this recognition as enhancing the value of goods, yet transposed it within the discussion of acquiring distinctive character. The whole controversy therefore shifted to the well-known rule that distinctiveness acquired through use could never help to overcome the interdiction against registering a functional sign.218 As has already been critically noticed in the legal doctrine, the CJEU missed an opportunity to engage in a thorough discussion about the attractive characteristics of a product that may function as commercial origin indicators.219 A similar role is played by red soles on high-heeled shoes, which most women perceive as originating 214 C–205/13 Hauck, para 31. 215 C–205/13 Hauck, Opinion, paras 79–80. 216 C-163/16 Christian Louboutin, Opinion, EU:C:2018:64, para 54. 217 C-371/06 Benetton Group v. G-Star International, EU:C:2007:542, paras 13–20. 218 Ibidem paras 24–28. 219 Annette Kur , ‘“Cumulation of Rights with Regard to Three-Dimensional Shapes” – Two Exemplary Studies’ in Alexandre Cruquenaire, Severine Dusollier (eds.) Le cumul des droits intellectuels (Larcier 2009) 164–165. ‘La raison d’être’ of functionality in the EUTM 55 from Louboutin, a highly reputed luxury brand. The AG tended to acknowledge the incentive facet of a trade mark registration, namely stimulating the rights holder to invest in the sign, affix it to products of consistent quality, engage in promotion strategies, and build a trade mark with a reputation. Whilst consumers are getting to know and appreciate a trade mark, functionality should not block this natural path of acquiring and enhancing recognition. The remaining question is how to fix the balance between the interests of a trade mark’s holder and the public interest to keep (aesthetically) functional features unprotected and in the public domain. If this is a question of setting out a hierarchy among different interests, to date the jurisprudence has not offered much guidance. These aspects will be revisited further within a ‘law and economics’ perspective (Chapter 4.3.). Perhaps the most constructive view is to focus on the competition rationale and consumer choice. An interesting AG’s second Opinion to Louboutin discussed the dynamism of consumer preferences that can evolve over time– depending on ‘exter nal circumstances’, such as changing fashion trends– implying that it could have an impact on the assessment of aesthetic functionality.220 This thought calls for further consideration, also in the context of technical/utilitarian functionality (Chapters 6 to 7), although the CJEU did not elaborate on the issue. Such a pro-competitive logic for the aesthetic rationale seems acceptable, however, the difficulty consists of setting out boundaries to an exclusion that may cover any product enjoying marketing success and consumer appeal. Nowadays most products are publicly displayed in a way encouraging purchase. What ‘increasing value’ may – and should – mean for the purpose of an exception of trade mark protection requires careful interpretation of the legal concepts together with and insight into the market specificity of a given case (Chapter 8). This may help achieve a sensible judgment over the risk of impairing competition. 2.3. In search of appropriate methods of solving the difficulties of trade mark overprotection The current CJEU jurisprudence on distinctiveness matters has generally faced severe criticism.221 The issue is not only about the ‘formalistic’ view taken on public interest, adopted to distinctly preserve the sphere of application of the provisions concerning distinctiveness, descriptiveness, and customariness. The current standards for acquiring distinctiveness through use seem somehow unsuitable, even unpredictable. It was argued that the CJEU’s assumption that consumers are not in the habit of perceiving these kinds of signs as indicators of commercial origin, that is, the principal impediment towards their registrability may not be sustained by empirical psychological studies describing 220 C-163/16 Louboutin, Opinion of AG Szpunar EU:C:2018:64, paras 47–52. 221 Extensively Kur, ‘Absolute Grounds for Refusal’ in Kur, Senftleben (n 24) paras 4.61–75. 56 ‘La raison d’être’ of functionality in the EUTM models of consumer perceptions.222 By contrast, consumers may be easily educated to perceive any sign as a badge of origin if it is consequently presented in a ‘typical trademark-use context’.223 This would favour and facilitate entities with the financial means to engage in long-term strategies, working inherently non-distinctive signs into consumers’ minds until they acquire secondary meaning and qualify for registration, with possible detrimental effects on the public interest. As previously discussed, an open-ended definition of public interest may consider a market-orientated, economic perspective of consumers and competitors’ needs, which has found a certain element of confirmation in some CJEU judgments. However, there are instances that call for a broader view, encompassing societal and cultural needs. Sometimes, trade marks, should mean more than ‘a potential economic asset’, 224 and such needs are outlined below. A ‘need to keep free’ is advocated for signs with so-called ‘inherently valuable expression’, which have already conveyed to the public an established set of messages – product information, ideas, emotions, and so on – where monopolization via registration on behalf of one holder would heavily restrict or deprive free use and communication of these messages in various areas of activity.225 A sign embedding this kind of additional ‘expressive’ layer preserves it alongside the ‘signalling’ function226 required to distinguish goods/services in trade. Thus, the need to refer to a sign’s expressive meaning for business communication (such as descriptive use, honest referential use, comparative advertisement), and beyond (e.g. for news, reviews, critics, parody, education, and artistic activities) could risk claims of trade mark infringement, especially in cases of marks with reputations protected outside the realm of specialization. This would advocate for keeping such signs in free use in the public domain, as it is perceived that this kind of societal impairment runs against the optimal balance, presumably set between rights holders’ incentives and benefits versus societal restrictions and costs.227 Even more negative effects could result from registering works of art or important cultural assets, most of these having fallen into the public domain 222 On the inconsistencies between the findings of cognitive psychology about consumer deci - sion-making and the application by courts of the normative model of consumer, Kimberlee Weatherall, ‘The Consumer as the Empirical Measure of Trade Mark Law’ (2017) 80(1) Modern Law Review 57, 61–80. 223 Lotte Anemaet, ‘The Public Domain Is Under Pressure – Why We Should Not Rely on Empirical Data When Assessing Trademark Distinctiveness’ (2016) IIC, 314–23. 224 Jennifer Dav is, ‘A European Constitution for IPRs? Competition, Trade Marks and Culturally Significant Signs’ (2004) 41(4) Common Market Law Review 1005, 370. 225 Lisa Ramsey, ‘Non-Traditional Trademarks and Inherently Valuable Expression’, in Calboli, Senftleben (n 22) 338–341. The given examples match aesthetic functionality such as a vodka bottle shaped on a Yucatan skull, environmentally friendly green-coloured packaging, pina colada scent for a ukulele (see Chapter 8). 226 This is a classification operated by Dreyfuss (n 170) 400–401. 227 Dreyfuss, ibidem 405–412; Ramsey, ‘Non-Traditional …’ ibidem 358–360. ‘La raison d’être’ of functionality in the EUTM 57 after previously being protected by copyright.228 Concerns are voiced about a ‘corrosive effect on cultural follow-on innovation’, as any creation, even in artistic domains, must develop on – or in contrast to – known pieces from the public domain, which makes the further possibility to copy and adapt so important.229 There is also a serious risk of depreciation, or ‘desecration’, 230 of an artwork by commercial use as a trademark in relation to goods/services, and sometimes in a context incompatible with the values originally expressed by the work and/or intended by its author. The legal doctrine offers different solutions for concerns of trade mark overlaps and overprotection, some of them being relevant for the interaction with functionality (see also 3.4.). The main focus is on ex ante control, namely on carefully scrutinizing the circumstances and legal grounds applied at the registration stage. Another issue, which goes beyond the scope of this analysis, concerns ways of calibrating the scope of already conferred protection, by reducing the enforceability of a trade mark right by means of defences and exceptions. At the opposite pole lies an approach denying a general social interest in keeping certain signs free, by arguing that the existing closed system of refusal/invalidity grounds suffices to rule out questionable registrations – ultimately, the possibility of acquiring distinctiveness through use would legally prevail, as distinctive character has to be measured in relation to specific goods /services and dynamically evolves over years.231 Such an approach apparently does not see the ‘availability need’ as a separate and essential factor for assessing distinctiveness, let alone the thorny hypothesis that there may be public interests put above acquiring distinctiveness, such as functionality or public order grounds. A radical choice may consist in ex ante denying any possibility to overlap trade mark rights with (already) copyrighted material, because – in breach 228 Senftleben, The Copyright/Trademark (n 125) 283 ff.; Irene Calboli, ‘Overlapping Rights: The Negative Effects of Trademarking Creative Works’ in Susy Frankel, Daniel Gervais (eds.) The Evolution and Equilibrium of Copyright in the Digital Age (CUP 2014) 52; Robert Tomkowicz, Intellectual Property Overlaps: Theory, Strategies, Solutions (Routledge 2012) 93–96; Viva R. Moffat, ‘Mutant Copyrights and Backdoor Patents: The Problem of Overlapping Intellectual Property Protection’ (2004) 19 Berkeley Tech L. J. 1473, 1520–1521, referring for the concept of ‘mutant copyright’ to Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23 (2003). 229 Martin Senftleben, ‘A Clash of Culture and Commerce: Non-Traditional Marks and the Impediment of Cyclic Cultural Innovation’, in Calboli, Senftleben (n 22) 315–318; Martin Senftleben, ‘Viegeland and the Status of Cultural Concerns in Trade Mark Law – The EFTA Court Develops More Effective Tools for the Preservation of Public Domain’ (2017) IIC, 683. 230 Judgement of EFTA Court of 6 April 2017 in Viegeland case E-5/16, paras 92–93, at www. eftacourt.int/uploads/tx_nvcases/5_16_Judgment_EN.pdf 231 T obias C. Jehoram, Constant v. Nispen, Tony Huydecoper, European Trade Mark Law: Community Trademark Law and Harmonized National Trademark Law (Kluwer Law International 2010), taking as a starting point the principle that ‘there are no such free marks’, 164–165. Similarly, Philips, ‘Trade mark …’ (n 25) 392. 58 ‘La raison d’être’ of functionality in the EUTM of the copyright bargain – concurrent or sequential trade mark protection impedes fair use and the creation of derivative works, as well as foreclosing public access to works that have otherwise fallen into the public domain.232 Implementing this option in the EU would be difficult, considering the lax requirements of protection against a broad notion of protectable creative (artistic) works which may cover almost all categories of signs, 233 perhaps with minimal impact on words and combinations of.234 Significantly, the CJEU recently confirmed the principle of cumulation of copyright with other forms of protection, autonomously and upon terms set by each IP regime, and refrained from clear-cut prohibitions or delineations between IPRs, even in case of works consisting of partially technical subject-matter.235 In addition, looking at registration proceedings, it is not clear whether an administrative body of EU members is – or should be – capable of appreciating ex ante the alleged copyrightability of a sign. As concerns an item (sign) already subject to copyright protection, the existing refusal ground related to collision with a third party’s earlier right, for example copyright, designs, persona rights, and so on, has a relative nature. It is invoked only after a demand filed by interested parties during opposition or nullity actions. An approach requiring categorical exclusion of copyrightable signs would need modifications to the rules of substantive and administrative law, which would have to concur with the twotiered harmonized structure of the EUTM system and the fact that the trade mark directives kept the specifics of national proceedings within the autonomy of Member States. In such conditions, the aesthetic functionality prohibition examined ex ante may, at least in some cases, help achieve the goal of preventing overlap with copyrightable works. Amongst less radical choices to deal de lege lata with overlaps, one option concerns excluding trade mark protection upfront, but only in relation to certain categories of signs. For those embedding cultural, symbolic value, another refusal ground, namely that of public order and morality, is considered to be more robust and a better fit than the currently invoked objections of lack of distinctiveness and/or functionality.236 This view concurs with the preharmonized German practice, which applied the public policy refusal ground 232 Calboli (n 228) 70–76. 233 Eleonora Rosati, Copyright and the Court of Justice of the European Union (OUP 2019) 91–93, discussing the difficulties of accepting taste (see C-310/17 Levola Hengelo v. Smilde Food, EU:C:2018:899) and perfumes as copyrightable work; for a discussion of harmonized originality standards, and implicit of a subject-matter; more in Eleonora Rosati, Originality in EU Copyright. Full Harmonization through Case Law (Elgar 2013). 234 However, fanciful, surprising terms and slogans may qualify for copyright, too. 235 C-683/17 Cofemel v. G-Star, EU:C:2019:721 (works of industrial art: women apparel), discussed by Annette Kur, ‘Unité De L’Art Is Here to Stay – Cofemel and Its Consequences’ (9 December 2019). Max Planck Institute for Innovation & Competition Research Paper No. 19–16 https://ssrn.com/abstract=3500845. See Case C-833/18, Brompton Bicycle, EU:C:2020:461 (bicycle with a patented folding system). 236 Senftleben, ‘A Clash …’ (Calboli, Senftleben n 22) 334–336. ‘La raison d’être’ of functionality in the EUTM 59 to refrain from granting in casu ‘telle quelle’ protection. It is worth noting that EUTM public order/morality provisions have never been interpreted so as to cover the negative aspects of cumulative protection between trade marks and copyright.237 The future will show if the guidance of the EFTA (European Free Trade Association) Court in the Viegeland case finds wider support across EU practice. Another, less stringent, approach suggests ‘an outright exclusion of cultural signs, descriptive signs, abstract colours’, 238 and perhaps also certain shapes and non-traditional marks. This may be difficult to implement, though, because in light of EUTM and TRIPS adopting a ‘negative’ definition of trade mark is inconceivable for these types of signs, leaving aside the need for even more precision. It is also less feasible to implement another distinct refusal ground with normative criteria suitable to catch and exclude all these categories. In the author’s opinion, the difficulty with trade mark registrations with adverse effects on public access is that they do not constitute a homogeneous category. In consequence, there are different kinds of public interests, with different addressees, that need to be considered. Some signs are famous artistic works, universally acclaimed, the status of which matters for humankind’s heritage in general; others concern basic product features which are important for trade (consumers and competitors, taken individually); others are just words, but enriched with specific meanings that should be freely referred to by all and in all areas of activity, and so on. Finding a legal instrument capable to solve ‘en gros’ all kind of distortions stemming from trademarking useful/desirable signs is unlikely. More likely, the solution will be found in developing a patchworked structure of legal means which selectively – but sometimes also cumulatively – can address all these varied circumstances. De lege lata functionality may effectively work – in certain instances – as an obstacle against overlapping rights, be it at the interface with technical subjectmatter or with valuable, creative works. Obviously, transposing it into practice depends on interpretation of the normative criteria set out in the functional provisions. By contrast, the public order ground – unless the CJEU judiciary suddenly changes their perspective – would rather preserve its exceptional character. Even if its current scope of application expanded, it would encompass unique (unusual) subject-matter pertaining to valuable creations, without being capable of solving all questionable interfaces between trade marks and copyrightable works or designs. 237 Until now this ground has meant to protect public security and physical integrity of citizens, safeguarding legal/social order, morality; banning vulgarity or any kind of messages insulting or affecting human dignity, EUIPO Trade Mark Guidelines sect. 4 ch. 7 https:// guidelines.euipo.europa.eu/1935303/1785746/trade-mark-guidelines/chapter-7-trademarks-contrary-to-public-policy-or-acceptable-principles-of-morality--article-7-1--f--eutmr-. Consult Senftleben, The Copyright/Trademark (n 125) 338–339. 238 Anemaet (n 223) 332. 60 ‘La raison d’être’ of functionality in the EUTM One leading voice strongly recommends adopting a so-called ‘integrated approach’ for the assessment of grounds pertaining to distinctiveness, descriptiveness and customariness, which would focus on ‘all interests involved’ (i.e. consumers, the general public, competitors).239 Such an analysis departs from the CJEU’s current formalistic practice of strictly operating with different notions of public interest, which especially refrains from considering the availability need of competitors when examining the distinctiveness requirement. Professor Kur emphasizes that the objective of achieving a ‘balanced protection system’ calls for putting the normative concept of distinctive character into the perspective of carefully scrutinizing whether the registration at issue may adversely affect competition. These considerations are formulated in respect to a specific kind of sign, namely those ‘that are in (relatively) scarce supply’.240 Admittedly, this category may cover not only descriptive signs and abstract colours, but especially signs consisting of product features, which would equally fall within the scope of functional exclusions. Implementing a competition dimension into the assessment of distinctive character would require somehow adapting CJEU guidance by strengthening the role of competition and market-orientated factors. It would seem necessary to examine, for instance, how many competitors are already using the same or (quasi) similar signs; whether these products are commercially feasible substitutes; and perhaps also to operate with a flexible, that is, proportionally dependent, percentage for consumers’ perception and recognition, all of this being rather ostensibly denied (or neglected) by current CJEU practice. The essential query remains whether, and by what means, it is possible to navigate (and optimally delineate) the different scales of competition needs for the purpose of assessing distinctive character and functionality. There is an obvious dynamism to the role of public interest (i.e. ‘a need to keep free’) for distinctiveness purposes which makes registration possible on the grounds of acquired secondary meaning, a path that cannot be followed by a sign caught by functional exclusions. Putting competitors’/consumers’ interests into the equation for solving both kinds of refusal grounds, it is frustrating, albeit impossible, to use a ‘public interests’ rationale as a clear-cut criterion for splitting the sphere of application between distinctiveness and functionality grounds. If the guidance were to operate with different facets of ‘public interest’, technical functionality could arguably be prima facie solved upon the imperative to separate trade mark protection from patents. However, as Chapter 6 argues, usually there is not a perfect correlation between the subject-matter of a 239 Kur, ‘Absolute Grounds for Refusal’ in Kur, Senftleben (n 24) paras 4.72(citation)–4.74, 4.204. 240 Kur, ibidem paras 4.71(in fine)-4.72. Similarly, Hendler suggested a ‘unified test of distinctiveness’, aiming at restricting registration of signs ‘that impact inordinately’ on public domain, Handler (n 146) 312. However such a broadly defined category of signs will require specification at a certain point. ‘La raison d’être’ of functionality in the EUTM 61 functional trade mark and that of a patent/utility model, which raises queries as to the extent that products of different appearance incorporating similar functionality may be relevant for conferring/denying trade mark protection. Aesthetic functionality is also more amenable to following the approach of exploring competition impairment through the criterion of substitutability of goods (Chapters 4 and 8). It is reasonable to assume that the solution for delineating the sphere of application between functionality and distinctiveness matters may surface from a restrictive interpretation of the normative concepts embedded in the functional provisions. By the same token, functionality should preserve the status of a legal ground to be analysed at a prior stage of examination. The following chapters will address possible criteria for consolidation into autonomous technical and aesthetic functionality tests. Bibliography Anemaet, L., ‘The Public Domain Is Under Pressure – Why We Should Not Rely on Empirical Data When Assessing Trademark Distinctiveness’ (2016) IIC, 314 Bently, L., Sherman, B., Gangjee, D., Johnson, P., Intellectual Property Law (5th ed. OUP 2018) Calboli, I., ‘Overlapping Rights: The Negative Effects of Trademarking Creative Works’ in Susy Frankel, Daniel Gervais (eds.) The Evolution and Equilibrium of Copyright in the Digital Age (CUP 2014) 52 Cooper Dreyfuss, R., ‘Expressive Genericity: Trademarks as Language in the Pepsi Generation’ (1990) Notre Dame L. Rev. 397, http://scholarship.law.nd.edu/ndlr/ vol65/iss3/1 Cornish, W., Llewelyn, D., Aplin, T., Intellectual Property: Patents, Copyright, Trade Marks and Allied Rights (8th ed. Sweet & Maxwell 2013) Davis, J., ‘Promoting the Public Interest and the European Trade Mark Directive: A Contradictory Approach’ (2013) 14 ERA Forum Journal of the Academy of European Law 117 Davis, J., ‘A European Constitution for IPRs? Competition, Trade Marks and Culturally Significant Signs’ (2004) 41(4) Common Market Law Review 1005 Derclaye, E., ‘Overlapping Rights’ in Rochelle Dreyfuss, Justine Pila (eds.) The Oxford Handbook of Intellectual Property (OUP 2018) 632 EUIPO Trade Mark Examination Guidelines https://guidelines.euipo.europa.eu/1935303/1790016/trade-mark-guidelines/ part-b-examination Firth, A., Gredley, E., Maniatis, S., ‘Shapes as Trade Marks: Public Policy, Functional Consideration and Consumer Perception’ (2001) 23(2) EIPR 86 Firth, A., ‘Signs, Surfaces, Shapes and Structures – The Protection of Product Design Under Trade Mark Law’ in Jan Rosén (ed.) European Intellectual Property Law (Elgar 2016) 289 Folliard-Monguiral, A., Rogers, D., ‘The Protection of Shapes by the Community Trade Mark’ (2003) 4 EIPR 173 Fhima, I., ‘The Public Interest in European Trade Mark Law’ (2017) 4 IPQ 311 Fox, A., ‘Does the Trade Mark Harmonisation Directive Recognize a Public Interest in Keeping Non-distinctive Signs Free for Use?’ (2000) EIPR 1 68 The US legal framework of functionality doctrine 3.2. Developing the functionality doctrine within the protection of trade dress The development of the US functionality doctrine closely followed the paths of protecting trade dress. It first emerged under unfair competition grounds and slowly migrated to the registration of trade marks. Adopting a historic, chronological discourse is necessary here to illustrate the evolution of the meaning and roles that functionality doctrine has had to play over the years. 3.2.1. The early years At the turning point of the 19th and 20th centuries, trade dress was not considered a proper subject-matter of a trade mark, either for registration or enforcement.261 Jurisprudence confined registration to so-called ‘technical trade marks’, a category meant to encompass a ‘name, symbol, figure, letter, form or device’, while consequently dismissing descriptive words and trade dress.262 One argument, known also to European legal systems, was that a product itself could not act as source indicator due to the intrinsic inseparability between the symbol and the marked object.263 Other justifications focused on utility and the assumption that consumers looked for products of a particular utility, whilst a product or its utility could not stand for a trade mark.264 This went further, stating that for useful, functional product features, trade marks should not serve as ‘an avenue to escape the limitations of the patent law’ (3.1 and 3.3.),265 so functional trade dress had been routinely denied registration.266 Although unregistered but used in trade, the appearance of a product could become a distinctive source-identifier of goods/services while the undertakings developed goodwill. A need emerged for protection against deceit (false 261 Trade Marks Act of 1905 and 1920 had limited scope and offered little guidance on protectable subject-matter, leaving untouched the issues of product configuration or functionality, see Th. Davis (n 253) 605–607; McKenna, ‘The Normative’ (n 247) 1862, retracing the distinction between ‘technical trade marks’ (protectable in actions of trade mark infringement) and ‘trade names’ (only unfair competition claims) to old English cases. 262 Glynn Lunney, ‘The Trade Dress Emperor’s New Clothes: Why Trade Dress Does Not Belong on the Principal Register (2000) 51 Hastings L.J. 1131, quoting at 1141 McLean v. Fleming, 96 U.S. 245 (1879) and other cases. 263 As noted in the case Davis v. Davis, 27 F.490 (C.C.D. Mass. 1886) 492, ‘the merchandise itself, or any method of arranging various packages, can[not] be registered as a trademark. … the trademark must be something other than, and separate form, the merchandise’, referred by Caitlin Canahai, Mark McKenna, ‘The Case Against Product Configuration Trade Dress’ in Graeme Dinwoodie, Mark Janis (eds.) Trademark Law and Theory: Reform of Trademark Law (Elgar 2021), at http://ssrn.com/abstract=3336366, 1, fn 1–3 with further references. 264 Oddi (n 255) 930, referring In re Denison Mfg Co, 39 F.2d 720 (CCPA 1930). 265 Amy Cohen, ‘Following the Direction of Traffix: Trade Dress Law and Functionality Revisited’ (2010) IDEA 593, 600–602 quoting Herz v. Loewenstein, 40 App. D.C. 277 (D.C. Cir 1913) 278 conc. toothpicks packaging with a corrugated embossing on margins, and also In re Oneida Community, 41 App. D.C. 260 (D.C. Cir 1913) conc. an O-shaped film against corrosion covering spoon bowls. 266 Th. Davis (n 253) 608, fn 55 mentioning case-law from 1928–1939. The US legal framework of functionality doctrine 69 representation causing the likelihood of confusion) and the proper avenue of protection constituted unfair competition torts of palming/passing off.267 However, conferring an injunction against copying trade dress collided with the jurisprudential principle: ‘everyone has a right to copy publicly accessible ideas not protected by copyright or patent’ (3.1).268 Jurisprudence mostly articulated the fear of extending a monopoly over product features, patentable or already patented, via trade dress protection.269 Functionality doctrine arose as an instrument to reconcile these conflicting interests. The courts strove to gauge the extent that certain product features were necessary to be copied. If the need was defined as to sell the ‘same’ product, courts adopted a ‘product-level market’ inquiry that concentrated on the features that consumers exactly wished to find when purchasing goods, without looking into possible alternatives.270 By contrast, if the necessity was to effectively compete in a broader market, defined by the type/class of goods, then the assessment considered the availability of viable equivalents.271 In both situations, the solution mitigating consumer confusion was to require newcomers to distinguish their products through wording and labelling, which made functionality a limited defense to be raised by defendants, thus not an absolute bar to plaintiffs’ claims, as applied in modern law.272 267 Mark Alan Thur mon, ‘The Rise and Fall of Trademark’s Law Functionality Doctrine’, (2004) 56 Fla. L. Rev. 244, 258–259, mentioning the requirements of a palming off claim: distinctiveness of plaintiff’s product (features); defendant’s copying of these distinctive features; consumers confused by the appearance of defendant’s product. 268 Rober t Bone, ‘Trademark Functionality Reexamined’ (2015) vol. 7(1) Journal of Legal Analysis 183, 192. Professor Bone explains that, apart from patents or copyright, the right to copy was a natural, common law right, originating from the belief that an ‘idea’ made publicly accessible, which the owner couldn’t control by excluding others, became the ‘common property’ of everyone (at 194). Regarding ‘the design idea that the feature embodied’, ‘everyone, including competitors … had the right to copy product features in all their specific detail’ – at 192, referring Upjohn v. Wm. S. Merrell Chem., 269 F.209, 210–211 (6th Cir. 1920); Daniel v. Electric Hose & Rubber, 231 F.827, 833–834 (3rd Cir. 1916). 269 Seminal case Kellogg v. National Biscuit 305 U.S. 111 (1938) conc. a pillow-shaped biscuit ‘Shredded Wheat’, produced under a lapsed patent, at https://supreme.justia.com/cases/ federal/us/305/111/, discussed by Dinwoodie, Janis (n 36) 108–111. 270 Bone (n 268) calls it an ‘intrinsic necessity ’ determined by how necessary was the feature at issue for plaintiff’s product (at 198–199), and reads it through the rulings: George G. Fox Co v. Glynn (191 Mass. 344 (1906) (at 196–08) conc. copying bread’s appearance; Flagg Mfg. Co. v. Holway, 178 Mass. 83,59 N.E.667 (1901) (at 199) conc. copying shape and arrangement of zithers; Pope Auto. Merch v. McCrum-Howell, 191 F.979 (7th Cir. 1911) (at 200) conc. a vacuum cleaner. 271 Thur mon (n 267) discusses at 268 – through a ‘competitive need rationale’ defined by the availability of ‘equally effective alternatives’ – some of the cases revisited by prof. Bone, together with Lektro-Shave v. General Shaver, 19 F. Supp. 843 (D. Conn. 1937) conc. the shape and housing of a cutter and at 270 the case of McGill Manufacturing v. Leviton Manufacturing 43 F.2d 607 (E.D.N.Y. 1930) conc. lighting fixtures. 272 Thur mon, ibidem 270–271. See also Crescent Tool v. Kilborn &Bishop, 247 F. 299 (1917) ‘The proper meaning of the phrase “nonfunctional” is only this: That in such cases the injunction is usually confined to nonessential elements, since these are usually enough to distinguish the goods, and are the least burdensome for the defendant to change’ at https:// cite.case.law/f/247/299/ 70 The US legal framework of functionality doctrine 3.2.2. The changing landscape of the First Restatement of Torts In 1938, the American Law Institute published the First Restatement of Torts, 273 which reaffirmed unfair competition law as the appropriate ground for trade dress protection against copying via the newly named tort of ‘unprivileged imitation’.274 This document set up a broader standard of functionality. Paragraph §742 defined a feature as functional ‘if it affects their purpose, action or performance, or the facility or economy of processing, handling or using them; it is non-functional if it does not have any of such effects’.275 In practice, the focus shifted from the distinction between essential and unnecessary copying to the query of whether the feature ‘affected’, that is, ‘contributed’ to the aforementioned purposes. The effect was a broadening of the scope of functionality to encompass any utilitarian meaning, that is, product performance, manufacture, aspect of use, and marketing. Many courts followed the Restatement literally and rejected the assessment based on competitive necessity and relevance of substitutes, 276 although an initial commentary to §742 implied that a determination of functionality should verify whether the prohibition of imitation by a trade mark holder will ‘deprive them [i.e. competitors, LB] of something which will substantially hinder them in competition’.277 An important input, touching upon IP cumulation, came from the conflict between federal patent law and unfair competition state law. The Supreme Court cast two famous rulings, known as the ‘Supremacy Clause cases’ or ‘Sears-Compco’ doctrine, in which federal law was said to preempt patent-like claims based on unfair competition.278 Twenty years later, a significant addition 273 Restatements is not a statute accor ding to European standards, but a comprehensive collection of guidance in a particular field of law, more www.ali.org/publications/show/torts/ 274 Requirements regarding the imitated product were: non-functionality; acquired distinctiveness; likelihood of confusion, see ‘The Public Interest and the Right to Copy Nonfunctional Product Features’, (1977) 19 Wm. & Mary L. Rev. 317, 320 fn 17, at https://scholarship. law.wm.edu/wmlr/vol19/iss2/7 275 Arthur L. Goodhart, ‘Restatement of the Law of Torts Volume III: A comparison between American and English Law’ (1941) 89 University of Pennsylvania Law Review 265, 304 fn 169, at http://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=9122&context=penn_ law_review 276 ‘Unfair Competition and the Doctrine of Functionality’ (1964) 64 Colum. L. Rev. 544, discussing at: p. 563 elements of a toggle clamp found functional upon expired patent, amply quoting prior case-law West Point Mfg. v. Detroit Stamping 122 F. Supp. 741 (E.D. Mich. 1954), rev’d, 222 F.2d 581 (6th Cir.), cert. denied, 350 U.S. 840 (1955) at https://casetext. com/case/west-point-mfg-co-v-detroit-stamping-co; p. 562 size and shape of a marking device limited by its function in Speedry Prods. v. Dri Mark Prods. 271 F.2d 646 (2d Cir. 1959); p. 560 pink colour functional because of psychosomatic effects in Norwich Pharmacal v. Sterling Drug, 167 F. Supp. 427 (N.D.N.Y. 1958), rev’d, 271 F.2d 569 (2d Cir. 1959), cert. denied, 362 U.S. 919 (1960). 277 As noted in In re Morton-Norwich Products, Inc., 671 F.2d 1332, 1340 (C.C.P.A. 1982). 278 Sears, Roebuck & Co. v. Stiffel Co, 376 U.S. 225 (1964) conc. a lamp https://supreme. justia.com/cases/federal/us/376/225/ and Compco Corp. v. Day-Brite Lighting, Inc., 376 U.S. 234 (1964) conc. a lighting fixture https://supreme.justia.com/cases/federal/ The US legal framework of functionality doctrine 71 was brought by the Bonito Boats judgment, in which the Supreme Court ruled that federal patent law preempted a Florida statute that prohibited the process of copying by direct moulding of unpatented boat hulls and thus restricted the free access via reverse-engineering to product functional features otherwise belonging in the public domain.279 Although it did not concern the case at hand, the Court highlighted the need to counterbalance the preemption rules with the rationale of unfair competition law of preventing consumer confusion, by stating that ‘the application of Sears and Compco to non-functional aspects of a product which have been shown to identify a source must take account of competing federal policies in this regard’.280 These rulings fuelled the doctrinal discussion around the nature of the ‘right to copy’ – whether it was constitutionally or prudentially founded – and its scope – whether it encompassed unpatented designs (product configurations) or those covered by an expired patent, or those subject to expired utility patents.281 As professor Dinwoodie emphasized, the ‘supremacy clause’ was not meant to solve all types of conflict in IP law. Most notably, any preemption arguments could not apply to the conflict between federal patent law and federal trade mark law (meaning here the Lanham Act, below). In such cases, the proper solution would involve balancing the conflicting interests and the public policies underlining each regime, in order to foster an interpretation that accommodates the effects of both statues.282 Significantly, the supremacy clause could also not serve as a legal basis to prohibit all protection to unpatented yet source-identifying product features.283 3.2.3. The Lanham Act, and trade dress becoming registerable on the federal register In 1946, Congress enacted the Lanham Act, a trade mark statute subject to several amendments, which provided federal registration on the Principal Register with nation-wide substantive rights for ‘any word, name, symbol, or device, or us/376/234/. Both cases dealt with copying articles from the public domain because prior patents had been invalidated. The Supreme Court acknowledged the possibility to require precautionary steps through labelling in order to avoid source-misleading cf. Cohen (2010) 617–618; Thurmon (n 267) 309–311. In 1964 several prominent scholars (such as Ralph Brown, Milton Handler, Walter Derenberg) commented on those judgments in the collective study Ralph Brown et al., ‘Product Simulation: A Right or A Wrong’, 1964 Colum. L. Rev. 1179, at https://digitalcommons.law.yale.edu/fss_papers/2721/ 279 Bonito Boats v. Thunder Craft Boats, 489 U.S. 141, 168 (1989) https://caselaw.findlaw. com/us-supreme-court/489/141.html 280 Ibidem 166–167. The Florida statute granted patent -like protection without requiring any consumer confusion or breach of trust/secrecy which would have been the prerequisites of initiating a claim under the law of unfair competition or trade secrets. 281 Amply discussed by Dinwoodie, (n 27) 621, 627–632, 717 fn 402, 712–718, who favoured a prudentially, conditional right to copy (i.e. to practice an expired patent) while prioritizing the safeguarding of patent system’s integrity. 282 Dinwoodie, ibidem 631–632. 283 Dinwoodie, ibidem 667. 72 The US legal framework of functionality doctrine any combination thereof’ used for source identification of goods/services.284 Alternatively, for unregistered marks it provided federal unfair competition protection under section 43(a) of the statute.285 A Supplemental Register for protection equivalent to state or common law was introduced for subject-matter unregistrable on the Principle Register, but having such prospects in future (e.g. descriptive words). The register gathered ‘marks’ defined as ‘any trademark, symbol, label, package, configuration of goods, name, word, slogan, phrase, surname, geographical name, numeral, or device or any combination of the forgoing’.286 These differences in statutory terminology were interpreted by certain scholars as direct proof that Congress did not envisage the protection of product configuration and packaging on the Principal Register, or intend to allow cross-registration between registers, while the Supplemental Register had a reduced ambit of simply recording a mark to facilitate its protection in those jurisdictions abroad that conferred trade mark protection.287 In the early post-Lanham years, the previous practice of denying registration to product features, due to incapacity of distinguishing goods/services or due to functionality issues, was maintained.288 But the critical turning point came in 1958, with the registration on the Principle Register of the Dimple scotch bottle during appellate proceedings in front of the Court of Customs and Patent Appeals (CCPA).289 The ruling marked a significant shift: from the dogmatic perspective of considering trade dress unregistrable subject-matter per se on the Principal Register, to the factual question of whether a bottle 284 Trademark Act of 1946, 60 Stat. 427, 428–429. Registration enabled federal infringement claims and several evidentiary benefits, such as presumption of ownership and validity, and incontestability after five years of continuous use. An important revision of 1998, known as ‘Trademark Law Treaty Implementation Act’ (Pub. L. No. 105–330, 112 Stat. 3064 (1998)) www.govinfo.gov/app/details/PLAW-105publ330 introduced functionality as a statutory ground for cancellation and a statutory defence against the infringement of incontestable trademarks. 285 Trademark Act of 1946, 60 Stat. 427, 441. A plaintiff had to prove that the trade dress is protectable (i.e. is distinctive) and had been infringed, more about section 43(a), Christopher Kellner, ‘Rethinking the Procedural Treatment of Functionality: Confronting the Inseparability of Useful, Aesthetically Pleasing, and Source-Identifying Features of Product Designs’ (1997) 46 Emory L J 913, 920–923. 286 Trademark Act of 1946, 60 Stat. 427, 435–436. 287 Glynn Lunney , ‘Non Traditional Marks. The Error Costs of Making an Exception the Rule’, in Calboli, Senftleben (n 22) 220–223; Lunney, ‘Trade Dress …’ (n 262) 1139–1152. Professor Lunney argued that Lanham Act adopted the common law definition of ‘technical trademark’ set by the Trademark Act of 1905, with ‘device’ referring only to a ‘coat of arms’ or ‘other heraldry’, and ‘symbol’ only to ‘emblem’, so that federal registration should exclude package and product configuration. 288 Ex parte Minnesota Mining & Manufacturing, 92 U.S.P.Q. (BNA) 74 (1952) conc. shape of adhesive cellophane tape as unregistrable subject-matter, and Sylvania Electric Products v. Dura Elec. Lamp 247 F.2d 730 (3rd Circ. 1957) conc. invalidated functional flashbulbs with a blue dot used as a defect indicator, both discussed by Oddi (n 255) 933–934. 289 Ex parte Haig & Haig, Ltd, 118 USPQ 229 (Dec. Comm’r Pat. 1958). The US legal framework of functionality doctrine 73 shape falls within the trade mark definition of a ‘symbol or device’ and can act as source indicator, that is, be distinctive.290 However, uncertainty persisted over whether the relaxation of the eligibility standards applied only to containers, and in the following years the same CCPA continued to deny trade dress protection to product shape, mainly for functionality reasons.291 The consolidation of the favourable turn towards protecting trade-dress came with the first recognition of federal unfair competition claims (based on section 43(a) of the Lanham Act) at the federal appellate level, in an infringement case concerning the appearance of a truck trailer.292 As the arguments ontologically challenging the protectability of trade dress began to fade, the debate moved to issues of prerequisites of protection, namely, fulfilling the positive parameter of distinctiveness and avoiding the negative parameter of functionality.293 The period starting from 1980 has been marked by a series of influential rulings which have been instrumental in establishing the conditions and boundaries of trade dress protection to date. 3.2.4. Consolidating the path of full trade dress protection and the uplifting of functionality The theoretic willingness to accept trade dress’s capability of being a trade mark294 did not prevent that courts faced difficulties in handling distinctiveness, and especially in finding inherent distinctiveness. 290 Critically Lunney, ‘Trade Dress …’ (n 262) 1155–1156. 291 In re Deister Concentrator, 289 F.2d 496 (C.C.P.A. 1961), https://law.justia.com/cases/ federal/appellate-courts/F2/289/496/392223/, denying registration despite secondary meaning to rhomboidal tables used for ore concentrating and coal cleaning, found ‘in essence utilitarian’; In re Shakespeare, 289 F.2d 506 (C.C.P.A. 1961) https://law.justia.com/cases/ federal/appellate-courts/F2/289/506/392572/, denying registration to spiral markings of fishing rods, as resulting from a patented manufacturing process. In both cases Judge Giles Rich noticed: ‘The true basis of such holdings is not that they [the marks] cannot or do not indicate source to the purchasing public but that there is an overriding public policy of preventing their monopolization, of preserving the public right to copy’. By contrast, in In re Mogen Davis, 328 F.2d 925 (C.C.P.A. 1964) https://law.justia.com/cases/federal/ appellate-courts/F2/328/925/418780/ CCPA reversed PTO’s denial of registration by finding the shape ‘purely arbitrary’ while other containers could ‘equally well’ perform the same ‘incidental’ function of holding wine. Judge Rich posited that ‘[w]hether competition would in fact be hindered is really the crux of the matter. … Others can meet any real or imagined demand for wine in decanter-type bottles … without being in the least hampered in competition by inability to copy the Mogen David bottle design’. 292 Truck Equipment Service v. Fruehauf. Corp 536 F.2d 1210 (8th Circ. 1976). 293 Dinwoodie (n 27) 652–654 considers distinctiveness and functionality as ‘two corollaries to the foundational principle’ (of ontological neutrality of the subject-matter of a trade mark), whereas functionality plays the role of a ‘negative parameter’. 294 For approving the neutral categorization of trade marks, Jane C. Ginsburg, ‘“See me, feel me, touch me, hea[r] me” (and maybe smell and taste me too): I am a trademark – a US perspective’ in Lionel Bently, Jennifer Davis, Jane C. Ginsburg (eds.) Trade Marks and Brands: An Interdisciplinary Critique (CUP 2011) 92–97. 74 The US legal framework of functionality doctrine As thoroughly examined by professor Dinwoodie, the methodology was initially influenced by the criteria of assessing word and figurative marks, which ultimately failed due to the complex structure of modern trade dress, its context of use, and the specific way its reached consumers.295 In 1992, the Supreme Court decided in the Two Pesos case concerning the unregistered décor of a Mexican restaurant that trade dress with established inherent distinctiveness may be enforced without proof of secondary meaning (acquired distinctiveness).296 This judgement, understood as a confirmation of trade dress’s capability to be inherently distinctive, had a wide impact on facilitating not only the protection of unregistered trade dress on unfair competition law, but more generally, its registrability as a trade mark.297 Along this line, in 1995, the Qualitex case confirmed the registration of a colour per se, that is, a hue of golden green used in relation to dry-cleaning pressing pads298 ( Chapter8.2). However, this favourable trend was tempered in 2000 by the same Court in the Wal-Mart judgement299 concerning the protection of the overall appearance of a line of clothing. The Court’s argumentation was based on the assumption that attaching a word to a product, or ‘encasing it in a distinctive packaging’ could be a badge of origin, thus inherently distinctive, however, product design or colour did not usually generate such consumer predisposition. Upon this distinction between product packaging and product design, the Court installed the rule that any features matching the category of product configuration or product design could be registered or enforced only upon the proof of acquired distinctiveness. 295 Graeme B . Dinwoodie, ‘Reconceptualizing the Inherent Distinctiveness of Product Design Trade Dress’ (1997) 75 N.C. L. Rev. 471, 485–516 discusses the yardstick test of Abercrombie & Fitch Co. v. Hunting World, 537 F.2d 4 (2d Cir. 1976) (pp. 485–487) – which introduced a classification of marks holding that for inherent distinctiveness a mark had to be either ‘arbitrary’, ‘fanciful’, or ‘suggestive’ in relation to the affixed goods – and the shortcomings of applying it to trade dress in Chevron Chemical v. Voluntary Purchasing Groups 659 F.2d 695,702 (Former 5th Cir. 1981) (pp. 508–511) – as well as the alternative test of Seabrook Foods v. Bar-Well Foods 568 F.2d 1342 (C.C.P.A. 1977) (pp. 512–516), which determined inherent distinctiveness by comparison to others designs from the field. The bottom line of the latter differentiated between ‘a “common,” basic shape or design, whether it [is] unique or unusual in a particular field, or whether it [is] a mere refinement of commonlyadopted and well-known forms of ornamentation for a particular class of goods viewed by the public as a dress or ornamentation for the goods’ (p. 513 referring case-law). This kind of argumentation lies closely to the current EUTM approach to shapes. 296 Two Pesos v. Taco Cabana, 505 U.S. 763 (1992). 297 Famous registrations of non-traditional signs include the shape of the Coca-Cola bottle (reg. no. 696,147 of 12.04.1960); the sound of NBC’s three chimes (reg. no. 523,616 of 4.4.1950), the scent of plumeria blossoms on sewing thread (reg. no. 916,522 of 13.07.1971) (July 13, 1971), In re Clarke,17 U. S. P. Q. 2d 1238, 1240 (TTAB 1990). More examples in Jeffrey S. Edelstein, Cathy L. Lueders, ‘Recent Developments in Trade Dress Infringement Law’ (2000) 40 IDEA 105, 117–122. 298 Qualitex v. Jacobson Prods., 514 U.S. 159 (1995) 165. 299 Wal-Mart Stores v. Samara Brothers, 529 US 205 (2000). The US legal framework of functionality doctrine 75 Complementarily, the doctrine of functionality was frequently applied in both registration proceedings and infringement litigation, but jurisprudence has been swinging between two opposite approaches.300 On one side, the ‘right to copy’ functional features applied to items that had fallen/were about to fall into the public domain after design/patent law protection expired. On the other side, functionality was measured by the ‘need’ of competitors to copy certain product features in order to compete effectively, that is, trade in viable alternatives. The latter view seemed congruent with the Restatement (Third) of Unfair Competition of 1995, which maintained the place of functionality along the competitive necessity rationale. According to § 17 a design is <<functional>> for purposes of the rule stated in §16 if the design affords benefits in the manufacturing, marketing, or use of the goods or services with which the design is used, apart from any benefits attributable to the design’s significance as an indication of source, that are important to effective competition by others and that are not practically available through the use of alternative designs. A commentator on an earlier draft read the last part of this definition as confirmation that functionality doctrine represented a balancing tool between trade mark protection and free competition such as to prevent the monopolization of ‘valuable’ design features raising unfair competitive advantages.301 Functionality remained a prohibition to trade mark registration or protection, 302 but its legal effects were also considered as defining the ‘scope of permissible use’ of a trademark by a competitor who should freely copy functional features, regardless of their source-identification capacity.303 This approach preceded the 1998 amendment to the Lanham Act which made functionality a statutory infringement defence.304 In parallel with the guidance set forth by the Third Restatement, evolving market needs generated a series of landmark judgments that established the 300 Mark McKenna (n 27) 824–836. 301 Harvey S. Perlman, ‘The Restatement of the Law of Unfair Competition: A Work in Progress’ (1990) 80 Trademark Rep 461, 468 explaining these design features as ‘valued by consumers, not for … identification’ but for enhancing ‘the beauty, efficiency, or cost of the product’. 302 Robert C. Denicola, Harvey S. Perlman, ‘A Foreword to the Symposium on the Restatement of Unfair Competition’ (1995–1996) 47(4) Art. 3 S.C. L. Rev. i, viii, noting that functionality ‘defines the permissible subject-matter of trademark protection’. 303 Paul J . Heald, ‘Filling Two Gaps in the Restatement (Third) of Unfair Competition: MixedUse Trademarks and the Problem with Vanna’ (1996) 47 S.C. L. Rev. 783, 796 referring the Reporters’ note to cmt. b of § 17. 304 Maury Audet, ‘Functionality Unanimously Trumps Incontestability after TLT Act and Wilhem Pudenz v. Littlefuse, Inc. ...’ (2000) 40 IDEA 473, discussing functionality defence prior to its enactment. 76 The US legal framework of functionality doctrine functionality tests still currently in use. The following remarks briefly retrace the essential inputs of these cases, whilst in-depth details of interpretation are discussed within Chapters 6 to 8. In Morton-Norwich305 the CCPA reversed the PTO’s refusal to register on the Principal Register the configuration of a container of spray starch and remanded the case to be reexamined on distinctiveness. Judge Rich provided ample analysis of functionality, introducing the emblematic distinction between functionality de facto – that is, the utility intrinsic of any object performing a function – from functionality de jure, which expressed the degree of design utility that determined the scope of the legal prohibition.306 The Court articulated the functionality standard ‘as not the right to slavishly copy articles which are not protected by patent or copyright, but the need to copy those articles, which is more properly termed the right to compete effectively’.307 The Court established a multi-factor test, including the availability of alternatives, to apply to utilitarian products. Another important ruling of 1982 was Inwood Laboratories v. Ives Laboratories in which the Supreme Court reviewed the appellate grounds for contributory infringement of the appearance of a prescription drug, with a colours scheme adapted to different dosages, and favoured a turn to the right to copy.308 Functionality was not the object of direct analysis by the Supreme Court, however some dicta expressed in footnotes defined it as ‘essential to the use or purpose of the article or … affect[ing] the cost or quality of the article’.309 This reminded the wording of Restatement of 1938, especially that references to Sears and Kelogg judgements favoured a restrictive ‘right to copy’ approach (3.2.2.). Previously, the District Court held the capsules’ colours and shapes functional because they represented a ‘shorthand code’ to pharmacists, doctors, and patients to correctly identify the drug and its dosage.310 The Inwood functionality standard seemed distanced from Morton Norwich, as established functionality in an absolute way, without considering competitive necessity or the extent of competition foreclosure. Soon a query arose over whether Inwood represented a modification done on purpose of Morton 305 In re Morton-Norwich Products, Inc., 671 F.2d 1332 (C.C.P.A. 1982). 306 Ibidem 1338. The judge r ejected the arguments which contested the shape’s capability to be a trade mark, by emphasizing that ‘this is not a “configuration of goods” case but a “configuration of thecontainer forthe goods” case’ (1336). 307 Morton-Norwich, ibidem 1339, 1340. 308 Inwood Laboratories v. Ives Laboratories 456 U.S. 844 (1982). The action was bought against the generic manufacturer of cyclandelate (a vasodilator) for the acts of pharmacists who, complying with prescription standards, were obliged to dispense capsules to consumers in bottles without initial labelling. 309 456 U. S. 850, fn 10, referring Sears, Roebuck & Co. v. Stiffel Co.,376 U. S. 225,376 U. S. 232(1964) and Kellogg Co. v. National Biscuit Co.,305 U. S. 111,305 U. S. 122(1938). 310 The coloured scheme ensured safe administration, and maintained psychologically reassuring and proper therapeutic effects, especially in older patients, who reacted negatively to any change in a drug’s appearance, 456 U.S. 853. The US legal framework of functionality doctrine 77 Norwich test, or just a Court’s digression.311 Future case-law faced difficulties reconciling both tests or finding the arguments to choose between them. The final change to the right to copy was consolidated by the Supreme Court’s judgment in TrafFix, 312 an infringement case of a technically configured product, that is, a dual-spring road design mechanism, the subject of a lapsed utility model. The Supreme Court reversed the 6th Circuit’s dismissal of functionality objections which was based on the competitive necessity analysis, that is, the absence of disadvantages towards competitors.313 The Court ruled that where a design is functional under the Inwood formulation, there was no need to proceed further to consider competitive necessity or inquire about secondary meaning. TrafFix judgement was read as a strong return to the right to copy approach, especially given that the Court emphasized the progressive role of copying items from the public domain, lacking patent or copyright protection314 and ultimately placed functionality within the patent bargain context.315 3.3. Where next for US functionality? Common concerns shared with the EU Intricate, vast, dynamic – these epithets can barely illustrate the complex nature of the functionality doctrine. The difficulties of distinguishing between the different kinds of functional aspects of a product (such as those pertaining to utility or eye-appeal), choosing the adequate test, and conferring a coherent interpretation, should not minimize the role that functionality plays in US trade mark law. Its importance has been recently bolstered by various scholarships that have advocated a holistic approach, which reaffirms the meaning and operative capacity of functionality rules across different IPRs (design, trade mark, patent, copyright) in search of a proper balance across the IP system.316 311 Harold R. Weinberg, ‘Trademark Law, Functional Design Features, and the Trouble with TrafFix’ (2001) 9 J. Intell. Prop. L. 1, 17–21; Andrew F. Halaby, ‘“The Trickiest Problem with Functionality” Revisited: A New Datum Prompts a Thought Experiment’ (2007) 63 NYU Annual Survey of American Law 151, 167. 312 TrafFix Devices v. Marketing Displays, 532 U.S. 23 (2001). 313 6th Circuit adopted the approach of Qualitex v. Jacobson Prods., 514 U.S. 159 (1995) 166, 170. By contrast in TrafFix, the Supreme Court considered that Qualitex test was confined to aesthetic functionality, especially in a case of a green colour without impact upon the use/ purpose or cost/quality of the cleaning pads 532 U.S. 23 (2001) 24–26. 314 TrafFix, 29, reference to Bonito Boats 489 U.S. 141, 168 (1989) and the pre-emptive role of patent protection. 315 TrafFix, 34–35. The Court highlighted important differences between the Lanham Act and patent law, namely that it was not the purpose of trade mark law to reward innovation or an investment made in a functional trade dress to become a source identifier, nor should its effect be to encroach on the limited period of legal exclusivity, which remains the privilege of patent law. 316 Chr onologically descending: Canahai, McKenna (n 28); Jeanne Fromer, Mark McKenna, ‘Claiming Design’ (2018) 167 University of Pennsylvania Law Review, 123; Buccafusco, 84 The US legal framework of functionality doctrine voices that advocate for a pro-competitive approach, which has at its core an inquiry about the ability to compete in a product market, with prime attention paid to the issue of alternative designs, yet without neglecting the risk of unbalancing the IP system (e.g. by extending patent monopoly via trade dress).343 This path should be followed also by EUTM judiciary, as this book tries to demonstrate. What substitutes mean, and how determinant they are for a sufficient level of competition, are both questions that IP law cannot neglect – not only in relation to functional trade marks. Professors Fromer and Lemley emphasize that market substitution should play a central role in assessing the boundaries of infringing use: ‘[m]arket substitution … is tied to IP’s goal of encouraging innovation. A use that does not interfere with the IP owner’s market generally does not interfere with the incentives to innovate that IP rights create’.344 Legal solutions should adjust to diverse business necessities. Functionality in trade mark law needs a flexible assessment, suitable for the new categories of non-traditional signs, and far from ossified dogmatic exclusions. Certainly, the assessment requires an insight into the market environment of rights holders and the way they make use of their IP portfolio to extract economic benefits. Putting functionality into a ‘law and economics’ perspective represents useful guidance for a court that is bound to understand and decide over the anticompetitive effects of protecting functional trade marks (see Chapter 4). Bibliography Audet, M., ‘Functionality Unanimously Trumps Incontestability after TLT Act and Wilhem Pudenz v. Littlefuse, Inc.’ (2000) 40 IDEA 473 Barrett, M., ‘Consolidating the Diffuse Paths to Trade Dress Functionality: Encountering TrafFix on the Way to Sears’ (2004) 61 Wash. & Lee L. Rev. 79 Bone, R., ‘Trademark Functionality Reexamined’ (2015) vol. 7(1) Journal of Legal Analysis 183 Bently, L., Davis, J., Ginsburg, J.C. (eds.), Trade Marks and Brands: An Interdisciplinary Critique (CUP 2011) Brancusi, L. ‘Alternative Products as a Factor in Determining the Functionality of Trade Marks – How the Criteria of US Functionality Doctrine Could Be Applied in 343 Rierson, ‘Toward …’ (n 316) 723–726. The author suggests a ‘reconfiguration’ of the Morton Norwich test, in which the criterion of alternative designs should be verified as to the impact on the product’s cost or quality. Additionally, this factor should be irrelevant in the case of product features expanding a backdoor patent monopoly, for instance if these features constitute a ‘significant inventive aspect’ of an expired utility patent (ibidem 747–748). The scholarship promoting an assessment focused on competitive necessity includes: clearly Dinwoodie (n 28) 701–746 and Thurmon (n 267) 340–370; with certain reserve McKenna (n 28); within a proand contra analysis, Bone ‘Trademark …’ (n 268) 227–242. 344 Fr omer, Lemley, ‘Audience ...’ (n 316) 1291. The authors suggest that a relevant product market may be determined by sales of products in the same market as the defendant or by the likelihood of entering that market in the nearest future (at 1293). The US legal framework of functionality doctrine 85 EU Law’ in Susy Frankel (ed.) Is Intellectual Property Pluralism Functional? (Elgar 2019) 178 Brown, R., Leeds, D.R., Handler, M., Derenberg, W.J., Bender, P., ‘Product Simulation: A Right or A Wrong’ 1964 Colum. L. Rev. 1179, at https://digitalcommons. law.yale.edu/fss_papers/2721/ Buccafusco, C., Fromer, J.C., ‘Forgetting Functionality’ (2017) 166 U. Pa. L. Rev. Online 119 Buccafusco, C., Lemley, M., ‘Functionality Screens’ (2017) 103 Va. L. Rev. 1293 Buccafusco, C., Lemley, M., Masur, J., ‘Intelligent Design’ (2018) 68 Duke Law Journal 75 Burnstein, S., ‘Commentary Faux Amis in Design Law’ (2015) 105 Trademark Rep. 1455 Canahai, C., McKenna, M., ‘The Case Against Product Configuration Trade Dress’ in Trademark Law and Theory: Reform of Trademark Law (eds. Graeme Dinwoodie, Mark Janis) (Elgar 2021), at http://ssrn.com/abstract=3336366, 1 Cohen, A., ‘Following the Direction of Traffix: Trade Dress Law and Functionality Revisited’ (2010) IDEA 593 Davis, T., ‘Copying in the Shadow of Constitution: The Rational Limits of Trade Dress Protection’ (1996) 2408 Minnesota Law Review 595 Denicola, R.C., Perlman, H.S., ‘A Foreword to the Symposium on the Restatement of Unfair Competition’ (1995–1996) 47 (4) Art. 3 S.C. L. Rev. I, at https://scholarcommons.sc.edu/cgi/viewcontent.cgi?article=3207&context=sclr Dinwoodie, G.B., ‘Reconceptualizing the Inherent Distinctiveness of Product Design Trade Dress’ (1997) 75 N.C. L. Rev. 471 Dinwoodie, G.B., ‘The Death of Ontology: A Teleological Approach to Trademark Law’ (1999) 84 Iowa Law Review 611 Dinwoodie, G.B., Janis, M., Trade Dress and Design Law (Aspen Publishers 2010) Edelstein, J.S., Lueders, C.L., ‘Recent Developments in Trade Dress Infringement Law’ (2000) 40 IDEA 105 Feretti, J., ‘Product Design Trade Dress Hits the Wall … Mart: Wal-Mart v. Samara Brothers’ (2002) 42 IDEA 417 Fischman Afori, O., ‘Reconceptualizing Property in Designs’ (2008) 25 Cardozo Arts & Entertainment Law Journal 1106 Frankel, S., ‘From Barbie to Renoir: Intellectual Property and Culture’ (2010) 41(1) Va. Well. L. Rev. 1 Fromer, J.C., ‘Expressive Incentives in Intellectual Property’ (2012) 98 Va. L. Rev. 1745 Fromer, J.C., ‘The Role of Creativity in Trademark Law’ (2011) 86 Notre Dame L. Rev. 1885 Fromer, J.C., Lemley, M.A., ‘The Audience in Intellectual Property Infringement’, (2014) 112 Mich. L. Rev. 1251 Fromer, J.C., McKenna, M., ‘Claiming Design’ (2018) 167 University of Pennsylvania Law Review, 123 Gambino, D., Bartow, W., Trade Dress: Evolution, Strategy, Practice (OUP 2013) Goodhart, A.L., ‘Restatement of the Law of Torts Volume III: A comparison between American and English Law’ (1941) 89 University of Pennsylvania Law Review, 265 at http://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=9122&context= penn_law_review Ginsburg, J.C., ‘“Courts Have Twisted Themselves into Knots” (and the Twisted Knots Remain Untangle): US Copyright Protection for Applied Art after Stars Athletica’ in Estelle Derclaye (ed.) The Copyright/Design Interface (CUP 2018) 297 86 The US legal framework of functionality doctrine Ginsburg, J.C., ‘“See Me, Feel Me, Touch Me, Hea[R] Me” (and Maybe Smell and Taste Me Too): I Am a Trademark – a US perspective’ in Lionel Bently, Jennifer Davis, Jane C. Ginsburg (eds.) Trade Marks and Brands: An Interdisciplinary Critique (CUP 2011) 92 Halaby, A.H., ‘“The Trickiest Problem with Functionality” Revisited: A New Datum Prompts a Thought Experiment’ (2007) 63 NYU Annual Survey of American Law 151 Heald, P.H., ‘Filling Two Gaps in the Restatement (Third) of Unfair Competition: Mixed-Use Trademarks and the Problem with Vanna’ (1996) 47 S.C. L. Rev. 783 Kellner, C., ‘Rethinking the Procedural Treatment of Functionality: Confronting the Inseparability of Useful, Aesthetically Pleasing, and Source-Identifying Features of Product Designs’ (1997) 46 Emory L J 913 Lemley, M.A., McKenna, M.P., ‘Scope’ (2016) 57 Wm. & Mary L. Rev. 2197 Lunney, G., ‘Non Traditional Marks. The Error Costs of Making an Exception the Rule’, in Calboli, I., Senftleben, M. (eds.) The Protection of Non-Traditional Trade Marks: Critical Perspectives (OUP 2018) Lunney, G., ‘The Trade Dress Emperor’s New Clothes: Why Trade Dress Does Not Belong on the Principal Register’ (2000) 51 Hastings L.J. 1131 McKenna, M.P., ‘An Alternative Approach to Channeling?’ (2009) 51 Wm. & Mary L. Rev. 873 McKenna, M.P., ‘(Dys)functionality’ (2011) 48 Hous L R 823 McKenna, M.P., ‘The Normative Foundations of Trademark Law’ (2013) 82 Notre Dame L. Rev. 1839 McKenna, M.P., Sprigman, C., ‘What’s In, and What’s Out: How IP’s Boundary Rules Shape Innovation’ (2017) 30 Harv. J. L. & Tech. 491 Oddi, S., ‘The Functions of “Functionality” in Trademark Law’ (1985) 22 Hous. L. Rev. 925 (Du) Mont, J.J., Janis, M.D., ‘Functionality in Design Protection Systems’ (2012) 19 J Intell. Prop. L. 261 (Du) Mont, J.J., Janis, M.D., ‘Functionality in U.S. Design Patent & Community Design Law’ (30 April 2016) Research Handbook on Design Law, at https://ssrn.com/ abstract=2773070 Moffat, V.R., ‘Mutant Copyrights and Backdoor Patents: The Problem of Overlapping Intellectual Property Protection’ (2004) 19 Berkeley Tech L. J. 1473 Perlman, H.S., ‘The Restatement of the Law of Unfair Competition: A Work in Progress’ (1990) 80 Trademark Rep 461 Rierson, S.L., ‘Toward a More Coherent Doctrine of Trademark Genericism and Functionality: Focusing on Fair Competition’ (2017) 27 Fordham Intell. Prop Media & Ent L.J. 691 Steinman R., ‘Taking a Mulligan: Moral Rights and the Art of Golf Course Design’ (2011) 51 IDEA 47 Thurmon, M.A., ‘The Rise and Fall of Trademark’s Law Functionality Doctrine’ (2004) 56 Fla. L. Rev. 244 ‘The Public Interest and the Right to Copy Nonfunctional Product Features’ (1977) 19 Wm. & Mary L. Rev. 317, at https://scholarship.law.wm.edu/wmlr/vol19/ iss2/7 ‘Unfair Competition and the Doctrine of Functionality’ (1964) 64 Colum. L. Rev. 544 Weinberg, H.R., ‘Trademark Law, Functional Design Features, and the Trouble with TrafFix’ (2001) 9 J. Intell. Prop. L. 1 DOI: 10.4324/9781003376040-5 4 Functionality within the framework of law and economics Competition concerns against protecting functional trade marks The importance of ensuring an appropriate level of market competition lies at the core of the ‘public interest’ rationale that underlies trade mark functionality rules. This complements the discussion with a competition law insight into the economic implications and risks of granting legal exclusivity to functional signs. The chapter begins by setting trade marks within the framework of competition law, with a focus on their economic benefits (4.1.). It next explores how trade marks may negatively affect competition, keeping in mind the possible application to functional signs (4.2.). The discussion comprises the issues of higher societal costs generated by the strategic use of trade marks (e.g. in conjunction with other IPRs, or for compatibility needs) which helps maintain market dominance and supra-competitive prices. These issues are particularly relevant for technical functionality. Another topic, this time significant for aesthetic functionality, consists of mapping the concept of ‘value’ of reputation against goodwill and brand components (such as brand image), with an insight into consumer co-branding and economic, marketing and accounting standards (4.3.). The last part explores how a competition perspective on market definition and product substitutability may be instrumental for trade marks functionality practice (4.4.). The chapter advances a market-orientated tool to be integrated within the functionality assessment, one which sufficiently reflects sufficient market competition and satisfies consumer needs. 4.1. Placing IP and trade marks within the framework of competition law Competition’s prime purpose of ensuring market access to competitors seemingly collides with the exclusionary nature of IPRs. At a deeper level, though, competition and IP are viewed as seeking compatible, complementary objectives. The following part outlines the purposes of EU competition law and looks into how trade marks may beneficially match this framework, by reducing consumer search costs and stimulating the output of quality products. 88 Functionality within the framework of law and economics 4.1.1. A brief introduction to the objectives and framework of EU competition law The purpose of EU competition law is shaped by a plurality of – often – conflicting policies, societal values, public interests, and economic models. From an economic perspective based on a static definition of competition, competition law should promote economic welfare, determined by a maximization of consumer surplus through increased allocative and productive efficiencies– intervention is needed when a monopolist may impose higher prices without constraints and reduce output while creating deadweight losses.345 Complementarily, the dynamic approach, of competition seen as a process, considers that what matters is the pace of innovation and the ability to introduce new products or make use of new production processes, thus not necessarily lowering prices, so that competition law should prevent restraints on innovation (e.g. thwarting better technologies from entering the marketplace).346 Apart from these economic goals, EU jurisprudence has added certain welfare purposes as necessary for the proper functioning of the EU, namely the integration of internal market, the prevention of consumer harm, and the economic freedom of undertakings to compete on the market.347 The latter is perceived as a reflection of the ordoliberal German doctrine that influenced the creation of the Single Market and European Economic Community (later EU), that is, the vision of a European structure, with its economy constitutionally interrelated with the political and legal system, in which there is increased state interventionism, whilst competition law acts as the guardian of ‘complete’ (perfect) competition, in which ‘no firm has the power to coerce other firms 345 Efficiency is an economic tool with multiple meanings and is an indicator of welfar e – it may refer to the amount of goods/services produced for which there is a demand, that is, willingness to pay (i.e. allocative), or to a level of output supplied at a lowest cost (i.e. productive). The notion of welfare is based on the assumption that consumers tend to maximize their utility, by getting the right amount of goods at a lowest possible price – kept closely to costs – in conditions of allegedly perfect static price competition. C. Scott Hemphill, ‘Intellectual Property and Competition Law’ in Rochelle Dreyfuss, Justine Pila (eds.) The Oxford Handbook for Intellectual Property Law (OUP 2018) 875–877; Jeffrey Harrison, Law and Economics in a Nutshell (6th ed. West Academic Publishing 2016) 30–78. In reality there are many limitations to the efficiency model challenged by a diversity of economic theories. 346 Herbert Hovenkamp, ‘Restraints on Innovation’ (2007) 27(1) Cardozo Law Review 247, 253–254; Luc Peeperkorn, Vincent Verouden, ‘The Economics of Competition’ in Jonathan Faull, Ali Nikpay (eds.) The EU Law of Competition (OUP 2014) paras 1.120–133 referring the seminal work Robert Solow, ‘Technical Change and the Aggregate Production Function’ (1957) Review of Economics and Statistics, 312–320 at www.jstor.org/stable/1926047 – who argued that more economic growth came from innovation than from increased price competition. 347 Ioannis Lianos, ‘Some Reflections on the Question of the Goals of EU Competition Law’ CLES Working Paper Series 3/2013, 14–32 at http://dx.doi.org/10.2139/ssrn.2235875. For a discussion integrating the tenets of EU Treaty, see Walter Frenz, Handbook of EU Competition Law (Springer Verlag 2016) 3–20. Functionality within the framework of law and economics 89 in a market’.348 This approach, embedded in the first EC Treaty, emphasized the need ‘to preserve a competitive market structure’ which meant that the guarantee of ‘undistorted competition’ represented a value per se, protected as an institution that indirectly protected all market participants.349 Competition law intervenes only in situations of market dominance/power, which means the power of an undertaking to charge higher than competitive prices by reducing market output, which competitors cannot answer with an increase of substitutable products offered to consumers.350 A central tool to determine market dominance is market definition, which serves to identify the range of close substitutes to provide a constraint on the behaviour of the undertakings supplying those products – market dominance has been traditionally determined using the calculation of market shares of the investigated undertaking(s).351 There are different ways to assess market dominance and its impact on competition, and EU practice has shifted from a so-called normative, ‘form-based’ approach – easy to handle by lawyers due to reduced economic analysis and favouring foreseeable results and legal certainty – to a more ‘economic’, ‘effect-based’ approach, requiring case-by-case empirical evidence and economic models that may lead to differentiated, perhaps unpredictable outcomes.352 From a legal standpoint, there are three types of economic behaviour that may be challenged by competition authorities, that is, abuse of dominant position, anticompetitive agreements, and consolidation of businesses. In the 348 J. Thomas Rosch, ‘Can Consumer Choice Promote Trans-Atlantic Convergence of Competition Law and Policy’ in Paul Nihoul, Nicolas Charbit, Elisa Ramundo (eds.) Choice: A New Standard for Competition Law Analysis? (Institute of Competition Law 2016) 265, at 268 quoting David Gerber, ‘Constitutionalizing the Economy: German Neo-liberalism, Competition Law and the “New” Europe’ (1994) 42 Am. J. Com. L. 25, 36. 349 Josef Dr exl, ‘Consumer Welfare and Consumer Harm: Adjusting Competition Law and Policies to the Needs of Developing Countries’ in Michal Gal et al. (eds.) The Economic Characteristics of Developing Jurisdictions: Their Implications for Competition Law (Elgar 2015) 272–274 discussing the seminal case C-6/72 Europemballage Corporation & Continental Can v. Commission EU:C:1973:22. 350 Hovenkamp (n 32) 4–2ff. 351 Alison Jones, Brenda Sufrin, EU Competition Law (6th ed. OUP 2016) 56; Christian Melischek, The Relevant Market in International Economic Law: A Comparative Antitrust and GATT Analysis (CUP 2013) 29; as to other than market-share methods of assessment: Jan Kupcik, ‘Firm’s Own Price Elasticity of Demand in Dominant Position Analysis’ (2022) JECL&P, published 17 March 2022, https://doi.org/10.1093/jeclap/lpac015; Werner Berg, Sophia Real, ‘How Close is Too Close? A Critical Review of the European Commission’s Assessment of Closeness of Competition’ (2016) 7(7) JECL&P 442. 352 For an overview Claudia Seitz, ‘Economic Principles in Antitrust law in the Aftermath of the More Economic Approach’ in Klaus Mathis (ed.) Law and Economics in Europe: Foundations and Applications (Springer 2014) 368–383; for tracing EU developments Josef Drexl, ‘Is There a “More Economic Approach” to Intellectual Property and Competition Law?’ in Josef Drexl (ed.) Research Handbook on Intellectual Property and Competition Law (Elgar 2008) 27–35. 90 Functionality within the framework of law and economics EU, the basic legal frame is conferred by the Treaty on the Functioning of the European Union (TFEU), in particular by the Art. 101 TFEU which deals with anticompetitive agreements and Art. 102 TFEU banning abuse of a dominant position.353 There are multiple additional EU acts, that is, regulations followed by Commission guidelines, such as those pertaining to mergers and acquisitions354 or to agreements covering the transfer and exploitation of IPRs.355 The exclusionary power of IPRs does not equal the ability to exclude competitors in economic terms, and is rarely perceived as unique source of market dominance, however, no IP regime is immune to an external correction based on the competition rules.356 The query about the extent to which IPR contributes to developing and consolidating market dominance, and the types of behaviour related to the ownership and/or exercise of an IPR that may violate the competition rules of Arts. 101–102 TFUE and/or secondary acts, falls far beyond the scope of this book.357 The following remarks will touch upon certain aspects of the interface between IP and competition law that are useful to map the role of trade marks in the marketplace. 4.1.2. The pro-competitive discourse on trade marks within the perspective of IP and competition goals Any IPR confers exclusive control over the exploitation of the protected asset, which enables the right holder to charge a higher price for an item than in conditions of distribution governed by free market and lack of legal privileges.358 353 Treaty on the Functioning of the European Union, Dec. 13, 2007, 2007 O.J. (C306) 1. Previous versions of the TFEU had Art. 101 numbered as 81 (also 85) and Art. 102 as 82 (also 86). 354 Council Regulation (EC) No. 139/2004 of 20 January 2004 on the control of concentrations between undertakings, [2004] OJ L 24/1. 355 Commission Regulation (EU) No. 316/2014 of 21 March 2014 on the application of Art. 101(3) of the Treaty on the Functioning of the European Union to categories of technology transfer agreements, [2004] OJ L 93/17 and Commission Regulation (EU) No. 330/2010 of 20 April 2010 on the application of Art. 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices [2010] OJ L 102 /1 – both replacing earlier versions. These acts introduced exemptions to the application of Art. 101 TFEU to the agreements therein defined, however there is no exemption from a challenge of abusive behaviour cf. Art. 102 TFEU. 356 Mariateresa Maggiolino, Intellectual Property and Antitrust: A Comparative Economic Analysis of US and EU Law (Elgar 2011); Katarzyna Czapracka, Intellectual Property and the Limits of Antitrust: A Comparative Study of US and EU Approaches (Elgar 2010). 357 For a succinct classification of EU competition cases applied to IPRs: Gustavo Ghidini, Rethinking Intellectual Property: Balancing Conflicts of Interests in the Constitutional Paradigm (Elgar 2018) 338–380. David Miąsik, Stosunek prawa ochrony konkurencji do prawa własności intelektualnej (Wolter Kluwer Warszawa 2012) 358–412. 358 This price is hypothetically calculated as being above the mar ginal cost of reproducing an IP-protected work or invention, Hovenkamp (n 32) 1–9 to 1–12. Functionality within the framework of law and economics 91 IPRs come at a price: there are administrative costs to operating the system (see registration/opposition/invalidity proceedings), transaction costs of infringement litigation and negotiating licences, and costs of rent seeking activities.359 However, there is a market and societal need for IPRs. Despite critics, innovation and creation are considered crucial for economic growth and intangible results should be covered by property rights, otherwise there would be no further incentive to pursue and invest in such activities at the detriment of dynamic competition.360 Although sometimes disputable, a restriction of competition at the consumption level – due to higher prices of the assets covered by IPRs – may be justified by enhancing competition at the production or innovation levels. From this economic perspective, trade marks have appeared as beneficial, pro-competitive market tools, mainly thanks to the works of William Landes and Richard Posner of Chicago Law School, which constitute the benchmark for any discourse on the relationship between trade marks and competition.361 A trade mark helps consumers select goods/services corresponding to their needs and preferences through the information it carries about the commercial origin and the characteristics of those goods/services.362 Because it is impractical or impossible for a consumer to test and learn about all noticeable and unnoticeable qualities of different products/services before purchase, the consumer chooses them upon favourable past experiences, recommendations, 359 W illiam Landes, Richard Posner, The Economic Structure of Intellectual Property Law (Harvard 2003) 16–21; Graham Dutfield, Uma Suthersanen, Global Intellectual Property Law (2nd ed. Elgar 2020) 39–40. 360 Justine Pila, Paul Torremans, European Intellectual Property Law (OUP 2016) 615–17. Ample debates have gauged the extent to which an IP ‘monopoly’ may positively serve as platform for innovation, which would call for cautiousness whenever deciding on a competition intervention. One argument says that a certain amount of (price) monopoly is necessary to achieve economies of scale – thus generating more output at a lowered price – but also to transfer profits to R&D activities which stimulate further innovation and dynamic efficiencies. This approach goes back to Joseph A. Schumpeter, The Theory of Economic Development (Harvard Economic Studies, 1934) and Capitalism, Socialism and Democracy (1942), more in Federico Etno, Competition, Innovation and Antitrust: A Theory of Market Leaders and its Policy Implications (Springer 2007) 189–195 focusing on patents. Critically, Steven Anderman, ‘Overplaying the Innovation Card: The Stronger Intellectual Property Rights and Competition Law’ in Peter Drahos, Gustavo Ghidini, Hans Ullrich (eds.) Kritika: Essays on Intellectual Property (vol. 1 Elgar 2015) 22–25; Michele Boldrin, David Levin, Against Intellectual Monopoly (CUP 2008) 243–267 pointing at the shortages of IP system in line with Fritz Machlup’s considerations of 1958 in ‘An Economic Review of the Patent System’, at www.mises.at/static/literatur/Buch/machlup-economic-review-patent-system.pdf. However, Christopher Buccafusco et al., ‘Experimental Tests of Intellectual Property Laws’ Creativity Thresholds’ (2014) 92 Tex L Rev 1921, 1935–1977, explored via experimental tests the impact of extrinsic motivation (i.e. incentives provided by copyright and patent, and thresholds of legal protection) and intrinsic factors (internal motivation) upon the process of creation/innovation. 361 Landes, Posner (n 31) 265, (n 359). 362 Ibidem (n 31) 268–270. 92 Functionality within the framework of law and economics or advertisement of trade marks.363 For this reason trade marks are seen to reduce consumer search costs.364 In response to this mechanism, trade mark owners are motivated to maintain a consistent quality of goods/services – more precisely, ensuring that there is the set of ‘product characteristics’ which consumers expect – and to develop goodwill through a specific relationship with customers (see 4.3.1.2.); complementarily, trade mark owners are interested in shaping the consumer mind through informative and persuasive advertising.365 Putting together these two positive effects, that is, the economizing role of lowering consumer search costs and incentivising right holders towards quality maintenance, trade marks are sought to ensure market transparency and stimulate vigorous competition.366 The pro-competitive effects of trade marks give grounds to the system of non-limited in time trade mark protection as long as a sign is in use. The argument says that legal exclusivity covers the commercial source of goods/services of one undertaking as distinguished from another – in other words, the link between consumers and the entity controlling the trade mark – and there is no monopoly covering the sign or the goods as such. Consumers’ optimized search for quality explains why trade mark holders are able to charge a higher price for goods/services bearing a trade mark than for non-trademarked ones. The trade-off is considered societally beneficial; it also becomes a self-enforcing promise, which stimulates the need for product variety, in other words, for more competing products. Admittedly, trade marks’ function of identifying the commercial origin of goods/services, sustained by a guarantee of specific quality, inevitably leads to product differentiation. This is theoretically a good thing, as long as product differentiation is supported by objective differences in product characteristics which account for demanding a higher price.367 However, market deficiencies may also occur: an over-optimal number of differentiated products, underproduction of some 363 Nicholas S. Economides, ‘The Economics of Trademarks’ (1998) 78 Trademark. Rep. 523. 364 Landes, Posner (359) 166–168. 365 Griffiths (n 33) 54–62 and 105–110; for a seminal study about trade marks as indicator of quality George A. Akerlof, ‘The Market for “Lemons”: Quality Uncertainty and Market Mechanism’ (1970) 84 Q. J. Econ. 488; for a critique that a business cost savings strategy may opt for maintaining ‘a good reputation at least cost’ where a lower quality is compensated by marketing strategies fuelling consumers beliefs of its (alleged) consistent level, Jonathan Aldred, ‘The Economic Rationale of Trade Marks: An Economist’s Critique’ in Bently, Davis, Ginsburg (eds) (n 294) 271–272. 366 For a correcting view that incentives are not a sufficient justification for trade marks, Mark Lemley, ‘Property, Intellectual Property, and Free Riding’ (2005) 83 Texas Law Review 1031; for an analysis of trade marks value through rivalrous/non-rivalrous uses David W. Burnes, ‘A New Economic of Trademarks’ (2006) 22 Nw. J. Tech. & Intell. Prop. 22. 367 Peter Dav is, Kirsten Edwards-Warren, ‘An Introduction to the Competitive Effects of Branding’ in Deven R. Desai, Ioannis Lianos, Spencer W. Waller (eds.) Brands, Competition Law and IP (CUP 2015) 13; William Cornish, Intellectual Property – Omnipresent, Distracting, Irrelevant? (OUP 2004) 81–82. Functionality within the framework of law and economics 93 trade marked products, distorted purchase decisions resulting from persuasive advertising, 368 or from the branding phenomenon which metamorphoses the image and value of trade marks independently from the quality and objective properties of the signified goods/services (4.3.1.1.). Concerns about the impact of trade marks on a state of imperfect competition was the object of Edward Chamberlin’s investigations from the early 1930s, where he believed that product differentiation enabled each seller to impose a price for his own product and enjoy a monopoly to an extent determined by the existence and scale of other competitors’ products, perceived as imperfect substitutes.369 Chamberlin thought that trade marks, and IPRs generally, were diminishing effective product substitution, due to consumers’ preferences for items covered by IPRs.370 Because consumer preferences are today steered by strategic branding, debatable questions remain as to the optimal amount of trade marks and product differentiation needed for economic and social welfare. The proliferation of trade marks/brands may be seen as artificially stimulating demand and creating dead-weight losses, because consumer money is not being spent on generating innovation or qualitative differentiation of products. The capability of trade marks enhanced by branding strategies to model and determine consumers preferences so as to diminish the choice of similar goods/services from different brands (i.e. reducing product substitutability) represents a vivid concern of policy-makers and legislators. To a certain extent this issue is also significant for understanding the competition rationale underlining the functionality rules (see 2.2.). From another angle, a driver of healthy competition resides in the capability for subsequent innovation built on pre-existing material available in the public domain.371 The scholarship amply discusses the costs and barriers created by IPRs for follow-on innovation, for example, how the scope, terms, and length of protection of IPRs determine a creator or innovator’s choice of innovation path, namely, deciding whether to use existing IPRs and pay licence fees, or to generate something new by working around existing IPRs.372 A utilitarian 368 Economides (n 363) 532–535. 369 Edward Chamberlin, The Theory of Monopolistic Competition (1st ed. 1933). 370 Deven R. Desai , Spencer W. Waller, ‘Brands, Competition, and Antitrust Law’ in Desai, Lianos, Waller (eds.) (n 367) 84–85. 371 Robert P. Merges, Amy L. Landers (eds.) Intellectual Property and Public Domain (Elgar 2017). 372 Christopher Buccafusco, Stefan Bechtold, Christopher Jon Sprigman, ‘The Nature of Sequential Innovation’ (2017) 59 Wm. & Mary L. Rev. 1, 4–47, discussing factors affecting follow-on innovation, such as the maturity of innovation space, consumers tastes, creators’ behavioural attitudes; Stefan Bechtold, Christopher Buccafusco, Christopher Jon Sprigman, ‘Innovation Heuristics: Experiments on Sequential Creativity in Intellectual Property’ (2016) 91(4) Indiana Law Journal 1252, 1255–1266, discussing the less rational side of decision making, in light of ‘behavioristic’ experiments: creators/innovators are more influenced by their own beliefs about the innovation environment than by objective factors, such as borrowing costs and the benefits from innovating (at 1283). 100 Functionality within the framework of law and economics services increases the chances of conflicts and litigation costs. This is because functional features are usually ‘weak’ and undistinctive, and sometimes incorporated as information part of a combined sign.396 Acquiring trade mark protection over the functional sign entails registration difficulties, as competitors usually monitor trade mark filings and initiate opposition or invalidation proceedings. Later, assuming trade mark protection is granted, enforcement follows, as the trade mark owner may sue competitors over the use of similar signs, with the aim of driving them away from the market.397 The outcomes of such legal confrontations depend on the financial and organizational strength of the business entities involved: a deep-pocket player may easily exhaust a smaller rival with a litigation burden. Economic studies show that large incumbent firms strategically oppose trade mark applications from rivals – and then delay proceedings – not only to force re-allocation of resources to the dispute, but in fact to interrupt their producing and marketing processes.398 Filing oppositions directly increases the value of trade mark portfolio, especially if an undertakin builds ‘a reputation for toughness’.399 Another study that discussed the congestion/depletion of word marks argued that incumbent strong corporations adopt ‘trade mark bullying’ intimidation strategies to prohibit smaller entities from the use of a similar (and frequently descriptive) element, even if it is non-confusing as to source identification.400 Such examples may support the assumption that similar behaviours may occur in relation to functional signs. Strategists frequently describe IPRs as a business leverage tool because of the ability to file infringement suits against vulnerable competitors.401 396 Mor e on reducing the scope of protection granted for combined signs containing ‘weak’ elements, Annette Kur, ‘Relative Grounds for Refusal or Invalidation’ in Kur, Senfteleben (eds.) (n 24) paras 4.351–353. 397 Lemley , McKenna (n 316) 2214–2219 and 2224–2225; Canahai, McKenna (n 263) 21–23. 398 Philipp Schautschick, Christine Greenhalgh, ‘Empirical Studies of Trade Marks – The Existing Economic Literature’, Department of Economics Discussion Paper Series 2013 (No. 659), University of Oxford, referring on pp. 33–34 to a study undertaken on a dataset of Canada opposition cases between 1996 and 2009 by E.J. Collete, ‘Increasing Rival Costs: Trade-mark Opposition as a Tool for Entry-Deterrence’, chapter of dissertation, Carleton University, Canada (2012). Along similar lines Lunney, ‘The Error …’ (n 287) criticizes the over-protection of trade dress as used ‘to scare off competitive entry’ (at 231) and exemplifies it with Two Pesos v. Taco Cabana, 505 U.S. 763, 23 U.S.P.Q.2d 1081 (1992), in which finding Two Pessos liable of the infringement of the restaurant décor of Taco Cabana put him out of business and forced to sell it to the plaintiff Taco Cabana (fn 42, at 229). 399 Philipp Sandner, The Valuation of Intangible Assets: An Exploration of Patent and Trademark Portfolios (Gabler Wiesbaden 2009) 46, referring Georg von Graevenitz, ‘Which Reputations Does a Brand Owner Need? Evidence from Trade Mark Opposition’ (2007) Discussion Paper No. 215, 1 DOI:10.5282/ubm/epub.13337. 400 Beebe, Frommer (n 381) 1022, giving the example of ENTREPRENEUR trade mark efficiently litigated by Entrepreneur Media. 401 Gerald B. Halt, Jr. et al., Intellectual Property and Financing Strategies for Technology Startups (Springer 2017) 59. Functionality within the framework of law and economics 101 From another angle, contracts may serve to solve this kind of emerging legal conflict. One example is co-existence agreements, which gather holders of highly similar marks to delineate the use of their signs in relation to specific categories of goods/services in order to avoid unnecessary and unpredictable judicial disputes.402 If letting the situation be litigated, the outcome could be a double-edged sword, that is, a finding of either infringement, or honest concurrent use, an extremely risky gamble for the first party to sue, who may then face further invalidation proceedings, potentially even leading to the loss of the trade mark at issue. For this reason, licence agreements may condition production, distribution, and other activities upon a prohibition on licensees challenging the validity of the trade mark at issue.403 However, in the EU the inclusion of this type of restriction in a licence or co-existence contract is not always left entirely to the discretion of parties; it may be investigated under the competition law framework of Art. 101 TFEU (previously Art. 85). EU jurisprudence has demonstrated that competition concerns may be raised by no-challenge clauses upon which a party should refrain from submitting a cancellation motion (for reasons of lack of genuine use) or opposing a registration, or submitting an invalidity claim based on absolute grounds for refusal, such as lack of distinctiveness, descriptiveness, or genericness.404 In those cases, the authorities looked for ‘appreciable’ restrictions of competition and analysed whether the maintenance of a trade mark would amount to an unjustified barrier to entry for competitors, or if the contractual restrictions had the main purpose of hampering distribution of new goods/services to a new territory. This trend of scrutinizing contractual prohibitions from a competition standpoint is still visible. EU Regulation No. 316/2014 pertaining to technology transfer agreements405 does not insulate from competition control the so-called ‘termination on challenge’ clauses which allow a licensor to terminate a license agreement, if the licensee attempts to challenge the validity of the IPR; however, such clauses are still permitted in case of exclusive licenses.406 402 The legislator’ s acquiescence to such agreements may be inferred from the EUTM’s formulation of the scope of a trade mark right, where reference is made to ‘third parties not having his [right holder] consent’ (LB), as argued by Ghidini (n 357) 289–290. 403 Valentine Corah, Intellectual Property Rights and the EC Competition Rules (Hart 2006) 126–128. 404 Case C-35/83 BAT Cigaretten-Fabriken v. Commission, [1985] E.C.R. 00363, paras 32– 37 (as an appeal from Commission Decision of 16 December 1982, Case IV/C-30.128); Moosehead/Whitbread, Commission Decision No. 90/186/EEC, 1990 O.J. L. 100, 32; case Airam/Osram reported in the Eleventh Report on Competition Policy (1981) 97. These cases were discussed in Lavinia Brancusi, ‘Assessing the Impact of Registering Non-Traditional Marks: A European Union Competition Law Analysis’ in Calboli, Senftleben (eds.) (n 22) 240–242. 405 See fn 355. 406 Thomas V inje, ‘European Union’ in Thomas Vinje (ed.) The Intellectual Property and Antitrust Review (3rd ed. The Law Reviews 2018) 50. 102 Functionality within the framework of law and economics Putting these findings in the perspective of functional signs, there are grounds to suggest analogical application. If functionality means a set of desirable features for a certain product category, a trade mark holder can orchestrate a series of contractual relationships with selected third parties in order to delimitate their use in correlation with no-challenges clauses. The latter would protect licensees against legal action from the trade mark owner, whilst simultaneously conferring market advantages to them when compared to those competitors left outside the agreements. Such competitors would then have been denied access to a functional sign which presumably would have been invalid from the start. From a competition standpoint this type of agreement has to be evaluated as a whole and on a case-by-case basis – if obligations are not justified or well balanced by contractual advantages enjoyed by each party, whereas the main effect of the contract consists of restricting market competition, then the contract may appear questionable.407 4.2.2. The leveraging capabilities of functional trade marks to induce competitive advantages The notion of leveraging IP defines the means of extracting and exploiting the value of IP portfolios in order to confer competitive advantages to the rights holders.408 Business strategy development describes how IPRs may effectively counterbalance the different types of market forces that influence the market position of an undertaking. One model belongs to prof. Michael Porter, who has extensively analysed the development of competitive strategy.409 This model places an undertaking in a ‘hub’ under pressure from five forces: the degree of rivalry among existing firms, customers’ purchasing power, barriers to entry, suppliers’ power, and threats of substitutes.410 The undertaking may engage in responding strategies based on ‘overall cost leadership’, ‘differentiation’, and ‘focus’ on a customer or product segment or geographical market. What bears significance for trade marks is the strategy linked to product differentiation, that is, providing a unique product, especially via brand image and technology features. The approach, supported by market data and studies, is that a branding identity generates price insensitive and switching costs whilst exerting influence upon purchasing power, availability of substitutes, and barriers to entry. The following part addresses two kinds of competitive 407 Ibidem, 52–53. 408 Halt (n 401) 51. 409 For a seminal work: Michael E Porter, ‘Competitive Strategy: Techniques for Analyzing Industries and Competitors (1980)’ University of Illinois at Urbana-Champaign’s Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship, https:// ssrn.com/abstract=1496175 410 Christopher Ar ena, Eduardo Carreras, The Business of IP (OUP 2008) 85–89 referring to Michael Porter, Competitive Strategy, Technique for Analyzing Industries and Competitors (NY The Free Press 1980) 4. Functionality within the framework of law and economics 103 advantage: the complementary use of trade marks as means of reinforcing patent strategies, with a focus on the pharma industry, and the use of indispensable assets to block access to interrelated markets. These issues are discussed in view of their possible application to functional signs. 4.2.2.1. The synergy between trade marks and patents There are studies that suggest that trade marks belong to market-specific business decisions in order to not only capture innovation and support growth strategies focused on product and quality differentiation, but also complement the protection of technological innovation.411 Although no universal rule applies, as there are many strategic and industry-dependent motivations for filing for trade mark registration, 412 firms are generally interested in using multiple forms of protection (such as patents and trade marks) in relation to different product features, in order to enhance the economic benefits that can be achieved individually, complementarily, and at different moments of time.413 This concerns, for instance, the medicine and chemical sectors, and somewhat applies to the information and communication sectors.414 Patents usually play an essential role in the early phases of the innovation value chain, whilst trade marks operationalize later product commercialization, 415 development of reputation, brand creation, and extension to new markets416. It is acknowledged that trade marks can be used to prolong, or substitute for other IPRs (e.g. in relation with small product changes) – this, in itself, is not a negative thing, if trade marks become an indicator of incremental innovation417 – but concerns arise when accumulating layers of IPRs protection, that is, ‘IPR stacking’418 turn into barriers to entry. As a rule, the existence of one IPR can rarely block new entrants – a more dangerous en411 Charles de Grazia, Amanda Myers, Andrew Toole, ‘Innovation Activities and Business Cycles: Are Trademarks a Leading Indicator?’ (2020) 27(2) Industry and Innovation 184, 186–187. 412 Extensively and critically , Dev Gangjee, ‘Trade Marks and Innovation?’ in Graeme Dinwoodie and Mark Janis (eds.)Trademark Law and Theory II: Reform of Trademark Law (Elgar 2021) at: https://ssrn.com/abstract=3658725 413 McKenna, ‘An Alternative’ (n 316) 873–884. 414 Gangjee, ibidem, 23–24. 415 Companies prioritize trade marks ’ procurement, so protection for packaging/ design/product shape is generally sought at a later stage of development, see Halt (n 401) 54. 416 Carolina Castaldi ‘On the Market: Using Trademarks to Reveal Organizational Assets, Strategies and Capabilities’ (March 2019) 8–9 at http://dx.doi.org/10.2139/ssrn.3255864; however, for service sectors and creative/cultural industries, trade marks may substitute for patents as ‘soft innovation’. 417 Meindert Flikkema, Carolina Castaldi, Ard-Pieter de Man, Marcel Seip, ‘Trademarks’ Relatedness to Product and Service Innovation: A Branding Strategy Approach’ (2019) 48 Research Policy 1340, 1341–1342 https://doi.org/10.1016/j.respol.2019.01.018 418 Car olina Castaldi, ‘The Economics and Management of Non-Traditional Trademarks’ in Calboli, Senftleben (n 22) 270. 104 Functionality within the framework of law and economics vironment is created by IPR exclusivity in correlation with other factors that affect new entrants, such as increased production costs and marketing time or decreased product functionality.419 During the term of patent protection, a combination with trade marks may successfully sustain IP competitive advantages. Geox’s story is an example of the synergy of trade marks with technology. By capturing and positioning specific product functionality (covered by patents on materials, part of products, methods of manufacturing) and creating in consumers’ minds enormous brand awareness of the ‘shoe that breathes’, they later expanded to other lines of windproof and waterproof apparel and shoes.420 Another type of strategy, that is, ‘product space packing’, consists of using trade marks along with patents, designs, and utility models in order to fill any profitable niches of products in possible demand, such as the approaches adopted by the market leaders Kellogg in the breakfast cereals industry or Henkel into detergents.421 Broad IP portfolios allow entities to choose a convenient right from their ‘menu’ and enforce it against smaller rivals, in order to obstruct or discontinue their activity. It is reasonable to assume that many of the trade marks intersecting with the subject-matter of patents or designs fit the category of shapes or position marks which generate litigation upon legal grounds related to distinctiveness or functionality. Indeed, a quick search of the EUIPO database displays, for instance, a long list of Henkel trade mark registration/opposition/invalidity proceedings concerning the shapes of dishwasher tablets, toilet devices, packaging, as well as design proceedings concerning toilet blocks and cosmetics containers.422 To achieve strategic leverage, a trade mark portfolio usually contains signs consisting of product features, because this is an efficient way of impeding competitors from offering alternatives of similar functionality. After the expiration of a patent, trade marks reinforced by branding strategies ensure the maintenance of higher, supra-competitive prices charged during the exclusivity period, which enables strong undertakings to continue and extend their market dominance.423 Several frequently discussed cases have oc419 Arena, Carreras (n 410) 148. 420 Francesca Cecchinato, Tiziano Vescovi, ‘The Geox: The Shoe that Breathes’ in Byoungho Ellie Jin, Cedrola Elena (eds.) Product Innovation in the Global Fashion Industry (Palgrave Macmillan 2018) 57, 66–69. 421 Markus Reitzig , ‘Strategic Management of Intellectual Property’ (2004) April MIT Sloan Management Review 5–6, https://sloanreview.mit.edu/article/ strategic-management-of-intellectual-property/ 422 Among 27 trade mark decisions see: T-393/02 (CTM 001162395); C-457/01P (CTM 000703231); EUIPO appeals R 1237/2013-1 (CTM 010401255); R 1153/2004-1 (CTM 001272541); EUIPO Inv. Dec. 31/08/2012 (CTM 010630317); 05/08/2004 (CTM 003024189). Among 18 design decisions see: EUIPO appeals R 2113/2015-3, T-296/17 (RCD 001663618-0003); R 2113/2015-3, T-296/17 (RCD 001663618-0003) and Inv. Dec. 08/09/2006 (RCD 000387089-0002). 423 Josef Dr exl, ‘Real Knowledge Is to Know the Extent of One’s Own Ignorance: On the Consumer Harm Approach in Innovation Related Competition Cases’, MPI Research Paper Functionality within the framework of law and economics 105 curred in the pharmaceutical industry. Bayer aspirin is a remarkable example of how the initial technological advantage of producing a ‘pure and durable form of acetylsalicylic acid’ by the end of 19th century was strategically enhanced over years by the trademark ‘Aspirin’, and developed through consumer brand awareness, loyalty, and a stable perception of superiority over any other equivalents. This, in turn, conferred Bayer a persistent market share even in the countries where the trade mark became generic (USA), whilst in those where registration was preserved (Argentina, Germany) analgesic market shares demonstrated its dominant position.424 Bayer’s additional advantages came from a global distribution network and high price positioning, hence a higher absolute profit margin, which encouraged the pharmacies to stock more Bayer products than cheaper substitutes, generating more demand and consolidating the company’s position.425 Indeed, stocking policy represents a sensitive factor to influence significant cost savings in case of shifting medicine consumption to lower priced generics.426 Bayer’s successful story was based off the asset of a word mark, as was appropriate for that period. Nowadays, the pharma industry complements business deterrence strategies with protection of trade dress, that is, shapes, colours, packaging, by means of non-traditional signs. Because a large part of US (aesthetic) functionality cases deal precisely with the shape, size, and/or colour of pills, 427 it is useful to have a market perspective on this matter. 4.2.2.2. A focus: functional trade dress as a deterrent to the entry of generic medicines In the pharma industry there is a clear interdependency between the value and lifecycle of a trade mark and an owner’s attitudes and business strategies, such as the intent to gain and maintain market power.428 Trade marks belong Series 09–15, at http://ssrn.com/abstract=1517757, 19–20. For a different study suggesting that patent/trademark synergy can be efficiency-enhancing (i.e. lower prices during patent exclusivity anticipate higher profits during subsequent trade mark protection), Gideon Parchomovsky, Peter Siegelman, ‘Towards an Integrated Theory of Intellectual property’ (2002) Faculty Scholarship at Penn Law, 1364 https://scholarship.law.upenn. edu/faculty_scholarship/1364 424 Klaus Jennewein, Intellectual Property Management: The Role of Technology-Brands in the Appropriation of Technological Innovation (2005 Physica Verlag) 31–53. 425 Ibidem, 55. 426 Alexandra Camer on et al., ‘Switching from Originator Brand Medicines to Generic Equivalents in Selected Developing Countries: How Much Could Be Saved?’ (2012) 15 Value in Health, 671 https://doi.org/10.1016/j.jval.2012.04.004. 427 Ar ul Acaria, Kavya Mammen, ‘Non-Traditional Trademarks in the Pharmaceutical Sector’ in Calboli, Senftleben (n 22) 274–285; Irene Calboli ‘Beyond Patents: The Problems of NonTraditional Trademark Protection for Medicines and Health Technologies’ (2020) 51 IIC 1. 428 Shukhrat Nasirov, ‘Trademark Value Indicators: Evidence from the Trademark Protection Lifecycle in the U.S. Pharmaceutical Industry’ (2020) 49(4) Research Policy 1, https://doi. org/10.1016/j.respol.2020.103929 106 Functionality within the framework of law and economics to a larger process of ‘lifecycle management’ which refers to the subsequent patenting of minor variations of the original active pharmaceutical ingredient (i.e. secondary patents), or adding other forms of exclusivity, in order to stifle competitor access to the market – if they are undertaken by the originating company, such practices are known as ‘evergreening’.429 Trade marks supports the practice of introducing patent variants together with new brands that benefit from, and/or supersede consumers’ loyalty towards older brands, so as to maintain premium prices.430 Even in relation to word marks, because of external regulations around chemical and generic names which create difficulties when developing a drug’s brand name, companies use the tactic of pre-emptive registration to block the access of competitors to valuable trade marks.431 However, it is the protection of trade dress that has become the main strategic tool of controlling consumer preferences. One reason for this is that in the US, unlike in the EU, prescription drugs are repackaged by pharmacies before being sold to patients, so consumers cannot rely on word and graphic trade marks affixed on packaging, but mostly on the appearance of the drug itself. Repeated habits are important, therefore a colourful and appealing look for a daily pill makes it easy to remember and irrationally bonds consumers to that particular brand. An important study by Hannah Brennan argues that consumers and doctors prefer branded drugs to generics because the complex branding strategies, especially the heavy advertising of trade marks, create ‘artificial differentiation’ based on the alleged superiority of the originator branded drug.432 Another study argues that patients subject to direct advertising have an influence on prescription drug demand, as doctors willingly prescribe medicine that a patient has learnt about and expects to receive.433 429 Robin Feldman , ‘May Your Drug Price be Evergreen’ (2018) Journal of Law and the Biosciences 590, 596; Chie Hoon Song, Jeung-Whan Han, ‘Patent Cliff and Strategic Switch: Exploring Strategic Design Possibilities in the Pharmaceutical Industry’ (2016) 5 SpringerPlus, 692, 6–11 https://doi.org/10.1186/s40064-016-2323-1; Hazel Moir, Luigi Palombi, ‘Patents and Trademarks: Empirical Evidence on “Evergreening” from Australia’, 2013, paper presented at 4th Asia-Pacific Innovation Conference, National Taiwan University, https://openresearch-repository.anu.edu.au/handle/1885/11418?mode=full, 1–3; C. Scott Hemphill, Bhaven N. Sampat, ‘Evergreening, Patent Challenges, and Effective Market Life in Pharmaceuticals’ (2012) 31 Journal of Health Economics 327, 328. Sometimes the originator decides to provide their own generics and positions them advantageously against other generics, cf. Hemphill, ‘Intellectual …’ (n 345) 891–892 discussing withdrawals and ‘product switch’. 430 Song , Han, ibidem, 12 (see table); Moir, Palombi, ibidem, 4–5. Sometimes the new brand ‘cannibalises’ the older one, but frequently ‘face-lifting’ the original brand with letters or words (such as adding ‘XR’ or ‘Plus’) suffices for further exploiting the branding benefits. 431 Nasirov (n 428) 7. 432 Hannah Brennan, ‘The Cost of Confusion: The Paradox of Trademarked Pharmaceuticals’ (2015) 22 Mich. Telecomm. Tech. L. Rev. 1. Doctors are also encouraged to prescribe branded drugs, which itself increases patients’ certainty of the drug’s effectiveness. 433 Anish V aishnav, ‘Product Market Definition in Pharmaceutical Antitrust Cases: Evaluating Cross-Price Elasticity of Demand’ (2011) Colum Bus L Rev 586, 599–601. Functionality within the framework of law and economics 107 In reality, generics must be bio-equivalent in order to get market approval, therefore arguments about lower the quality and presumably worse manufacturing conditions of generics are not sustained by clear proof (such as inspection of facilities).434 When competitors are forced to change the appearance of a generic drug because the original form is covered by a trade mark, there are proofs of reduced adherence from the perspective of vulnerable patients who considered the change in appearance confusing.435 There is also a reduction in drug effectiveness via placebo effects, because patients usually mistrust any change and doubt the quality of a generic. In many cases, trade-dress protection contributes to a self-fulfilling myth of the superiority of a particular brand over any other substitute, which allows the rights holder to maintain higher prices and revenues. A prominent example is the famous ‘Purple Pill’ of AstraZeneca, used for the drug omeprazole and sold under the name Prilosec – the world’s top-selling drug in 2000, and later replaced (yet not ‘cannibalised’) by the new patented version of the active enantiomer, named ‘Nexium’. The new drug, dressed as a new version of the existing purple pill, enjoyed the shift of reputation, brand salience and consumer loyalty from Prilosec and maintained its sales level for a period of ten years after the expiration of the first patent on omeprazole.436 As the US jurisprudence has confirmed, in specific circumstances the functionality doctrine prevents the conferring or enforcing of trade mark protection for features of appearance of a drug for purposes related to the use or the effectiveness of a drug (Chapters 3, 6, and 8). Similar application may occur under the EUTM, now that the reworded functional exceptions encompass colours, alone or within combinations of other kinds of product features. 4.2.2.3. Functional features as ‘indispensable’ asset for follow-on ‘new products’ It is generally accepted that protecting a product’s functionality via IPRs affects product substitutability, especially when coupled with brand loyalty and sale strategies (rebates, tying/bundling). This is even more true when the protected asset is essential for the functioning of other products/services. Some assets physically connect products, others simply embody the features or information that need to be copied/transformed to develop follow-on products. Legal exclusivity over the asset enables the rights holder to transfer various 434 Brennan (n 432) 19–24. For an argument about the lack of quality assurance from generic manufacturers, Richard Posner, ‘Intellectual Property: The Law and Economics Approach’ (2005) 19 Journal of Economic Perspectives 57, 67. 435 Brennan (n 432) 33–35; Moir, Palombi (n 429) 17 referring to an Australian trial concerning variants of the anti-depressant drug Efexor, in which the court justified an injunction against a generic upon evidence that mentally ill patients were confused about switching to a medication of a different appearance. 436 Brennan (n 432) 27–29; Moir, Palombi (n 429) 27–31; Song, Han (n 429) 7. 108 Functionality within the framework of law and economics benefits generated in the original market of the core product, to other interrelated, downstream markets, such as consolidating their position on the existing market, facilitating entry to a new market, or bringing in additional revenues. A classic example represents original spare parts and/or add-on accessories, as compared to independently manufactured parts.437 More recent revolutionizing examples constitute ‘smart connected products’, comprised of software and connectivity components enabling their functioning within an ‘Internet of Things’ network (e.g. the Bose wi-fi system, coupled with a product cloud which allows music streaming over the Internet, or Tesla cars which have software connected to a monitoring system running remote services and upgrades).438 Product standardization and connectivity amount to a disruptive wave of ‘IT driven transformation’ which changes both the external competition environment and the internal organization of manufacturing companies.439 This renders topical the issue of how to protect such valuable assets by means of IPRs, and in which conditions they should be made available to competitors. There is a huge area of law dealing with the conditions in which pools of standardized essential patents – instrumental for global interoperability technologies such as Wi-Fi, USB, 4G, or Bluetooth – are licenced upon ‘fair’, ‘reasonable’, and ‘non-discriminatory’ (FRAND) terms, set by the standard-development organizations.440 It is beyond this chapter to engage in a discussion, but here it will be noted that compatibility can be essential for various industries, and, apart from patents on products or processes, product appearance may be covered by designs or functional trade marks, which equally serve to block competitors’ access to product features. The purpose of this part is to explore the general guidance that EU competition ‘refusal to license/deal’ cases – concerning assets held essential for supplying products or services on inter-related markets – have conferred on the criteria of ‘new product’ and ‘indispensable’ character (of the asset), in order to hypothetically consider the situation of product functionalities covered by trade marks. Starting from the principle that owning and exercising an IPR is not abusive per se, even for an undertaking with a dominant position, the CJEU laid down the ‘exceptional’ circumstances when a refusal to licence constituted an 437 Laure Schulz, ‘The Economics of Aftermarkets’ (2015) 6 JECL&P 123. 438 Michael Porter, James Heppelmann, ‘How Smart Connecting Products are Transforming Competition’ (2014) 11 Harvard Business Review, https://hbr.org/2014/11/ how-smart-connected-products-are-transforming-competition 439 Michael Por ter, James Heppelmann, ‘How Smart Connecting Products are Transforming Companies’ (2015) 10 Harvard Business Review, https://hbr.org/2015/10/ how-smart-connected-products-are-transforming-companies 440 Rafał Sikorski, ‘Access to Standard Essential Patents and Antitrust Enforcement: The Case for Licensing Component Manufacturers’ (2020) 82(2) RPEiS 19, 20–31; Jorge Contreras, ‘Global Rate Setting: A Solution for Standards-Essential Patents?’ (2019) 94 Wash. L. Rev. 701, 713–721; on classification of standards and setting organisations, Alexandra KuźnickaCholewa, Standaryzacja nowych technologii – jej wpływ na zakres swobody wykonywania uprawnień z patentu (Warszawa C.H. Beck 2022) 9–47. Functionality within the framework of law and economics 109 abuse of dominant position. The flagship ruling IMS Health, 441 which built notably on Magill, 442 and Oscar Bronner, 443 formulated the following requirements: (i) the protected asset was indispensable to compete in a market; (ii) the refusal prevented the appearance of a new product/service for which there was potential consumer demand; (iii) the refusal had no objective justifications; and (iv) it restricted/excluded competition in the secondary market. The ‘new product’ requirement emerged in the Magill case, in which access was refused to copyrighted information about individual TV programmes, necessary for compiling a comprehensive weekly TV guide. Such a product had not previously existed, as viewers accessed only listings for individual stations, it was not offered by the IP holder, and met a ‘specific, constant and regular potential’ consumer demand.444 The IMS Health judgment (conc. copyright over a database containing pharmaceutical sales data gathered from local German pharmacies according to a ‘brick structure’ built upon geographical sectors) emphasized the specificity of the new product through its different nature, understood as not duplicating pre-existing goods/services.445 AG Tizzano indicated that although the compared products could be in partial competition due to a limited degree of substitutability, the new product should answer new consumer needs, unsatisfied by the existing offer.446 One divergent commentator noted that in the IMS case, competitors were not interested in making a different alternative, but in copying the existing product, thus forcing price competition.447 An interesting development was brought by the Microsoft judgment, which found abusive the refusal of sharing interoperability information with competitors in the workgroup server operating market, even if no particular new product had been identified, as long as the conduct at issue limited ‘technical development’.448 In other words, Microsoft’s ‘artificial interoperability advantage’ and market position discouraged competitors from developing alternative server operating systems. The requirement of an ‘indispensable’ character of the asset (for conducting business activities on the secondary market) represented a key issue known as the ‘essential facilities’ doctrine.449 The Bronner case brought important explanations, however, it did not deal with IPR. The case concerned 441 C-418/01 IMS Health v. NDC Health, EU:C:2004:257, paras 49–52. 442 Jointly C-241/91P, C-242/91P RTE and ITP v. Commission (Magill) EU:C:1995:98. 443 C-7/97 Oscar Bronner v. Mediaprint, EU:C:1998:569. 444 C-241/91P, C-242/91P Magill, paras 52–54. 445 C-418/01 IMS, para 49. 446 C-418/01 IMS Opinion, EU:C:2003:537, paras 62, 66. 447 Josef Drexl, ‘Intellectual Property and Antitrust Law: IMS Health and Trinko – Antitrust Placebo for Consumers Instead of Sound Economics in Refusal-to-Deal Cases’ (2004) 35 IIC 788, 799–800. 448 T-201/04 Microsoft v. Commission, EU:T:2007:289, paras 653–665. Another type of abuse concerned bundling services: in the media player market, Microsoft tied the media functionality of Windows Media Player to their Windows PC operating system. 449 Maggiolino (n 356) 141–179. 116 Functionality within the framework of law and economics be associated with a brand, firm, or a trade mark and generally encompasses a set of positive values, revealed by ‘favourable mental states’ that determine consumers to repetitive purchase habits.482 Goodwill is linked to reputation, as enhanced by the capability of a trade mark to ensure consistent quality of goods and acquire reputation via advertising, communication, and investment functions – nevertheless, the goodwill of a business is more than the reputation of an individual asset (trade mark). It is important to note that accounting standards value goodwill differently than the value of trade marks/brands (4.3.2.2.). Under EUTM, reputation is a prerequisite for granting enhanced trade mark protection beyond the confusion of origin and outside the principle of speciality against specific forms of use, that is, one that takes unfair advantage of, or is detrimental to, the distinctive character or the repute of a trade mark – the law provides for an infringement ground and for a relative ground for refusal or invalidity of a trade mark.483 This special regime aims to protect registered trade marks that have developed a reputation and supersedes the previous means of protection in EU countries, which mostly relied on trade mark claims based on dilution or civil law tort liability.484 The regime is compliant with Art. 16(3) TRIPS and differs from the model of protecting wellknown marks set forth in Art. 6bis of the Paris Convention. The latter model, although implemented much earlier, only protects unregistered trade marks within the principle of speciality and against registration or use by third parties of identical or similar signs for identical/similar goods or services in case of a likelihood of confusion.485 Some doubts concerned the interaction, especially the differences between the concepts of ‘well-known’ and ‘reputation’. The former was linked to notoriety, that is, being known by parts of the public, whilst the latter seemingly related to the ‘independent attractiveness’, ‘advertising value’, ‘the quality’ of a trade mark.486 At that time professor Kur had already opined that ‘some degree of renown’ among the public could be required to prove reputation, 482 Extensively, Robert Bone, ‘Hunting Goodwill: The History of the Concept of Goodwill in Trademark Law’, 2006 Boston University Law Review 547, 549–554; 569–572. Professor Bone considers goodwill an ‘amorphous, abstract’ notion (at 583), variously defined by lawyers, economists, accountants, which raises difficult queries as to the kind of ‘property’ that it represents, its source and link with other business assets, its transferability conditions (usually upon the sale of the business), and the means of enjoying trade mark protection. 483 Arts. 8(5) and 9(2(c) of EUTMR and Arts. 5(3)(a) and 10(2(c) of TMD. 484 Comparatively, Michal Bohaczewski, Special Protection of Trade Marks with a Reputation under European Union Law (Wolters Kluwer 2020) 10–30. 485 The pr otection was introduced by the Hague Conference of 1925 (with amendments) initially only to cover goods, cf. Bodenhausen (n 61) 92, whereas Art. 16(2) TRIPS extended its scope to include services. 486 Annette Kur , ‘Well-Known Marks, Highly Renowned Marks and Marks Having a (High) Reputation What’s It All About?’ (1992) IIC 218, 224–227. Functionality within the framework of law and economics 117 487 an issue later confirmed by the CJEU, which favoured a quantitative approach.488 Reputation has been defined upon the knowledge of a trade mark by a ‘significant part’ of the relevant public, and not through a qualitative assessment indicating positive associations or a specific ‘image’ acquired in the course of trade.489 Due to similar quantitative criteria being used both for defining well-known marks and marks with reputation, the differences between these two regimes pertain mostly to the type and scope of protection afforded, 490 which diminishes the practical importance of well-known marks as compared to those with reputation.491 Although the CJEU does not equate reputation with uniqueness, originality, exclusive image, or other qualitative indicators of a trade mark, notoriety amongst the relevant public must imply positive consumer feedback: the public were able to learn about the trade mark either via personal experience (plausibly, repeated purchases) or through the effects of promotion, which, per se, bolsters and disseminates the attractiveness of that mark against other. Professor Griffiths noted that a trade mark, having been functioning on the market and ‘recognised’ by consumers, undergoes a transformation and acquires ‘reputation’. This reputation is a conglomerate of information concerning quality and product characteristics, ‘encapsulat[ing] consumers’ expectations of these products based on their collective experience and other information available to them’.492 If it is not prestige and fame, but consistent quality level and consumer predictable expectations of the trademarked goods/ services that determine reputation, then ‘everyday consumer products, which are rarely associated with excellent quality, can also be qualified as reputed’.493 However, doubts remain as to what extent positive messages – those that may be summed up as the ‘attractiveness’ of a trade mark – constitute an essential layer of reputation. To make things more complicated, what if a trade mark serves as the core of a brand, or is a brand? Would reputation mean something different to the other positive components that define the brand? These concerns have been exacerbated by the EUTM enforcement practice that has developed new types of trade mark functions akin to branding. In relation to high-class/luxury goods, the CJEU has already based the ‘value’ of a trade mark upon the ‘allure’, ‘aura of luxury’, ‘prestigious image’ of goods, which required protection under the traditional quality or advertising 487 Ibidem, 228. 488 C-375/97 General Motors v. Yplon, EU:C:1999:408. 489 Senftleben , in Kur, Senftleben (n 24) paras 5.193–5.204; Kur in Kur, Senftleben (n 24) paras 4.411–4 discussing a gradual scale with well-known and famous marks. 490 As indicated, reputation protects registered trade marks, with respect to identical/similar signs even when applied to dissimilar goods/services. 491 Bohaczewski (n 484) 70–75, indicating the usefulness of relying on well-known marks in case of ‘vintage’ signs that may be revoked for non-use reasons. 492 Griffiths (n 33) 111. 493 Bohaczewski (n 484) 46. 118 Functionality within the framework of law and economics function.494 Subsequently, a new ‘communication’ function addressed the capacity of a sign to communicate ‘important’ messages (i.e. positive associations), by capturing the marketing efforts aimed at building a brand ‘image’.495 Afterwards, the ‘investment’ function emerged as ‘acquiring or preserving a reputation capable of attracting consumers and retaining their loyalty’ via advertising or other commercial techniques.496 The CJEU contended that any kind of trade marks, not necessarily just those with reputation, was capable of performing the communication and/or investment functions.497 These rulings have mingled reputation with the other values and associations characterizing brands in a way that it is difficult to tell what ‘value’ is at stake. Scholars argue trade marks have acquired autonomous value in need of protection.498 However, branding techniques (especially persuasive advertising) make consumers assign value to attributes, that is, product ‘atmospherics’499 that are, predominantly, unrelated to quality and real product differentiation. These values interconnect and metamorphose to ensure the specific personality of a product.500 This was, and still is, the quintessence of branding. For example, an older survey showed how branding was primarily referred to as ‘values’ and ‘personality’, and to a lesser extent ‘accumulated weight of goodwill’.501 Recently, another study showed that ‘brand experience’ (in terms of being unique, memorable, or superior) determines most of the perceived value of a brand for consumers.502 Although conceptually there are differences between trade marks and brands, the values underlining 494 C-337/95 Dior v. Evora ECLI:EU:C:1997:517, para 45; C-59/08 Copad v. Dior ECLI:EU:C:2009:260, paras 24–26; Seville (n 39) 361–362. 495 C-487/07 L’Oréal v. Bellure ECLI:EU:C:2009:378, paras 49–50; Opinion AG Mengozzi ECLI:EU:C:2009:70, para 54. 496 C-323/09 Interflora v. Marks & Spencer, ECLI:EU:C:2011:604, paras 62–63. For a broader discussion of applying the ‘functions theory’ in practice and interference with domestic rules of unfair competition law, see Annette Kur, ‘Trademarks Function, Don’t They? CJEU Jurisprudence and Unfair Competition Practices’, Max Planck Institute for Innovation & Competition Research Paper No. 14–05, at https://ssrn.com/abstract=2401536, 10 ff. 497 C-323/09 Interflora, para 40. 498 Michel V ivant, ‘Revisiting Trade Marks’ (2013) 3(4) Queen Mary Journal of Intellectual Property 307, 310–311. 499 This term belongs to Jessica Litman, ‘Breakfast with Batman: The Public Interest in the Advertising Age’ (1999) 108 Yale L.J. 1717, 1726–1730. Discussing advertising agencies’ role on the trade marks/brands relationship, Patricio Sáiz, Rafael Castro, ‘Trademarks in Branding: Legal Issues and Commercial Practices’ (2018) 60 Journal of Business History 1105. 500 Andr ew Griffiths, ‘Brands, “Weightless” Firms and Global Value Chains: The Organisational Impact of Trade Mark Law’ (2019) 39 Legal Studies 284, 293. 501 Chernatony, Riley (n 467) 432. 502 Klaus-Peter Wiedmann et al., ‘The Power of Experiential Marketing: Exploring the Causal Relationships among Multisensory Marketing, Brand Experience, Customer Perceived Value and Brand Strength’ (2018) 25(2) J Brand Manag 101, 105 – here discussing the strategy of multisensory marketing in the luxury hotels business. Functionality within the framework of law and economics 119 each of them tend to mix and overlap over time.503 For these reasons, discussing the value of trade marks by using branding concepts brings unclear outcomes. Additionally, if there is a need for differentiating reputation and its value within overall trade mark value and brand components, then the task grows immensely, and may be unfeasible. 4.3.2. The multi-faceted ‘value’ of a brand A brand represents a commercial notion, not a legal one. The value of a brand is captured by the term ‘brand equity’, meaning ‘the economic value of a brand as a source in the creation of value for brand owners’.504 The following part first explores how marketing places brand image and reputation amongst the other comportments of brand value. A complimentary approach discusses whether financing and accounting standards capture the value of brand image and reputation when valuating trade marks and brands. A final point accentuates the significance of consumer input in brand creation and valuation. 4.3.2.1. Brand image – A marketing view Amongst various ways of measuring brand equity, marketing mostly uses consumer perceived value, defined as the differential impact of ‘brand knowledge’ that a branded product has on individual consumer as compared to a nonbranded one.505 Brand knowledge is defined by two major components: brand awareness and brand image. ‘Brand awareness’ refers to the strength of a brand in the memory of a customer, tested on two frontlines: recognizing a brand when confronted with it amongst other competing brands – called ‘brand recognition’ – and recalling a specific brand while browsing different products or experiencing specific needs, ‘brand recall’.506 This capability depends on a brand’s salience, that is, the transfer of positive information across product categories. ‘Brand image’ occurs later based on brand awareness. Brand image is about consumers’ perceptions and associations, the meaning of a brand to customers, how they see and feel about it.507 The bundle of positive associations (categorized as 503 Jennifer Davis, ‘The Value of Trade Marks: Economic Assets and Cultural Icons’ in Ysolde Gendreau (ed.) Intellectual Property: Bridging Aesthetics and Economics (Montreal 2006) 110–125; Jonathan Schroeder, ‘Brand Culture: Trade Marks, Marketing and Consumption’ in Bently, Davis, Ginsburg (n 294) 161–176 seeing brands as ‘combination of strategy, culture and consumer imagination’ (at 176). 504 Neil W ilkof, ‘Branding, Co-branding and Innovation: Expectations and Limitations’ (2018) 13 JIPL&P 611–612, 614 (citation). 505 For a seminal work, Kevin Lane Keller, ‘Conceptualizing, Measuring, and Managing Customer-Based Brand Equity’ (1993) 57(1) Journal of Marketing 1, 8–9. 506 Ibidem, 3. 507 Ibidem, 3–4. 120 Functionality within the framework of law and economics attributes, benefits, attitudes) interact reciprocally and should be ‘favourable’, ‘strong’, and ‘unique’ in order to induce consumer loyalty and increase the probability of brand choice.508 Overall, this marketing model considers brand equity as a ‘multidimensional concept’ that depends on the brand ‘knowledge structures’ existing in consumer minds, and on an undertaking’s actions capitalizing on these knowledge structures.509 Strictly speaking, brand equity does not include reputation as a distinct component. Attempting an analogy, if the trade mark concepts of recognition and reputation were to fit into this model, recognition would mean the identification of a mark/brand among other brands on the market, 510 whilst reputation would lie closer to brand image and deal with consumer beliefs and perceptions about the mark/brand.511 However, it would be very difficult to gauge the differences between reputation and brand image (as part of brand experience), much less their intrinsic value (see 4.3.1.2.). There are studies that use these two concepts, albeit without clear delineation. For example, the WIPO Report on brands took a two-dimensional approach focused on ‘reputation’ and ‘image’. It described reputation in the context of ‘quality, functionality, reliability and other attributes’, whilst ‘brand image’ via examples of ‘luxury, trendiness or social responsibility’.512 The Report acknowledged that successful branding strategies ‘combine[d] reputation and image in such a way that reinforce[d] each other and appeal[ed] to a variety of consumers tastes’.513 In the author’s opinion, the Report illustrates how difficult is to conceptually separate reputation from brand image, especially if reputation is understood through a set of brand components that actually pertain to the realm of ‘brand image’. 4.3.2.2. Valuation of trade marks and brands – a financial and accountingview Searching for the value of a trade mark and its reputation needs facts and figures, which brings to mind the financial records of companies. Several difficulties appear. Such documents usually show an aggregate of all trade marks, which may obstruct identifying the value of each trade mark. Another general issue is that corporate group reports feature little transparency concerning the type and extent of IPRs allocated between the parent and the different subsidiary holding companies.514 The way economists assess trade mark value 508 Ibidem, 8. 509 Ibidem, 14. 510 Unless recognition is equated with reputation measured upon public awareness. 511 Although CJEU rejects a qualitative standard, see 4.3.1.2. 512 WIPO Report 2013: Brands – Reputation and Image in the Global Marketspace, 21 (hereafter WIPO Report) at www.wipo.int/publications/en/details.jsp?id=384 513 WIPO Report, 114. 514 Janice Denoncourt, ‘Company Classification Taxonomy and Corporate Intellectual Property Rights Owners’ in Daniel Gervais (ed.) The Future of Intellectual Property (Elgar 2021) 55, 69–72. Functionality within the framework of law and economics 121 does not tell us much about the value of reputation alone. Although trade marks as reputational assets tie into brand valuation, the dissonance between the accounting standards of calculating brand value and the marketing/management perspective on brand valuation creates difficulties when disentangling and quantifying brand image, goodwill, much less reputation. The following remarks attempt to outline these issues. Economic studies demonstrate that when intangibles are evaluated for the purpose of determining the value of a company, the financial markets mostly focus on knowledge assets, that is, R&D investments and patents due to their prospective returns on investment than on trade marks.515 When evaluation includes trade marks, the indicators used for determining the value of a trade mark are the following: the Nice Classification of covered goods/services (indicating the ‘breadth’ of a trade mark); the number of previous identical/ similar registrations in other jurisdictions (these ‘seniorities’ indicate consumer familiarity with the trade mark); the number of oppositions lodged against rivals (the greater the tendency to defend a portfolio, the more valuable it becomes); the number of oppositions received from rivals.516 There are studies that see trade marks as ‘indicators of reputational assets’, 517 which means that reputation influences the market value, however, reputation on its own is not a quantified, leading factor of measurement. It is also argued that trade marks combined with strong branding investment create a ‘market for brands’, as trade marks become extensively traded commodities.518 Similarly, financial markets favour trade marks that develop existing brands, especially when future cash flows are expected from brand extensions.519 In certain industries trade marks can account for a significant share of a firm’s market value, also depending on their relationship with branding strategies.520 In the author’s opinion, these studies suggest that when trade marks contribute to a firm’s value, then valuation does not describe the value of trade marks alone, even less so their reputation, but instead exists in regard to the developed brands. As concerns brand valuation, this task is the hardest, because traditional tax/accounting methods do not capture the essence of a brand and its real value. Brands, qualified by accounting as ‘non-recognisable’/‘selfcreated’/‘internally generated’ intangible assets, cannot appear in the balance sheet and are not distinguished from the cost of developing the overall business 515 Sandner (n 399) 35–39 with references. 516 Ibidem, 37, 44–47. 517 Car olina Castaldi ‘All the Great Things You Can Do with Trademark Data: Taking Stock and Looking Ahead’ (2020) 18(3) Strategic Organization 472, 474. 518 Ibidem, 478. 519 Joern Block, Christian Fisch, Philipp Sandner, ‘Trademark Families: Characteristics and Market Value’ (2014) 21(2) Journal of Brand Management 151, 167. 520 Mafini Dosso, Antonio Vezanni, ‘Firm Market Valuation and Intellectual Property Assets’ (2020) 27(7) Industry and Innovation 705, 720–723 discussing the significance of trade marks for automobiles, computers, and pharmaceuticals. 122 Functionality within the framework of law and economics activity – any brand investment is deducted from income and considered ‘current expenses’.521 From an economic standpoint, though, brands constitute assets bringing future benefits.522 Accounting requires disclosure of the brand value in the balance sheet only in case of mergers or acquisitions.523 For such transactions, the value of an acquired brand is determined by that part of the price exceeding the fair market net value of identifiable assets, shown in the balance sheet under the term of ‘goodwill’. Accounting understands ‘goodwill’ as a miscellaneous category comprising intangible assets allocated to five broad categories, one being ‘marketing assets’, such as trade marks and brands.524 There is much criticism against valuing brands under goodwill. For instance, the value of acquired goodwill is fixed at the point of acquisition; therefore, it cannot capture the possible increase of brand value over time.525 Another problem is that if the price paid for shares is less than the book value, there is no goodwill, so no brand value is included.526 The difficulty of capturing the value of brands across the different stages of business activity has prompted management specialists to advance new perspectives. ‘Finance should recognize that brand is about value creation. Brands exist in the minds of targeted customers. They aren’t something a company owns. A brand is the value that a customer adds to the intrinsic value of a product’527. This subjective consumer value can be transformed into financial resources for a company, especially if business activities are focused on performance, investment and maintaining consumers’ loyalty. A brand is considered an intangible financial asset that a company ‘controls’ and should monetize for its purposes.528 This shift towards defining value via experience/perception is reflected by the branding literature that operates with the terms of ‘brand’ and ‘(corporate) reputation’. Salinas offers the definition of ‘corporate reputation’ by Charles Fombrun as ‘the overall estimation in which a company is held by its constituents, representing the “net” affective reaction of customers, investors, employees, and the general public to the company’s name’.529 However, Salinas criticizes the synonymous use of ‘brand’ and ‘reputation’, by consider521 Thomas Günther, Catharina Kriegbaum-Kling, ‘Brand Valuation and Control: An Empirical Study’ (2001) 53 Schmalenbach Business Review 263, 264; Gabriela Salinas, The International Brand Valuation Manual (Wiley 2009) 3–4. An example of ‘recognised intangible assets’, as acquired separately by an entity, are trade marks. 522 Salinas (n 521) 3. 523 https://corporatefinanceinstitute.com/resources/knowledge/accounting/goodwill/ 524 Salinas (n 521) 25–26; Sandner (n 399) 43 fn 37; www.freshbooks.com/hub/accounting/ goodwill-accounting-definition 525 Davis, ‘The Value …’ (n 503) 106, fn 28. 526 Salinas (n 521) 358 with references. 527 Bobby J. Calder, Mark L. Frigo, ‘The Financial Value of a Brand’, Strategic Finance, 1 October 2019, at <U>https://sfmagazine.com/post-entry/october-2019-the-financial-valueof-brand/, 3</U> 528 Ibidem, 4. 529 Salinas (n 521) 8. Functionality within the framework of law and economics 123 ing that because ‘corporate reputation’ results from brand management and is about ‘granted’ perception, that is, something ‘non controllable’, ‘corporate reputation does not qualify as an intangible asset because it fails to meet the separability criterion; it cannot be bought, sold or transferred’.530 This discussion teaches us two things. First, there is a distinct, still ambiguous concept of (corporate) reputation in the branding area that should not be aligned with the concept of ‘reputation’ in trade mark law. Second, if public perception indeed represents an important dimension when determining value (for a brand or of a corporate reputation), then specialists are still grappling with how to measure it. The importance of consumers’ experiences for the existence and value of a brand is elaborated further in 4.3.2.3. below. Even with regard to brands, the absence of a standardized brand valuation relates to the huge diversity of calculation models applied by service providers (e.g. Brandient, Interbrand, Nielsen etc.). These models follow, or combine, one of the three general approaches focused on cost/market/income, and there is usually a two-pronged structure encompassing a financial dimension – measured by past/future profits or revenues from royalties/licensing fees – and a consumer dimension – defined by customers’ attitudes, measured directly from surveys, interviews, polls, and so on, or indirectly, by expert panels.531 For instance, Interbrand analyses three key components: the financial performance of branded products/services, the role of the brand as purchase driver, and the brand’s competitive strength, that is, the ability to create consumer loyalty, demand, and future profit.532 Reputation is not among the ten key factors used by Interbrand to measure brand strength, such as differentiation (i.e. being a distinctive proposition), consistency (keeping promises), and maintaining a presence in consumer life.533 These factors may relate to or build reputation in a trade mark sense, but certainly they are not identical to it. Similarly, another study shows that reputation is not among the 12 enumerated main determinants of determining brand equity, whilst brand image holds first place.534 4.3.2.3. Consumers co-creating brand image and value The marketing arguments that brand valuation methodology should reflect the ‘added value’ by consumers concurs with interdisciplinary discussions over 530 Salinas (n 521) 365. Differ ently, a study measuring corporate reputation: Benjamin Pfister, Manfred Schwaiger, Tobias Morath, ‘Corporate Reputation and the Cost of Future Equity’ (2020) 13 Business Research 344. 531 Rober to Moro Visconti, The Valuation of Digital Intangibles (Palgrave Macmillan 2020) 246–250; WIPO Report, 45–46. 532 Mike Rocha, ‘An Exceedingly Good Solution: Looking back on 30 years of Brand Valuation’, at www.interbrand.com/views/exceedingly-good-solution-30-years-brand-valuation/ 533 www.interbrand.com/best-brands/best-global-brands/methodology/ 534 Visconti (n 531) 252. 124 Functionality within the framework of law and economics consumers’ involvement and investment in brands, from the perspective of anthropology, psychology, and sociology. A decade ago Deborah Gerhardt posited that consumers are capable of such strong personal attachment and financial ‘sacrifices’ to support a brand – through various activities, that is, building fan communities, free advertising, creating brand history, discouraging purchase of counterfeit products – that they decide the existence and meaning of a brand.535 This approach has been recently confirmed by a study of Burberry’s branding development, stretching over 100 years, which initially benefitted from consumer attachment to historical events and fashionable lifestyle, only to be negatively affected by incidents of football hooliganism by supporters wearing Burberry caps.536 The diminished consumer perception of the brand quickly led to a drop in demand from the primary clientele, whilst the firm needed time to reconnect with consumers and rebuilt the brand’s ‘aristocratic’ image.537 Another interesting study about trade marks’ communication/investment functions argued that brand image represented the result of a ‘performative role of consumers’, and not necessarily the fruits of investment undertaken by the trade mark owners.538 This argument builds on the anthropological assumption that identity is formed as a result of the process of ‘intertextual performance’ (of its self-image) or ‘performative citation’.539 Consumers are seen to continuously perform the daily act of choosing/wearing a trade mark/brand, and by doing so, they co-create the brand image. Making a brand part of everyday life constitutes a key feature of the ‘anthropological marketing’ approach embraced by IKEA, Apple, Lego, and Google.540 This proves that anthropological marketing applies to different kinds of goods, including utilitarian ones, without being restricted to prestige goods, which are presumably chosen to conspicuously showcase money, status, or power. The doctrine names these Veblen goods, generally affiliated with luxury brands, after the author Thorstein Veblen who, by the end of 19th century, described women’s dressing as a way of putting into evidence men’s wealth.541 535 Deborah Gerhardt, ‘Consumer Investment in Brands’ (2010) 88 N.C. L. Rev. 427, 450. Gerhard advocated for the protection of consumers’ interests in using signs as information tools. 536 Luminiţa Olteanu , ‘Rebranding Strategies and Their Boomerang Effect – The Curious Case of Burberry’ (2020) 23 JWIP 777, 784–791. 537 Ibidem, 791–792. 538 Luke McDonagh , ‘From Brand Performance to Consumer Productivity: Assessing European Trade Mark law after the Rise of Anthropological Marketing’ (2015) 42 Journal of Law and Society 4, 611. 539 Ibidem , 624–625, referring the seminal studies of Judith Butler, ‘Performative Acts and Gender Constitution: An Essay in Phenomenology and Feminist Theory’ (1988) 40 Theatre J. 519 and Constantine Nakassis, ‘Brand, Citationality, Performativity’ (2012) 114 Am. Anthropologist, 629. 540 McDonagh (n 538) 626 referring IKEA marketing strategy. 541 Thorstein Veblen, The Theory of Leisure Class (1899), referred to in the context of the politics of clothes and women’s self-creation by Diane Zimmerman, ‘Upstairs/Downstairs, Functionality within the framework of law and economics 125 Today marketers need consumers to feel and think that branded goods/ services are indispensable tools for self-expression and socializing. This dynamic dialogue between consumers and brands is essential for the understanding of modern brand creation, a fact already capitalized on by marketers.542 Lawyers still have to map its implications to trade mark law.543 For instance, in the context of protecting reputed trade marks, Olteanu’s analysis led to the conclusion that proof of brand reputation could not be solely based upon the owner’s strategies of positioning and promoting the brand, instead the focal point should be ‘how the brand was received and perceived by the public’.544 This seems an interesting point for this book. The significance of a consumer’s bond with a brand (co-branding) for the assessment of aesthetic functionality is discussed below. 4.3.3. The ‘value’ of reputation within the assessment of aesthetic functionality The above discussion shows that the attempt to assess the value of reputation for aesthetic functionality purposes leads to some frustrating results. Lawyers, marketers, and economists face conceptual gaps in frameworks and methodology when dealing with trade marks that convey value to goods and have the potential to develop into brands. It is extremely difficult to distinguish reputation from other sources of positive information, especially those pertaining to brand image. This translates into further difficulties in separately measuring the value derived from reputation from the other economically valuable components of a trade mark/brand. Conceptually, there is no clear correspondence between the legal notion of a trade mark and the complex market concept of a brand. Delving into the nature of the magnetism of certain symbols, there is also an unclear channel between reputation and brand image, let alone goodwill. A product may have multiple features and attributes that are valuable to a consumer, and the crux of aesthetic functionality requires distinguishing the source of some particular aspects. For a trade mark with reputation, usually surrounded by branding strategies, such an assessment is difficult to conduct. Nowadays the relationship between consumers and brands covers numerous psychological/sociological benefits. Consumers drive various values from brands, not necessarily Fashionwise: A View of Design Protection from Lower Down the Food Chain’ in Sun, Beebe, Sunder (n 466) 179–196. Similarly, Ann Bartow, ‘The Gender of Trademarks and Luxury Branding’ in Sun, Beebe, Sunder (n 466) 145. 542 Jeffrey Belson, ‘Reflections on Branding and Trade Marks: Then and Now’ (2019) 14 JIPL&P 601, 604–605. 543 An avenue of debate will likely evolve around ensuring free access to symbols, with regard to fundamental rights and freedoms. See Jens Schovsbo, ‘“Mark My Words” – Trademarks and Fundamental Rights in the EU’ (7 August 2017) at: https://ssrn.com/abstract=2928031 544 Olteanu (n 536) 791. 132 Functionality within the framework of law and economics or only ‘enough substitutes’ to enable SSNIP.569 Another issue is that consumer preferences can affect the analysis of demand-side substitutability. For instance, in the field of artistic and literary production, consumers are driven by subjective tastes rather than by objective needs.570 Although economic and market data constitute objective grounds to assess product substitutability, judgments may lead to unexpected outcomes, because the legal interpretation may favour certain subjective criteria. A classic example represents the CJEU United Brands case, in which bananas were found to be a distinct (narrow) market from other fresh fruits, because of specific characteristics (i.e. appearance, taste, softness, seedlessness, easy handling) which made them suitable for satisfying the constant needs of a sensitive group of consumers (i.e. those very young, old or sick).571 The choice of product features and targeted public – which, as regarding bananas gained the playful name of the ‘toothless fallacy’ – was criticized as ignoring economic evidence which would have proved the opposite: that there was substitutability between bananas and other fruits.572 The statical focus on a group of consumers of inelastic demand risks neglecting the adjusting dynamism of market forces. The argument is that competition may depend on the balance between locked-in and free consumers, and also on evolving market conditions which together may determine that the free part of consumers with high price elasticity renders the increase of price for locked-in consumers unprofitable.573 This is not to say that it is always a mistake to define a market narrowly. Such a finding may be justified by combining a particular demand for specialized products (e.g. spare parts, luxury goods) with specific market conditions (e.g. a specific production technology or distribution system) – together they may generate the dependency of a smaller undertaking upon a dominant supplier.574 A narrow market definition may result from the specificity of the industry. For pharmaceuticals, market definition uses the classification of the 569 Joseph Farrell, Carl Shapiro ‘Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition’ (2010) 10(1) Art. 9 The B.E. Journal of Theoretical Economics 1, at 4 referring to FTC. v. Whole Foods 502 F. Supp. 2d 1 (D.D.C. 2007). 570 Senftleben, ‘Impact …’ (n 456) 262–263, discussing copyrightable works in reference to a study led by Joseph Drexl, Copyright, Competition and Development, Report by the Max Planck Institute for Intellectual Property and Competition Law’, December 2013, 75–80 https://www.ip.mpg.de/fileadmin/ipmpg/content/forschung_aktuell/02_copyright_ competition/report_copyright-competition-development_december-2013.pdf 571 C-27/76 United Brands v. Commission, ECLI:EU:C:1978:22, paras 20–35, concerning the abuse of dominant position due to agreements imposing re-sale restrictions. 572 Melischek (n 351) 65; Ber nard van de Walle de Ghelcke, ‘Economic Reasoning before the European Union Courts in Competition Law’ (2018) 44 Bruges European Economic Policy Briefings 1, 20 at http://aei.pitt.edu/97330/ 573 Florian Wagner-von Papp, ‘Unilateral Conduct by Non-dominant Firms: A Comparative Reappraisal’ in Fabiana di Porto, Rupprecht Podszun (eds.) Abusive Practices in Competition Law (Ascola Elgar 2018) 225, 263–264. 574 Fr enz (n 347) 675–676; by contrast, for a broad market definition even for spare parts: Anne Wagner, Sophie Oberhammer, ‘The Application of Competition Law to the Automotive Industry’ (2015) 6(9) JECL&P 669, 672, 677. Functionality within the framework of law and economics 133 Anatomical Therapeutic Chemical (ATC) system which divides medicines by types of properties. However, the choice of the ATC level may restrain the market to a single drug or a molecule (e.g. a market comprised of the patentprotected drug and the generic) which may facilitate finding a dominant position held by the patented drug producer.575 The situation of a narrowly defined, one-product market, may be also linked to long-term branding strategies – an important issue of this book. Branding can induce low responsiveness to price changes and affect the substitutability of products (4.3.3. below). This issue bears significance when discussing trade marks’ functionality in the context of access to, and choice of, alternative products. In spite of the shortcomings of market definition, and although different methods have been advanced for replacing or adapting the traditional framework, 576 market definition remains a central element of competition law inquires. 4.4.3. How can brands affect market competition and product substitution? The ability of a firm to hold market power and charge monopoly prices depends on the resistance of its position to new entrants. Obstacles that may deter entry or hinder the market expansion of competitors are known under the term of ‘barriers to entry’, although there are diverging views over its exact meaning and scope.577 The following part looks into how brands affect consumer choice and product substitution, with a distinct consideration on the link between brands and narrowly defined markets. 4.4.3.1. Brands as barriers to entry and reducing consumer switching One classification of barriers to entry distinguishes sunk costs, structural barriers, and the strategic behaviour of an incumbent.578 Several parameters that determine barriers to entry may relate to trade marks/brands. Advertising and 575 Recently in T -691/14 Servier v. Commission, EU:T:2018:922, the GC disagreed with the Commission’s confining of the relevant market to Servier’s drug perindopril (appeals C-176/19P & C-201/19P); in Losec case T321/05, AstraZeneca v. Commission, EU:T:2010:266, C-457/10P, EU:C:2012:770, a proton pump inhibitor formed a distinct market from other anti-acid blockers used for ulcer treatment. 576 Far rell, Shapiro (n 569) about assessing the closeness of competition via price pressure tests; Rupprecht Podszun, ‘The Pitfalls of Market Definition: Towards an Open and Evolutionary Concept’ in di Porto, Podszun (eds.) Abusive Practices in Competition Law (Ascola Elgar 2018) 68–90. 577 R. Preston McAfee, Hugo Mialon, Michael Williams, ‘Economic and Antitrust Barriers to Entry’ (2003) at: https://vita.mcafee.cc/PDF/Barriers2Entry.pdf discuss the wider approach of Joe Bain, Barriers to New Competition (Cambridge 1956) who defined barriers as anything that allows an incumbent to earn above the cost of production and distribution without the threat of entry, and the more restrictive view of George Stigler, The Organization of Industry (Chicago 1968), who focused on the costs to be incurred by new entrants which an incumbent need not to bear. 578 Jones, Sufrin (n 351) 81–85. 134 Functionality within the framework of law and economics promotion are usually held to be ‘irrecuperable costs’, because any newcomer needs to bear them in order to become known on the market. From a different perspective, advertising already undertaken by an incumbent constitutes a ‘first mover advantage’ that may become a structural barrier.579 As earlier discussed (4.3.), advertising, apart from informing consumers about product differentiation, is instrumental for developing reputational assets (branding, goodwill). The stronger and more positive the conveyed product image, the greater the feeling of resistance among loyal customers to trying another product – this mechanism works as structural barrier, too. An incumbent may also engage in various activities to strategically anticipate, delay, or act against the entry of competitors (e.g. tying practices, exclusivity agreements, fidelity and bundled rebates) which aim at keeping customers pleased with the current choice of product, and discouraging them from switching to alternatives.580 A classic example is offering free drug samples to doctors in order to direct their prescription habits, as they are unwilling to choose unadvertised drugs, despite similar medical efficacy.581 Consumer switching capability, corelated to product substitutability, can be heavily influenced by branding. The assumption that brands allow for charging premium prices to loyal locked-in consumers and reduce inter-brand competition (4.3.1.) was colloquially verified in an experiment by professor Glynn Lunney amongst his students. It concerned the choice of Coca-Cola versus Pepsi. Initially, vending machines at the campus sold both types of sodas at a similar price; then the price of Coke was artificially increased (around the SSNIP threshold) in order to examine how many students would buy Pepsi instead.582 The outcome proved an insensitiveness to SSNIP and an unwillingness to switch, which in competition terms meant that Coke and Pepsi were imperfect substitutes and each constituted a distinct, product market.583 Various factors may influence consumer decision-making to undermine the switching impulse. Manufacturers may use marketing strategies to manipulate the way consumers view, or rather fail to understand, product attributes and benefits, which induces irrationally triggered purchase behaviours – scholarship defines these sorts of controlled practices as ‘laboratories of consumerism’, a market manipulation which amounts to a market failure, due to imperfect product information and a suboptimal level of consumption.584 It still remains 579 Ibidem, 82, 84–85. 580 Ibidem, 84. 581 McKenna, ‘An Alternative’ (n 316) 889, fn 50, citing Richard F. Adair, Leah R. Holmgren, ‘Do Drug Samples Influence Resident Prescribing Behavior? A Randomized Trial’ (2005) 118 AM. J. MED. 881. 582 Lunney, ‘Trademark ...’ (n 391) 424–426. 583 See also McKenna, ‘Is Pepsi …’ (n 37). 584 Jon D. Hanson, Douglas A Kysar, ‘Taking Behavioralism Seriously: The Problem of Market Manipulation’ (1999) 74 New York University Law Review 103, 194–217, https://ssrn. com/abstract=1288182 Functionality within the framework of law and economics 135 difficult to map the neuro-effects of brands triggered in brain regions that are not stimulated by direct experience of product features, such as during blind tastes. Knowledge of a brand, sometimes bolstered by high prices, makes a product taste or work better than cheaper alternatives despite having similar functional characteristics.585 For the category of luxury (Veblen) goods, the more expensive an item, the more it is in demand – an exclusive clientele needs expensive brands in order to demonstrate their wealth, and turns away from them when too many look-alikes target more budget-conscious clients.586 Behavioural patterns are influenced by sociological and cultural factors. Of significance are ‘network effects’, where ‘the utility that a user derives from the consumption of a good increases with the number of other agents consuming the good’.587 The popularity of a brand boosts network effects, as the more frequently consumers choose a brand to enjoy community benefits, the stronger the brand grows, becoming less vulnerable to competitive pressure.588 Finally, consumers may not engage in switching for different mundane reasons: longterm cultivated habits, the technical ease of following the beaten track, 589 or an inherent reluctance to risk money on trying alternatives. 4.4.3.2. Some EU competition cases on brands The interest of the doctrine in challenging the common view of trade marks as pro-competitive tools finds support in those EU competition cases that have captured the importance, and sometimes the negative impacts, of branding. One example which challenges the rule that sole procurement and the existence of an IPR (here a trade mark) does not give market power and is not anticompetitive per se, shows that a trade mark or a trade mark licence, subject to a transfer of ownership or right to use, may qualify for control against concentration by acquisition of control, under EU Merger Regulation No. 585 David Eagleman, The Brain (Canongate 2016) 121–123; McKenna (n 37) 2081 referring Samuel McClure ‘Neural Correlates of Behavioural Preferences for Culturally Familiar Drinks’ (2004) 44(2) Neuron, 379–387 at https://doi.org/10.1016/j.neuron.2004.09.019, discussing branded drugs (at 2082–2083) and bleach products (at 2084). 586 Laurie Bagwell , Douglas Bernheim, ‘Veblen Effects in a Theory of Conspicuous Consumption’ (1996) 86 (3) The American Economic Review 349. 587 Mark Lemley, David McGowan, ‘Legal Implications of Network Economic Effects’ (1998) 86 Calif. L. Rev. 479, 483. 588 Daniel Crane, ‘Brands and Market Power: A Bird’s-Eye View’ in Desai, Lianos, Waller (eds.) (n 361) 128, 132–133. 589 Benjamin Edelman ‘ Does Google Leverage Market Power Through Tying and Buying’ (2015) 11(2) JCL&E 365, discussing the difficulty of a user in switching from automatic, habitual activity to deliberate activity (e.g. choosing services other than Google’s), by referring (at 372) to the study of Adam Candeub, ‘Behavioral Economics, Internet Search, and Antitrust’ (2014) 9 I/S: A Journal of Law and Policy for the Information Society 407, https://ssrn.com/abstract=2414179 136 Functionality within the framework of law and economics 139/2004.590 This demonstrates that trade marks/brands do have economic value and qualify as ‘assets’. There were cases in which the transfer of a trade mark or an exclusive trade mark licence of significant importance, amounted to ‘concentration’ because the brand names and reputation conferred the undertaking with a ‘market presence’ of the required ‘market turnover’.591 More significant for this book is when branding is factored into the algorithm of assessing market dominance and anticompetitive conducts. EU Merger guidelines indicate consumer loyalty to a brand and the importance of promotion and advertising as forms of barriers to entry which restrict the ability of rival firms to compete.592 Similarly, EU guidelines on vertical restraints consider distribution agreements of branded goods or services as more harmful than restraints of non-branded goods, because of branding’s capability to induce a lower responsiveness to price changes and reduce products’ substitutability.593 This stimulates a price increase for branded goods which is not necessarily correlated with an increase in quality or changes in other objective product features. The practice of selective distribution594 has also raised anticompetitive concerns. Contractual restrictions linked to preferential treatment of luxury goods and brands were interpreted by the CJEU through subjective criteria of assessment, such as whether they contributed to the reputation of goods, sustained ‘the aura of luxury’, 595 or preserved the ‘prestigious image’ of goods, which in total cannot account for clearly measurable societal benefits.596 There is a noticeable tendency to exploit the exclusive status of 590 Art. 3 Reg. defines concentration as a change of control causing a lasting change in the market’s structure which may emerge from the acquisition of control of the whole/parts of an undertaking(s) allowing the exercise of decisive influence, and this may result via purchase of assets or by contracts (e.g. licence). 591 Damiano Canapa, Trademarks and Brands in Merger Control (Wolters Kluwer 2016) 64– 68 discussing EC Case No. Comp/M.5859, Whirlpool/Privilege Rights of 07.07.2010, https://ec.europa.eu/competition/mergers/cases/decisions/m5859_473_2.pdf 592 Guidelines on the assessment of horizontal mergers …, OJ C 31, 5.2.2004, pp. 5–18, para 36. 593 Guidelines on Vertical Restraints, OJ C 130, 19.5.2010, pp. 1–46. 594 A selective distribution system r epresents a vertical restraint, because of the limited number of authorized dealers and resale options, chosen upon specific criteria, justified by the nature of the product and by the capability to perform dedicated services (e.g. special conditions for display/sale, trained staff, individual advice). These restrictions are justified by improving competition by other factors than price, cf. Frenz (n 347) 605–609. 595 C-59/08 Copad v. Dior, EU:C:2009:260. Critically, Martin Senftleben, ‘Trademark Transactions in EU Law – Refining the Approach to Selective Distribution Networks and National Unfair Competition Law’ in Jacques de Werra, Irene Calboli (eds.) Law and Practice of Trademark Transactions (Elgar 2015) https://ssrn.com/abstract=2586765 596 In C-230/16 Coty DE, EU:C:2017:941, the CJEU ruled that a selective distribution system designed to preserve the luxury image of the goods, is compatible with Art. 101(1) TFUE, whilst the prohibition on retailers using online third-party sales platforms did not constitute hardcore restrictions ‘of customers’ or ‘of passive sales to end users’, under Art. 4(b)-(c) of Regulation No. 330/2010. Such prohibitions were deemed appropriate (if uniformly applied and proportionate) and justified for the quality, presentation, and differentiated sale channels, deemed essential to preserve the brand’s ‘luxury image’. This diverged from CJEU Functionality within the framework of law and economics 137 brands to control different types of resale activities, 597 although it is debatable whether consumers would prefer a reduction of prices for goods sold in normal selling conditions. To adapt to technological developments, and especially the increase of e-commerce, there are new versions of the Vertical Block Exemption Regulation and Guidelines on Vertical Restraints, to enter into force in late 2022.598 4.4.3.3. Brands narrowly determining a ‘one product’ market As market definition usually assesses the interchangeability of products with regard to a product’s characteristics, prices, and intended use, branding can constitute an additional preference of consumers, diminishing product substitutability. This may result in situations of a one-product market (market segmentation), defined by a single brand. Competition practice has dealt with cases when branding was essential to determining a separate market for locked-in consumers, creating barriers to entry and supporting a finding of market power. There are industries in which branding represents a significant competition parameter – strong marketing, advertising, and promotion activities educate consumers to think of ‘brands’ instead of ‘companies’ or ‘product categories’. For instance, luxury cosmetics marketed under prestige brand name were limitedly substitutable with similar products, because the aura of exclusivity and high quality were reflected in the high price, and appropriate marketing bolstered the specific aesthetic or function quality of individual/line of products.599 Similar findings may occur for more ordinary types of products. In US jurisprudence, butter, flour, tissue, and bread constituted distinct branded market products, despite the presence of important private labels producers of these goods.600 EU practice found branding to be the major demand-driver for spirits, because brands were not earlier approach in C-439/09 Pierre Fabre, EU:C:2011:649, that ‘the need to maintain a prestigious image [was] not a legitimate aim for restricting competition’ so that a contractual clause pursuing such aim would fall under Art. 101(1) TFUE. CJEU ruled that prohibitions of Internet sales and marketing of cosmetics/personal care products constituted a restriction ‘by object’ cf. Art. 101(1) TFUE, as well as ‘hardcore’ restrictions of active/passive sales to end users, cf. Art. 4(c) Reg. 330/2010. 597 For instance Oberlandesgericht Düsseldorf of 06.03.2018, I-20 U 113/17 forbade REAL DE (as a subsequent reseller) to sell beauty brands Kanebo and Sensai instore and online – although the goods were authentic and without physical alteration – because the location and selling conditions were detrimental to the reputation and luxury image of the brands. 598 https://ec.europa.eu/competition-policy/public-consultations/2021-vber_en 599 Commission Case No. IV/33.242 – Yves Saint Laurent Parfums, OJ L 12, 18.1.1992, pp. 24–35. 600 W aller, Desai (n 471) 1464 citing United States v. Dairy Farmers of Am., 2001-1 Trade Cas. (CCH) 73,136 (E.D. Pa. 2000); United States v. Kimberly-Clark Corp. and Scott Paper Co., 1996-1 Trade Cas. (CCH) 71,405 (N.D. Tex. 1995); United States v. Interstate Bakeries Corp., 1996-1 Trade Cas. (CCH) 71,271 (N.D. Ill. 1995). 138 Functionality within the framework of law and economics easily transferable among spirits (‘there is no Johnnie Walker gin or Gordon’s whisky’) and each brand satisfied specific consumer demands (reflected by taste, price, and image), leading to separate markets for each branded spirit.601 Similarly, bottled at source mineral water was separated from soft drinks or bottled purified tap water on the French market, because the branding policy of the main suppliers created a special ‘image of natural, pure and healthy product associated with source waters’ which discouraged consumers from recognizing soft drinks as substitutes for mineral water in home daily use.602 The picture of branding affecting consumer choice and demand-side substitution requires the addition of supply-side substitution. Brands may function as barriers to entry if a producer launching an alternative product needs something more than technical capabilities to compete on the market. A significant example is represented in the cola segment of the drinks market, which was found to be distinct from other flavoured carbonated soft drinks.603 Despite the fact that competitors had the capacity to use existing filling lines and switch production from one type of soft drinks to another, this was not sufficient for entering the cola market, because branding strategies and intense marketing positioning would be needed in advance. Brands can also affect product substitutability from another angle. Longterm use of a brand may have the outcome of a price increase for a generic group of products. The consumer gets a false market picture, as they deem products interchangeable, which under lower price competition conditions would have not belonged to the same product market. This situation of a wrongly defined wide market is known in the doctrine as ‘the cellophane fallacy’. It refers to a U.S. case in which cellophane was found substitutable to other flexible wrapping materials, enabling DuPont to avoid a finding of market power, even though the company had already charged monopolistic prices.604 The issue of the cellophane fallacy supports the hypothesis that a single brand may define a product market.605 4.4.4. Product substitution – an analogy for a market-orientated functionality test Previous discussion in 4.4.1.–4.4.3. has argued that sufficient market competition requires that consumers enjoy free choice across a range of competitive alternatives. The extent of product substitutability and consumer switching capabilities is captured by the concept of market definition. In certain 601 Commission Case No. IV/M .938 – Guinness/Grand Metropolitan, OJ L 288, 27.10.1998, pp. 24–54. 602 Commission Case No. IV/M.190 – Nestlé/Perrier, OJ L 356, 05.12.1992, pp. 1–31. 603 Commission Case No. IV/M.794 – Coca-Cola/Amalgamated Beverages, OJ L 218, 9.8.1997, pp. 15–42. 604 United States v. E.I. du Pont de Nemours, 351 U.S. 377 (1956). 605 Canapa (n 591) 145. Functionality within the framework of law and economics 139 circumstances branding may influence market definition, either by narrowing it, or altering the competition conditions. These aspects may become relevant within the framework of functional trade marks. 4.4.4.1. Product definition for functionality purposes At its core, the functionality doctrine is concerned with not unduly restricting competition. From a positive standpoint, it is about enabling competitors to efficiently trade in substitutes (i.e. products that meet consumer preferences). This pro-competition objective permeates all major CJEU rulings on functionality, whether technical or aesthetic (Chapter 2). As argued elsewhere, this approach advocates for conducting assessments of functional trade marks on parameters sensitive to market realia, able to capture the extent of product substitutability.606 It may be posited that beneficial effects on pricing and production conditions would flow from a situation in which an asset belongs to the public domain and may be copied. Using a parallel with the US law (Chapter 3), the ‘right-to-copy’ approach, denying trade mark protection to product features that were previously protected by other IPRs (mainly patents) would be a handy, straightforward solution that bypasses the costs of evaluating the possible alternatives. However, such a ‘one size fits all’ assessment is detrimental to certain kinds of overlapped forms of protection, especially those pertaining to combinations of product features and those arising on aesthetic grounds (Chapter 8). It would also erroneously disregard dynamic market conditions, consumer needs, technological advancement, and other social parameters that play a part when deciding whether or not to confer trade mark protection to a functional sign. For these reasons, it is preferable to give due consideration to the alternative ‘need-to-copy’ approach, which focuses on circumstances of competitive necessity. Functionality ought to be centred on evaluating substitutes and their effectiveness and commercial feasibility. US jurisprudence has ruled on cases using the competitive necessity test, both in regard to utility and aesthetic functionality (see Chapters 3, 6.1.2., 6.4.2. and 8.4.3.1.). Prominent scholars have advocated for the adoption of a market-orientated assessment, drawn upon antitrust parallels.607 Similarly, in other areas of law, market substitution was considered a useful tool for assessing the similarity of goods from the consumer’s vantage point for infringement purposes, 608 or to 606 Brancusi ‘Alternative Products …’ (n 241) 185, 204. 607 For the most compr ehensive study, Dinwoodie (n 27) 684–746; similarly, Weinberg (n 311) 48–53; M. A. Cunningham, ‘Utilitarian Design Features and Antitrust Parallels: An Economic Approach to Understanding the Functionality Defense in Trademark Litigation’ (1996) 18 Hastings Comm. & Ent. L.J. 569, 584–588; Diana Elzey Pinover, ‘Aesthetic Functionality: The Need for a Foreclosure of Competition’ (1993) 83 Trademark Rep 571, 600–604; Daniel McClure, ‘Trademarks and Competition: The Recent History’ (1996) 59 Law and Contemporary Problems 13. 608 Fromer, Lemley, ‘Audience …’ (n 316) 1255–1256 and 1291–1297. 140 Functionality within the framework of law and economics establish the relevant product category and availability of substitutable terms for testing genericness.609 The analogical implementation of a market-orientated functionality test on EUTM grounds – using some criteria developed by the US jurisprudence – will be examined in Chapters 6 to 8, which discuss the interpretation of EUTM functionality provisions step-by-step. At this stage, it is essential to note that an inquiry over product alternatives requires product demarcation. There is an inverse relation between the breadth of a product category and the extent of the possible substitutability. The wider the product category defined by specific product features, the easier to find substitutes acceptable to clients, to mitigate the risks of conferring trade mark exclusivity on behalf on one entity. Conversely, a narrow product category reduces the chances of finding substitutes, which would speak against trademarking a functional sign, as competitors would need to copy those features in order to effectively compete. Product delineation may be modelled upon the antitrust market definition, but it is not an identical exercise. Prominent scholars support the notion that an analogy of market definition for IP purposes would mean evaluating ‘the range of rivalry’ between undertakings, and not a query over market power and capacity to impose higher prices.610 This results from the assumptions that IPRs rarely confer monopoly power, brands are not markets, and rare cases of single-brand markets require something more than a powerful brand, such as ‘market dominance in an underlying product’.611 However, even this approach acknowledges the difficulties that might appear if product features ‘spill over into functionality’, and ‘[a] “design” that commandeers the entire set of reasonable alternatives can end up dominating a market’.612 Functionality may hinder competition in various ways, depending on the industry, a company’s market position, correlation with other IPRs, strategy of growth, and branding policies. It should come as no surprise that the market environment built upon and around IPRs reinforces the benefits of exclusively using an asset – a functional trade mark may effectively obstruct certain product features on behalf of one entity. Exploring the impact of functional trade marks on competition requires a tool that adapts market definition to the purposes of analysing the switching mechanism and product substitutability. As already suggested, the transposition of market definition for IP purposes should focus on exploring the ‘quality’ of available competing products set within ‘a spectrum of competition’, where different factors determine their substitutability (such as price, quality, branding, other indices of product 609 Coverdale (n 379) 882–890; Folsom, Teply (n 379) 1347–1358. 610 Herbert Hovenkamp, ‘Markets in IP and Antitrust’ (2012) 100 Geo. L. J. 2133, 2134. This article engages with McKenna (n 37). 611 Hovenkamp (n 610) 2138 (quote); Hovenkamp, Janis, Lemley (n 32) 4–8 to 4–10; Beebe, Hemphill (n 316) 1388. 612 Hovenkamp (n 37) 2144. Functionality within the framework of law and economics 141 differentiation).613 The impediments on producers in terms of necessity and costs to design around certain product features should be supplemented with considerations about consumer demand showing a low degree of product interchangeability, especially if this is driven by brand-motivated choices and price insensitiveness. An additional inquiry should focus on whether the consumer preferences at issue deserve specific attention, with regard to the effectiveness of the business activity or the primacy of public policies over the IPR’s purposes. For instance, wider access to drugs at convenient prices is a priority embedded by international conventions which should impact the decision of conferring trade mark protection to a functional drug’s appearance. In such context, legal exclusivity on behalf of a private undertaking would undermine the higher, societal purpose of ensuring convenient access to drugs. Similarly, ensuring the compatibility of products ties into the need for standardisation, which urges careful scrutiny of functional features. Even more so, as connectivity is a key asset of the modern technological infrastructure. 4.4.4.2. Where can information about product substitution be found? This essential query represents the type of proofs which are needed to assess product substitutability for functionality purposes. Again, an analogy can be drawn with the evidence used for market definition in competition/antitrust cases. The following remarks build on evidence mentioned by the US compendium of antitrust guidelines, although it is important to consider them more as possible starting points/suggestions.614 To understand manufacturers and market conditions, the first and most direct source of information comes from the interested parties, because companies usually undertake industry studies to evaluate their status vis-à-vis competitors.615 This kind of analysis covers various topics: the spectrum of a company’s own products versus competing ones across different product categories, concentration of capital, business strategies concerning product innovation, brand extensions, advertisement, promotions, pricing decisions, models of consumers behaviours, and substitution patterns in response to the introduction of a new product (e.g. which product and how much volume would be lost, which competing products consumers would switch to). Bearing in mind the negative aspects of branding, evidence of market segmentation implying a ‘one branded product’ market can be indicative of limited substitution of the products at issue. Business correspondence and corporate decisions are also relevant for revealing branding strategies related to the launching of new products.616 Such 613 McKenna (n 37) 2102. 614 ABA Section of Antitr ust Law, Market Definition in Antitrust: Theory and Case Studies (Chicago 2012) 9, 14, 99–112. 615 Ibidem, 102. 616 Gore (n 560) 3. 244 Technical functionality Bibliography Bently, L., Sherman, B., Gangjee, D., Johnson, P., Intellectual Property Law (5th ed. 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