Substantive law is both the origin and the terminus of private international law analysis. This is the natural cycle, not the all-too-often vicious circle. All conflicts norms have been developed—and will be developed anew every day—based on substantive law norms. Constructing a private international law regime without such a substantive law foundation would be akin to setting a spire into the vacuous air.
Introduction
As seen in the preceding chapters, the fields of trademark and unfair competition conflicts law and choice of law suffer from a number of defects. Most of these deficiencies are due to misconceptions at the level of substantive law—specifically the interplay of substantive law and conflicts law, or choice of law.
One problem is the distortive positioning of substantive unfair competition law between the sectors of private law and economic, or regulatory, law. Theory and practice still primarily define unfair competition prevention as part of tort law and delicts protecting individual rights rather than as a sector of regulatory policies aimed at protecting market information infrastructure. This improper classification on the basis of an obsolete fundament necessarily also prevents a correct assessment of the relationship between policies of trademark protection and unfair competition prevention. Rather than explaining the two fields on the basis of their widely overlapping policies as part of a largely uniform and homogeneous sector of regulatory law, current doctrine differentiates between trademark “rights” protection and unfair competition “conduct” prevention. This misperceived trademark/unfair competition dichotomy accounts for a common sweeping explanation of trademark protection as a subdomain of intellectual property law in general rather than as a facet of economic regulation with a special focus on market information. Terminology is revealing: intellectual property—like propriété intellectuelle or geistiges EigentumFootnote 1—implies the existence of a comprehensive concept of unitary rights. This is where fallacy looms, particularly with respect to trademarks and trademark conflicts. While the law does protect many different products of human creativity, innovation, and labor, there is no uniform or comprehensive structure of immaterial rights. And since there is no uniformity of substantive law policies, no uniform choice-of-law doctrine exists. For trademark and unfair competition conflicts law and choice of law, this necessarily means that neither the traditional doctrine of international tort law nor the old-age formalism of intellectual property territoriality can provide for consistent rules of conflicts attachment.
Before I try to correct these issues related to conflicts resolution, however, I will take a closer look at substantive law doctrine in the fields of tort law, unfair competition and trademark law, the remainder of intellectual and industrial property law, and antitrust law. Although the debate has come a long way, the vast majority of arguments and explanations put forward have failed to adequately discuss the most distinctive feature: the fields’ core policy aimed at protecting the market information infrastructure. Correct information transmission and processing within the marketplace is the most essential condition for an unmanipulated consumer decision making as the quintessence of market mechanics. The theoretical underpinnings of economic competition and the consumer’s function as a referee in competition will thus be my starting point for the analysis (see infra p. 275 et seq.). As this will highlight, the concept of unmanipulated consumer decision making stands at the center of both trademark and unfair competition policies. Only in light of this tenet can a topography of substantive law policies succeed. In order to highlight the demarcations between different sectors of private law and economic regulatory law, I will start with a delineation of tort and unfair competition policies. In addition, I will take a closer look at the integral distinction between different “rights” in the field of intellectual property and will illustrate that antitrust law is a segment of economic regulatory law that must be distinguished from unfair competition and trademark law. On this basis, I will conclude by describing trademark and unfair competition law as a sector of widely overlapping policies aimed at the protection of market information infrastructure (see infra p. 295 et seq. and p. 348 et seq.).
Section 1 Foundations—The Market Mechanism
As we have seen so far, for both trademark and unfair competition law, the issue of marketplace determination is essential.Footnote 2 The question is inseparably connected with the notion of competition. My analysis will therefore start by exploring the economic and legal foundations of competition in a market economy.
I The Concept of “Economic Competition”
While, for instance, the nature and characteristics of “property” have been debated from the beginning of legal thinking, the notion of “competition” has become an object of legal analysis only relatively recently, in the late nineteenth century.Footnote 3 It is thus not too surprising that legal theories on competition are far from being fully developed. But it is not only the fact that ideas in the field still need more analysis and debate. The problem is more fundamental: economic concepts can seldom be comprehensively and convincingly explained in legal terms and with the traditional conceptions developed by lawyers. In most cases, their implementation needs a modification, if not alteration, of legal terminology and concepts. Looking for a solid reconceptualization therefore requires stepping outside the boundaries of traditional legal methodology. This is particularly important for an analysis of trademark and unfair competition law: at their core, both fields are concerned with decision making and transacting among consumers and other market participants. What matters are the microdynamics of market transacting—dynamics that are situated within an overall order of competition.
A The Legal Framework
Individual freedom is the centerpiece of a competitive order.Footnote 4 It thus also functions as the pacemaker of the market economy. Here, the law already comes into play: only if the legal backdrop of constitutional, public, and private law allows for economic activities to freely evolve will the market mechanism function unhinderedly.Footnote 5 Most basically, the degree of freedom and the corresponding characterization of the economy is an issue of constitutional law. An institutional order of competition results from the overall structure of civil rights protection and general regulatory legislation.Footnote 6 From such a macroperspective, we can identify different scenarios of the competitive order: market economies, social market economies, and socialist or communist state-directed economies.Footnote 7 In addition, a macroperspective may look at the structure of markets or, more concretely, the status of competition. It then provides a more specific snapshot of competitive relations. This is the primary domain of antitrust law. The allocation of power within a certain market may be characterized as a monopoly, oligopoly, polypoly, or any combination or variant thereof. With respect to trademark and unfair competition law, however, these macrostructures are only indirectly relevant. It is not the idea of competition as a constitutional or static order, but as a concrete description of market activity, that matters. The subject matter of protection, therefore, is a dynamic and individualized phenomenon—it is the evolution of competition within the macrostructures. Accordingly, any analysis of trademark and unfair competition policies requires a specific microperspective: it must focus on individual market participants and their transacting in the market.
B The Rediscovery of Chaos
There is consensus that competition is largely beneficial per se.Footnote 8 However, this is as far as the consensus goes. Despite innumerable attempts to define economic competition,Footnote 9 there is still no universally accepted definition. Neither economic nor legal theories have been able to comprehensively explain the functions of competition in a market economy or to address the complexity of the market mechanism.Footnote 10
“Perfect competition” was the paradigm of early twentieth-century theory.Footnote 11 A market with perfect competition is the antithesis of a monopoly market. It requires a maximum number of participants on both the supply and the demand side, a homogeneity and substitutability of products, a uniformity of prices, and a lack of entry barriers to the market.Footnote 12 But it is questionable to assume that each market will and should consist of a plentitude of market participants (suppliers and consumers) and that all participants will always act rationally. Indeed, this model is unrealistic for a number of reasonsFootnote 13 and, in the 1930s, began to lose its ground to new paradigms of competition policy. The most contrary and influential concept at the time was the model of “workable competition,” conceived by John Maurice Clark.Footnote 14 Workable competition, he explained, is not a state of perfect competition. Nonetheless, it can still provide the foundation for a satisfactory and beneficial functioning of the market mechanism. Products may be heterogeneous, prices may vary, and market entry barriers may exist. And still, this kind of competition, “with all its defects—and these are serious—is better than the ‘pure and perfect’ norm, because it makes for progress.”Footnote 15 Hence, workable competition, sometimes also called “monopolistic” or “effective” competition,Footnote 16 can contain elements of a monopoly market while still fostering economic progress.Footnote 17 The concept of workable competition, however, soon also came under attack for its rather static perspective. Clark had begun to stress the elements of progress and dynamics in his later works on the issue. Over time, it became questionable whether the status of competition in a specific marketplace was necessarily determinative for individual transacting and the overall development of competition. As suggested, for example, by Erich Hoppmann in the 1960s, the intensity of competition within a marketplace would not necessarily result from or be affected by the structures of market power or market shares: debates on static functions and on the quality of rivalry in competition are useless as long as the dynamics of competition are ignored.Footnote 18 Emphasizing these dynamics established an evolutionary concept of competition.
The gist of this concept has been captured most fittingly in Friedrich A. von Hayek’s model of the market mechanism as a process of discovery. Under this model, markets are evolutionary chaos:Footnote 19 it is impossible to pay sufficient attention to all available information. Yet the transmission of information is at the core of competition. Individual decisions will therefore rarely ever be perfect in the sense of economic rationality. Nonetheless, the results of an ideally functioning market mechanism will be approximated if individual activity is allowed to develop spontaneously and on the basis of a principally unhindered flow of information. This free and dynamic process was already present in Adam Smith’s understanding of the economy and his allegory of the invisible hand. Its conceptual parallel is the modern characterization of the market mechanism and competition as a self-regulating system.Footnote 20 For Smith, market participants’ freedom to transact was vital.Footnote 21 Hayek extended and modified this concept of freedom into a general model of order for many different contexts. Accordingly, competition is a process of constant and repeated discovery in which individual participants promote progress and innovation through trial, error, and correction of their conduct on the basis of prior experience.Footnote 22
C The Dynamics of Competition
The rediscovery of the chaotic nature of economic competition was the first crucial step toward modernization. The second step, particularly important for trademark and unfair competition law, was the description of competition as a process of two-tiered sequential transacting.
1 A Tradition of Competitor Protection
Early theoretical definitions of unfair competition referred only to the offer side of the market. Their focus, hence, was on the vulnerability of one competitor to the other.Footnote 23 This lopsidedness was also implemented in early court practice, which generally found competition to be an attempt to foster one’s own enterprise at the expense of other enterprises.Footnote 24 Scholarly commentary throughout the first part of the twentieth century adopted the same perspective.Footnote 25 The Bundesgerichtshof’s early adjudication in the second half of the century also began with a restricted focus that saw competition as an invasion of customer relations and of a competitor’s goodwill in order to divert business for the invader’s own benefit.Footnote 26 But this perspective has changed over time. In modern scholarly commentary, Wolfgang Fikentscher’s definition has remained an evergreen reference for the extended conception.Footnote 27 He described competition as the autonomous striving of competitors (whether supplying or demanding) to conclude transactions with third parties (customers) by advertising contractual terms and conditions in as beneficial a manner as possible. In addition, he stressed that competitors can and will affect one another through their market conduct.Footnote 28 This aspect is also key to this inquiry: over time, the perspective has changed from one focused on competitors alone to one that considers both sides of the market—in other words, one that gives regard to consumers and other market participants.
2 The Advent of (Consumer) Decision Making
Even though the perspective has been extended beyond mere intercompetitor relations, many definitions of competition still place little emphasis on the most determinative stage of the market mechanism: participants’ decision making and transacting. Only if the actual transaction remains unmanipulated can individual decision making fulfill its function as the quantum part of the market economy. Accordingly, any legal conception of regulating competition must give regard not only to pretransactional conduct but also to the implementation of parties’ decision making as the final stage of the competitive process.
As discussed earlier, European nineteenth-century doctrine of trademark protection largely excluded consumer interests from the field of relevant considerations.Footnote 29 And the picture was not much different with respect to unfair competition prevention. Part of the debate surrounding the enactment of the 1896 and 1909 Unfair Competition Acts in Germany was whether unfair competition prevention would look only at competitors’ concerns or whether it would also protect the concerns of consumers and the public. In the end, consumers’ interests were deemed of secondary importance at best.Footnote 30 Even in the decades that followed, consumers and their functions within the marketplace only slowly became integrated into the conceptual framework of unfair competition policies. For most of the twentieth century, consumer protection was merely an instrument for determining the inadmissibility of competitive conduct vis-à-vis the competitor. Individual competitor protection was achieved by means of preventing consumer confusion; it was not an aim as such.Footnote 31
Starting in the second half of the century, however, a genuine concern for consumer protection entered the stage in European unfair competition law.Footnote 32 The interest in free and fair competition sought to protect not only competitors but also—and above all—consumers. After all, the argument went, consumers were interested in optimal competition since it guarantees the best quality at the lowest prices.Footnote 33 At first, this interest led to a sweeping extension of consumer protection policies. More specifically, in 1975, the Council of the European Communities proclaimed the paradigm of an “informed consumer.”Footnote 34 And the Court of Justice implemented the idea through a “consumer information model” that was established in Cassis-de-Dijon and subsequent cases. Ever since, providing sufficient information to the consumer has become a means to facilitate the free movement of goods and services within the community market.Footnote 35 Protecting the consumer’s informed decision making has thus gradually moved center stage.
At this point, an important caveat regarding the terms “consumer” and “consumer decision making” is in order. Any market transaction requires consideration of at least two sides of the market. Either side may consist of natural persons acting outside their trade or profession (usually termed “consumers”) or professionals acting in an entrepreneurial or business function, including corporate entities. When looking at market transacting in general, however, the focus must be on the function, not the status, of the market participants involved. Yet for the sake of simplicity, I will use “consumer” and “consumer decision making” in order to illustrate that a market transaction concerns the “other side” of the market. This simplification does not, however, imply a limitation to transactions including natural persons.
3 The Complementary Spheres of Transactional Freedom
Against this backdrop, it is clear that two complementary spheres of participants’ transacting exist. The starting point for competition is the entrepreneur’s freedom to act and transact. Each competitor may autonomously decide on her activities. The freedom to conduct business is the most basic prerequisite for the formulation of a free market.Footnote 36 In addition, on the consumer side of the market, the freedom of transacting complements the entrepreneur’s freedom. This is the exact opposite of early twentieth-century theory explaining that “the public provides the ground upon which the competitors compete; the public is the instrument upon which the commercial actor plays.”Footnote 37 Today, entrepreneurs’ freedom and their activities provide the substrate for the consumer to effectuate her decision making. More drastically put, it is the consumer’s decision that will both complement and complete the most essential element of the market mechanism. This is the gist of explanations of the consumer as the “referee” in competition and of consumer sovereignty as most fundamental.Footnote 38
Seen in this light, it is clear that securing the consumer’s freedom to transact has two basic prerequisites. Most generally, the consumer must be free to make the ultimate decision whether or not to transact. Prior to the decision, however, she must have access to optimal information. This is a more specific aspect of her freedom of decision making. Only if the consumer has complete and correct information on the relevant market parameters—particularly regarding quality, price, and available alternatives—can she execute a rational transaction. In this regard, the modern understanding of the market mechanisms is no longer based on the model of exchanging goods or services alone; rather, it is founded on a concept of information transmission.Footnote 39 It is these major phases of consumer decision making—the transmission and processing of information, along with the subsequent transacting—that will guide my analysis.
II The “Triangular” Structure of the Market Mechanism
Looking at the two spheres of transactional freedom, it becomes obvious that different categories of regulatory policies can be at play when competition-related conduct is at issue. Figure 1 helps clarify this point. As mentioned above, my depiction of “consumers” does not imply that other market participants (e.g., commercial buyers or vendors) instead of consumers may not stand on the demand side of the market in a situation of competition between two or more market participants.
Figure 1 The “Triangular” Structure of the Market Mechanism
In the upper area of the figure—the horizontal level—a competitive relationship exists.Footnote 40 Freedom here requires that competitors be free from external restrictions resulting from state or private-party activities. A significant part of unfair competition doctrine concerns scenarios of restrictions of freedom among competitors.Footnote 41 This is the case, for instance, if a trade secret is stolen or if a competitor’s business assets are destroyed. Strictly speaking, however, these instances of competition are not part of the core of process-oriented policies. They are devoid of an immediate influence on the market mechanism. Of course, many scenarios of direct hindrance to a competitor may completely cut off the market mechanism by isolating the victim-competitor from the competitive process. Such a situation thus necessarily comprises a factual reduction of the victim-competitor’s sphere of activities. Yet there is no immediate effect on consumer decision making. This kind of anticompetitive effect is thus governed by the second category of unfair competition policies.
In the second category, limitation of competitor freedom ensues from conduct targeted primarily and directly toward the consumer. These limitations occur between the upper and the lower levels of the model, within the vertical relationship. There is no competition between competitors and consumers.Footnote 42 Nonetheless, their relationship is the pathway directly connected to the market mechanism. If a competitor addresses the consumer in order to execute a transaction, she will directly affect the consumer’s freedom to transact, but at the same time, she will indirectly restrict her competitors’ freedom to transact. This indirect relation among market participants on the upper level has also been laid out in the Unfair Commercial Practices (UCP) Directive.Footnote 43 While the directive’s policy foundation (“purpose”) in article 1 is centered on consumer protection,Footnote 44 its recitals explain that protecting consumer decision making also indirectly protects competitors’ legitimate interests in competition.Footnote 45 Hence, what must remain untouched by external influences is consumer decision making. The consumer-as-referee must remain free to transact or not to transact, for consumer self-determination and sovereignty (Konsumentensouveränität) is the precondition of market efficiency.Footnote 46
Before moving on, yet another clarification is necessary. As Figure 1 illustrates, the competitive process is actually not triangular but multiangular. Each market transaction directly involves at least one party at the upper level and one at the lower level.Footnote 47 Of course, unless there is a monopoly on both sides of the market, there will be more parties involved. Almost always, the number of market participants on either side is much bigger. Yet in essence, the structure remains triangular: the consumer represents the decision maker choosing between two alternatives in the market.
III The Stages of Consumer Decision Making and Transacting
A casual look at the dichotomy between horizontal and vertical relations, particularly the emphasis accorded to the consumer’s freedom of decision making, might imply that the distinction is merely an issue of consumer information—more specifically, the transmission of information. Such a perspective, however, would unduly restrict the analysis. Consumer transacting can be influenced and manipulated by more than misinformation. One example is the pressuring of a consumer. If a consumer is pressured, she may make a decision that she would not have made otherwise. Even though information may have been transmitted correctly, her transaction is the result of a restricted decision-making process. In such a case, the quality of pretransactional information and its transmission is not relevant. Therefore, in order to correctly assess the multiple possibilities of affecting the consumer’s decision making, consumer behavior must be divided into stages.Footnote 48 First, the consumer collects information. She then stores this information and processes it by comparing alternatives and eliminating unsuitable or less promising options. Ultimately, she implements the results of her information collecting and processing by concluding a transaction in the marketplace. The consumer’s ultimate decision whether and how to transact—the principal subject matter of protection in trademark and unfair competition law—can be influenced during any stage of this process.
A Information Transmission
It is commonly understood that information transmission within the marketplace must be complete and undistorted. Yet even more fundamentally, a market-internal infrastructure of information transmission as such must exist. This problem has been well explored. George J. Stigler has addressed it as a central aspect of his theory of information economics.Footnote 49 As he explains, the market, in order to function, requires that its participants search for information. Stigler uses market prices as an example, but the principle applies universally: a market participant who wants to ascertain the most favorable conditions for her transaction must search for available options. While conditions of the ultimate transaction may improve with increased search efforts, the consumer will have to subtract her searching costs from the relative gains obtained from the transaction. This is the concept of search costs.Footnote 50 As Stigler goes on to explain, advertising is a method of providing information about market participants and market conditions; most optimistically, it is an “immensely powerful instrument for the elimination of ignorance—comparable in force to the use of the book instead of the oral discourse to communicate knowledge.”Footnote 51 In essence, the effect of advertising is “equivalent to that of the introduction of a very large amount of search by a large portion of the potential buyers.”Footnote 52 This theory has provided the foundation for today’s understanding of market communication and the importance of information economization. A functioning system of information transmission—in other words, an infrastructure of market information—is essential for the marketplace to exist.
On a second level, the information transmitted through this infrastructure must be correct and truthful. This has been explained by George A. Akerlof, who illustrates the concept using the example of a used-car market, which features an asymmetry of information (a “market for lemons”). Usually, sellers have better and more knowledge than customers regarding the true value of a used car. But chances are high that sellers will not share this additional information with customers. This leads to bad deals for the buyers: because they cannot distinguish between cars on the basis of quality, they may therefore pay the same price for a good car as for a bad one (the latter being the proverbial “lemon”). Over time, then, if complete and correct information remains unavailable to consumers, the quality of products within a market will deteriorate. After all, sellers have no incentive to provide quality products if suboptimal quality guarantees the same return. Since buyers will increasingly avoid transacting in this market, it will ultimately vanish.Footnote 53 The ensuing costs of dishonesty have two components: the costs paid by cheated purchasers and the losses on behalf of the public resulting from the nonexistence of a market for quality products.Footnote 54 Protecting truthfulness in market information, therefore, has both individual and public aspects.
In order to overcome this informational asymmetry, the consumer has two resources. First, she can rely on existing information. This is the body of information developed by her own or other consumers’ experiences. Existing information may also consist of information provided by intermediaries or authorities (e.g., product-testing information). In legal terms, this sort of information is transmitted through the product’s or a competitor’s market goodwill.Footnote 55 Second, the consumer can look to advertising as a source of newly created information.Footnote 56 This is information transmission beyond the goodwill mechanism; it need not rely on existing information within the marketplace. Together, both categories make up the “market language.”Footnote 57 In general terms, therefore, market language identifies sellers, buyers, prices, and product quality—parameters and conditions that are important for economically rational decision making. Market language—its existence and truthfulness—is the essence of every marketplace. It actually is the marketplace.Footnote 58
B Information Processing
In addition to collecting market information, the consumer must also properly process the information in order to transact rationally. The outcome of decision making will depend both on the quality of information that has been transmitted and gathered, and on the decision-making process as such. In addition to manipulating market information, competitors can thus also try to exert an impact that is not based on incorrect information content but that affects the subsequent processing of information. This category of manipulation, although still within the reign of unfair competition prevention, is not necessarily governed by trademark law.Footnote 59
Indeed, modern legal instruments for unfair competition also distinguish between an outright distortion of market information and other kinds of impact on consumer decision making. The UCP Directive,Footnote 60 for instance, separates “misleading” (arts. 6 and 7) and “aggressive” commercial practices (arts. 8 and 9). A commercial practice is regarded as misleading “if it contains false information and is therefore untruthful or in any way, including overall presentation, deceives or is likely to deceive the average consumer, even if the information is factually correct.”Footnote 61 Quite differently, an aggressive commercial practice is not necessarily founded on information transmission. On the contrary, the focus is oriented toward the consumer’s last stage of transacting. Article 8 explains a practice to be considered aggressive if,
in its factual context, taking account of all its features and circumstances, by harassment, coercion, including the use of physical force, or undue influence, it significantly impairs or is likely to significantly impair the average consumer’s freedom of choice or conduct.
Examples of such manipulation can be found in annex I of the directive. According to number 30 of the so-called black list, for instance, a practice is considered unfair when a competitor “[e]xplicitly inform[s] a consumer that if he does not buy the product or service, the trader’s job or livelihood will be in jeopardy.” Information on the product or service may be correct; ultimately, however, this practice might affect the transaction by appealing to the addressee’s feelings of sympathy. Since this kind of “ancillary information” is apt to pressure the consumer, it is considered an aggressive practice.Footnote 62 Of course, the directive’s black-listed scenarios do not necessarily require an actual distortion of consumer behavior. Yet, as the example illustrates, some of these scenarios are apt to create a risk of undue impact beyond the actual content of essential product information. This is manipulation of the consumer’s decision making on an intermediary level—between information transmission and final transacting. With regard to the importance of freedom of competition, both the protection of decision-making economization on the basis of correct information and the prevention of subsequent improper information processing have the same function.
C Implementation of the Consumer’s Decision
Finally, there is a last stage of the decision-making process that is often neglected: the consumer’s free implementation of her decision in the marketplace. Her decision-making process may be flawless and unmanipulated, and the outcome may be economically rational, but the market mechanism will still be distorted if her decision’s final implementation is affected. Quite often, manipulation of this last stage cannot and need not be distinguished from improper impact on the processing. Take, for example, the case where consumers are physically prevented from entering a business’s premises in order to divert them to another’s business.Footnote 63 According to the definition in article 8 of the UCP Directive, this is an aggressive practice. There need not be an effect on information transmission or processing. Instead, the simple execution of the consumer’s decision (i.e., its implementation in the market) is being frustrated. Like an improper impact on earlier stages, invasion of the final stage of the transaction process invalidates the entire mechanism.
Notwithstanding general acknowledgment of the consumer’s referee function, the protection of her decision making is regularly limited to the mere preservation of information correctness and processing. The question of where a transaction is or would have been implemented is then simply overlooked. As a result, particularly in choice of law, the place of impact on information correctness or processing—and not the place where the consumer will actually effectuate or would have effectuated her decision through a market transaction—is deemed to matter as a point of attachment. One example is illustrative here: as the leading practitioners’ legal commentary on the German Unfair Competition Act (UWG) explains, submitting an offer to the consumer (e.g., by e-mail) will be deemed to “affect” or “impact” the market at the place where the message is being received. Hence, ultimately, it is irrelevant how the consumer reacts after she has received the letter.Footnote 64 In particular, it will not matter in which jurisdiction the consumer will subsequently transact (or forbear to transact). This position is in line with the Bundesgerichtshof’s decision in Kauf im Ausland and subsequent adjudication on cross-border unfair competition conduct.Footnote 65 Nevertheless, it does not duly accommodate the function of the consumer’s transaction as the core element of a market economy. A slight modification of the facts suffices to take this simplified attachment rule ad absurdum: if the e-mail has been received during the consumer’s holiday trip, where she is far away from her country of residence (and usual place of transacting), attaching choice of law to the temporary place of receipt would be incorrect. I will address this particular scenario in more detail in the last chapter.Footnote 66 Worth pointing out for now is that if consumer decision making is the most important factor for the functioning of the market mechanism, and if it is the consumer’s referee function that can be described as the core element of free competition, then the ultimate outcome of decision making must not be disregarded—especially not in choice-of-law analysis.
In essence, therefore, the complete scope of the consumer’s decision-making process must be protected against improper invasion. The protected domain starts with the transmission of information within the marketplace. It continues with the consumer’s processing of information and then proceeds to cover the final result of the information processing—the consumer’s transaction. Only if the consumer can carry out all of these stages without being externally manipulated can the outcome be considered to be economically rational.
D Caveat: Limitations of Consumer Decision Making
We have now seen that consumer sovereignty guarantees competitive efficiency and that it must be the subject matter of protection for regulation in terms of trademark protection and unfair competition prevention. But this is a mere theoretical ideal. In reality, human decision making is never perfect or completely rational. Indeed, many instances of consumer decision making will result in economically imperfect transactions. Not all consumers are homines oeconomici. Such imperfections were actually addressed quite early in economic theory. In the 1950s, Herbert A. Simon described a fundamental flaw in the concept of consumer autonomy—the phenomenon of bounded rationality.Footnote 67 His model illustrates that there will rarely ever exist a situation that allows for a perfectly rational ex ante processing of all relevant factors. While the individual may believe that she is making a rational decision, she seldom is. Furthermore, as critical theory went on to explain, maximum information will not bring out optimum competition, either. In fact, giving market participants a maximum of information may result in information overload, for consumers are limited in their cognitive capacities to collect and process market information.Footnote 68 In recent decades, many more doubts concerning consumer skills and capacities have been raised.Footnote 69
An extended debate on behavioral economics is not necessary here, though one question is inevitable: If consumer decision making by its nature tends to result in irrational transacting, can it still serve as a factor for analysis in trademark and unfair competition law or choice of law? This is the point at which the characteristics of competition dynamics come into play again. As we have seen, the market economy is built on the sum of individual transactions.Footnote 70 By definition, these transactions are imperfect. Looking at competition from a perspective that embraces it as a dynamic and evolutionary process even requires a “natural” consumer, with all her decision-making deficits. Intrinsic limitations on rationality must then not only be accepted as a preexisting given—they may in fact be essential to the model.Footnote 71 Indeed, the steadfastly rational and profit-maximizing individual would be the death of discovery and innovation, and any regulation trying to substitute the consumer’s decision with an artificially determined proxy that yields correct, just, and optimal results would disable the evolutionary mechanism of competition. Hence, there is no alternative to consumer decision making.
IV Summary
Economic competition requires freedom of transacting. The dynamic structure of competition reflects two different aspects of this freedom, each concerning a separate relationship between market participants. First, freedom of transacting must exist between competitors (horizontal relationship). In addition, it must be preserved between competitors and the other side of the market, usually the consumers (vertical relationship). With respect to the mechanics of competition, the latter relationship is central, since it is the consumer’s role as the “referee” in competition that is the most important factor for the functioning of the market mechanism. From a historical perspective, it becomes clear that legal doctrine initially focused on the horizontal level and only lately moved on to consider the vertical relationship. Initially, unfair competition law was aimed at protecting competitors—consumers were considered the substrate upon which competitors’ battles were fought and decided. Under a modern understanding of competition, however, consumers’ interests are considered determinative. The understanding of economic competition as a dynamic process of market communication and transacting provides the microstructure for our analysis. It is consumer decision making and transacting that serves as the core subject matter of protection under modern doctrines of trademark and unfair competition law. This subject matter necessarily also determines the reconceptualization of choice of law.
Section 2 Implementation—Substantive Law
The previous chapters have unveiled a number of defects in current doctrine. One major flaw is the alleged dichotomy between, on the one hand, subjective “rights” and “property” protected under tort and trademark law and, on the other, the system of objective rules of market “conduct” implemented under the regime of unfair competition law. Similarly problematic is unfair competition law’s alleged socialization toward an often unqualified protection of “consumer interests.” All of these defects require a reconceptualization—this also plays out with regard to choice of law. The key to the promulgation of a consistent conflicts doctrine lies in a precise definition of legal purposes in trademark and unfair competition law, as well as in a clear separation of the area from other fields of market regulation. Substantive law policies will thus provide my starting point. The following discussion will address the relevant questions of overlap and demarcation for the fields of torts and delicts, intellectual property, and antitrust law.
I Tort and Unfair Competition Law
As we have seen, legal doctrine has never managed to liberate unfair competition law from its tort heritage, whether in substantive law or choice of law. US law still treats intellectual property and unfair competition as a subspecies of business torts and tort law in general.Footnote 72 In Europe, the Rome II Regulation’s treatment of both tort and unfair competition choice of law in a single instrument is a prominent example of their common heritage.Footnote 73 Nonetheless, notably in European law, it is also widely contended that the two areas pursue different purposes. Roughly speaking, tort law is deemed to protect absolute private rights. Unfair competition law is characterized as establishing a system of objective rules of market conduct.Footnote 74 While this characterization may often help support practically adequate results, it is not a doctrinally consistent explanation of the interrelation. Run-of-the-mill torts mostly concern noncompetitive activity, and they usually do not overlap with unfair competition law. With regard to commercial conduct, however, the picture is far more complex: legal policies of unfair competition prevention, especially at the horizontal level of intercompetitor relations, may be an issue of protecting “individual rights.” Similarly, it is debated whether a “subjective right” can be found to exist in a competitor’s position in the marketplace. In virtually all scenarios, therefore, both a tort concern for property or subjective right protection and an issue of fairness in competition may be at stake. This conundrum of overlapping policies reflects a general debate over how individual rights and freedom should be delimited in free markets. A close look at developments in US and European tort and unfair competition law highlights the most relevant aspects.
A The Mirage of Practical and Formal Differences
The debate on the interplay between tort and unfair competition policies and the question of how to differentiate the two sectors is mostly founded on practical and formalist arguments. Two aspects are regularly highlighted in order to explain the difference, though both are unconvincing. First, with regard to remedies, conventional wisdom usually refers to the practical realities that seem to illustrate that tort law is focused on compensation, while unfair competition law provides primarily for injunctive relief.Footnote 75 Some scholars have concluded therefrom that the system of unfair competition prevention is prohibitive yet noncompensatory. As they contend, prevention—not restitution—governs.Footnote 76 The divergent frequency of occurrence of different remedies in practice, however, hardly allows for a conclusion to be drawn. On the contrary, a look at the substantive law foundations of the field suggests a different outcome. First, history reveals that injunctive relief has only recently achieved its current importance in practice. Unfair competition prevention in early German doctrine, for instance, favored penal sanctions and compensatory relief at the expense of the victim’s injunctive relief.Footnote 77 Furthermore, modern tort and unfair competition law largely provide for both injunctive relief and damages.Footnote 78 The difference in frequency is due to a mere practical necessity: in unfair competition disputes, an accounting of the plaintiff’s actual damages is often difficult, sometimes even impossible. Injunctive relief, therefore, prevails as a practical matter in most proceedings.Footnote 79 In principle, however, unfair competitive conduct (if intentional or negligent) may of course also result in a finding of compensation—in addition to the remedy of injunctive relief.Footnote 80 Conversely, even though most tort suits center on the issue of compensation, injunctive relief is also available and (like in unfair competition law) does not require the defendant’s fault.Footnote 81 In some areas of tort law, injunctions may even be the dominant practical remedy.Footnote 82 It is therefore true, as the Restatement of Unfair Competition Law (Third) explains, that “the judicial preference for injunctive relief in unfair competition cases is not an exception to ordinary remedial principles, but rather an application of those principles in a context in which injunctive relief is ordinarily the most appropriate remedy.”Footnote 83
Moreover, a formalist differentiation based on the alleged “absoluteness” of rights that are protected under tort law is no more helpful than a look at practical remedies. Historically, of course, unfair competition has been qualified as a tort or delict. Yet the discussion increasingly centers around the fact that the two sectors differ with respect to the relevant subject matter of protection. Unfair competition law, it is contended, aims to regulate market behavior through objective rules of conduct.Footnote 84 Quite differently, the subject matter in torts comprises absolute rights.Footnote 85 But this also leads into the wrong direction. Rights and entitlements are always relative. Most illustratively, the relativity of rights can be shown to govern rules on tangible property. Owners of real property never enjoy unlimited power.Footnote 86 The statutory rule in the German Civil Code illustrates this point with clarity. As the code’s provision on tangible property provides, “The owner of a thing may, as far as the law and the rights of others are not violated, deal with his property as he wishes and exclude others from interference.”Footnote 87 Of course, this express relativity stands in stark contrast to William Blackstone’s oft-enunciated definition of property as the “sole and despotic dominion which one man claims and exercises over the external things of the world, in total exclusion of the right of any other individual in the universe.”Footnote 88 Yet this no longer represents a consensus on the nature of property rights and other entitlements. The German lawmakers’ determination of limitations on tangible property, like all modern conceptions in the field, has been designed without the slightest remainder of such absolutist dominion.Footnote 89 And a fortiori, the relativity of rights also governs with regard to intangible subject matter.Footnote 90 The scope of personality rights and protection of personal reputation provides for an illustrative example. The protection of an individual’s reputation against improper invasion by a competitor may be granted concurrently under a general theory of tort law and under the system of unfair competition law.Footnote 91 But the right must always be balanced against other concerns—particularly freedom of speech.Footnote 92 In essence, therefore, the law creates an individual right only to the extent that this right fulfills a function and serves a common end or collective good. Truly absolute rights in intangibles do not exist. Accordingly, neither the actual state of affairs in courtroom practice nor the traditional formalist perspective on absolute personal entitlements helps provide a clear demarcation between the fields of torts and delicts on the one hand and unfair competition law on the other.
B The Relativity of Protection Levels
The determinative aspect must be sought elsewhere. All personal entitlements may be relative under modern private law doctrine. However, the metric for assessing the relativity of these rights varies. As we will now see, the relevant standard for a demarcation is based on the different regulatory policies that are designed to establish and maintain the state of free competition.
1 Early Starting Point: Claims “against the World at Large”
An early approach to the issue of rights relativity stems from Roscoe Pound. The definition of “property” in his 1922 Introduction to the Philosophy of Law illustrates the different options, notably with respect to the intensity of protection for different categories of individual entitlements. His explanation may not provide for a very practical guideline, but it lucidly illustrates the fundamental question: To what extent is a private entitlement to be considered “relative,” and at what point does it become a “right against the world at large”?
In addition to rights in corporeal things, the freedom of industry and contract, and the guarantee of enforcement for promised performances, Pound explained a fourth category of claims that constitute “property”:
[T]here is a claim to be secured against interference by outsiders with economically advantageous relations with others, whether contractual, social, business, official or domestic. For not only do various relations which have an economic value involve claims against the other party to the relation, which one may demand that the law secure, but they also involve claims against the world at large that these advantageous relations, which form an important part of the substance of the individual, shall not be interfered with. Legal recognition of these individual claims, legal delimitation and securing of individual interests of substance is at the foundation of our economic organization of society.Footnote 93
This general understanding of claims “against the world at large” highlights what would soon become the central issue in twentieth-century unfair competition doctrine. My overview on the historical debate traced the contemporary struggle with trademark-as-property and goodwill protection, as well as other formalist constructs.Footnote 94 Pound’s explanation did clarify that the determination of distinct categories and boundaries of such claims must be considered constitutive for socioeconomic transacting. After all, without protection, there was no incentive to explore, create, or maintain elements of the respective subject matter. Yet what he left unanswered was the question how to delimit the public domain from such claims “against the world at large.” In terms of trademark and unfair competition doctrine, this question concretely asked whether individual competitors can claim an absolute and exclusive “right in competition,” notably in the preservation of their customer base, their market share, or another kind of achievement in competition. A closer look at the development of legal thought in the United States and Germany will highlight the most crucial aspects of a journey from the initially sweeping if-value-then-right approach to the modern segmentation of market-regulation policies.
2 United States: From Property to Policy and Back Again
As we saw in chapters 1 and 2, throughout the nineteenth century, plaintiffs phrased their requests in terms of property, or subjective, rights. The propertization and protection of ever more interests accommodated a practical penchant to think in categories of absolute entitlements, especially in trademark and unfair competition disputes. This conceptual victory of individual property protection was an heir to Lockean theory: any position that could be related to someone’s labor, effort, or investment was found to constitute an absolute, subjective, and exclusive right.Footnote 95 As we have also seen, this concept came under pressure in US legal thought at the beginning of the twentieth century.Footnote 96 Two aspects of the development are relevant here. First, the concept of property as such was redesigned soon after the turn of the century. Second, this also led to a change of paradigms in trademark and unfair competition doctrine, at least at the theoretical level.
The modern reconceptualization of property was influenced greatly by Wesley Newcomb Hohfeld. In 1913 and 1917, he presented a new scheme of property rights analysis, which consisted of eight fundamental legal relations as constituent elements of “property.” This approach, he argued, was intended to establish “the lowest common denominators of the law.”Footnote 97 Hohfeld attempted to explain all existing relations and facets of “property” as consisting of a basic toolbox of “rights,” “privileges,” “powers,” and “immunities,” as well as their jural opposites and correlatives.Footnote 98 Hohfeldian theory has been extensively analyzed and discussed, and while the debate’s details go beyond the scope of this inquiry, two points are relevant. First, it appears that Hohfeld, even though a critic of legal formalism, ultimately perfected the formalist dephysicalization of property. This trend started much earlier, but Hohfeldian thought spurred the dissolution. Under his segmented system of differentiated property components, every individual entitlement or value could ultimately be classified as a property right. This malleability may have been convenient in terms of theory, but it had a fatal effect in practice: as reflected by case law at the time, the ubiquity and potential infinity of property rights resulted in the concept’s ultimate demise.Footnote 99 Property had become arbitrary, and a new concept had to be found.
The second aspect concerns the structural foundations. Hohfeld, in clarifying the difference between legal “liberties” and legal “rights,”Footnote 100 actually set the stage for a remodeling of individual rights theory. The then-governing formalist reasoning had established a system of wide-ranging property and private rights protection. Hohfeld illustrated that injury alone would not imply a remedy. As he explained, an individual’s liberty (or, in Hohfeld’s terms, “privilege”) to do something was not necessarily accompanied by a duty of others not to invade this sphere of freedom. Hence, liberty alone would not automatically signify a right.Footnote 101 By this means, he opened the debate for a new perspective on the metric used for delimiting individual rights from the public domain—one that was no longer a merely value-based rule of assumption. On this basis, realist critics suggested that value protection should be determined by reference to the policies of the community.Footnote 102 This open reorientation toward a new paradigm of policies was particularly influential for trademark and unfair competition theory.
One famous example—mentioned in chapter 2—is the realist critique in Oliver Wendell Holmes’s writings and authored opinions. In the 1917 Supreme Court decision E.I. Du Pont Nemours, for instance, he explained the protection of trademarks and trade secrets under the rubric of property as a legally created construct: “The word ‘property’ as applied to trademarks and trade secrets is an unanalyzed expression of certain secondary consequences of the primary fact that the law makes some rudimentary requirements of good faith.”Footnote 103 Good faith—as the expression of a general standard delimiting competitive conduct—was what determined whether something could be protected as a trademark, trade secret, or other intangible value. The following year, in his dissenting opinion in International News Service, Holmes further explained that “[p]roperty, a creation of law, does not arise from value, although exchangeable—a matter of fact.”Footnote 104 Hence, policy, not value, should determine whether a position could be found protectable subject matter in unfair competition law.Footnote 105
In 1935, no less famously than Holmes, Felix Cohen extended the attack on “property” in his seminal Columbia Law Review article.Footnote 106 I have already explained Cohen’s criticism from a historical perspective.Footnote 107 Important here is that his article pointed to something else—a structure to be found below the surface of the skirmishes between formalists and realists:
The prejudice that identifies the interests of the plaintiff in unfair competition cases with the interests of business and identifies the interests of business with the interests of society, will not be critically examined by courts and legal scholars until it is recognized and formulated. It will not be recognized or formulated so long as the hypostatization of “property rights” conceals the circularity of legal reasoning.Footnote 108
In his critique of the distortion in contemporary interest analysis, Cohen anticipated the modern debate on the area’s change from mere competitor protection to the protection of consumers and the public good. He did not elaborate further on the correlation of interests, though. Rather, the successor theory to legal realism built on this concept.
Cohen’s “interests of society” (in modern terms, market efficiency and welfare) ultimately came center stage when the law and economics movement established what has become the dominant approach to many fields of modern US law ever since.Footnote 109 The law and economics approach seemed equipped to overcome traditional foundations. Its proponents substituted the background regime of formal property in trademarks and other entitlements with an objective efficiency calculus. After all, welfare economics in legal theory, as Duncan Kennedy has explained, helped purge legal theory of such concepts as “freedom,” “justice,” and “naturalness.” In the end, efficiency would remain the eternal constant of legal purposes—a metric of absolute objectivity.Footnote 110 It is also true that modern US trademark law has come to be dominated by the ideas of the Chicago school of law and economics. The concept is simple and comprehensive: “trademark law, like tort law in general … can best be explained on the hypothesis that the law is trying to promote economic efficiency.”Footnote 111 As a result, today’s economists and lawyers view trademarks as essential aids for establishing and maintaining market efficiency.Footnote 112 As we have seen, the reduction of consumer search costs has become the most important trademark function. Even case law has integrated the concept.Footnote 113
But a broader look reveals a different picture—one where the fortress of trademark-as-property protection still solidly stands. As we saw in my exploration of the post-Chicago development of US trademark law, despite the economization of policies, courts often pay only lip service to the change.Footnote 114 Indeed, ideas of property and goodwill protection and of the prevention of misappropriation and free riding, as well as a growing concern for trademark functions beyond the traditional concept of confusion prevention, have taken over. In the end, neither the realist attack nor the law and economics movement has initiated a groundbreaking change. In fact, trademark and unfair competition law has even become increasingly repropertized in recent decades.
3 Germany: The Eternal Dichotomy of Rights and Competition
Like in the United States, nineteenth-century formalist reasoning had developed an extended concept of individual rights protection in Germany and Europe.Footnote 115 In its attempt to construe the legal order as a consistent system of rights and duties, contemporary civil law thought introduced the concept of so-called subjective rights as subject matter or protection in tort and property law. The concept may seem strange and unfamiliar to common law jurists. Yet it mirrors the debate on common law property formalism. Theoretically, the subjective right was understood as an expression of personal autonomy and free will.Footnote 116 In practice, however, the issue was always whether a position could be seen as truly private and therefore not part of the public domain.Footnote 117 To use Pound’s terminology, the question was whether there is a right “against the world at large.”Footnote 118
With regard to trademark rights, the situation should be clear—though it has been anything but. Following the concept of trademark-as-property protection, dominant case law and scholarly commentary have usually found trademarks to be subjective rights.Footnote 119 Remarkably, however, critical voices have forcefully rejected this view by arguing that trademarks are indications of product source only. As they contend, trademarks are not full-fledged assignments of intellectual property rights; they merely prevent unfair competition by prohibiting consumer confusion. Accordingly, the trademark owner is not entitled to (and thus has no subjective right in) the exclusive and comprehensive use of the symbol.Footnote 120 The situation has been even more contested with respect to the question whether subjective rights exist under a system of unfair competition prevention. While courts are still undecided on the issue, scholarly commentary largely rejects a subjective right of victim-competitors that could be found sufficiently absolute to warrant protection. Agreement exists only under a very narrow perspective: in cases of unfair product imitation and theft of trade secrets, a subjective right may be found.Footnote 121 Most other cases, however, are disputed. Some scholars, for instance, suggest finding a subjective right whenever the specific purpose of the norm at issue is to protect the individual competitor only. They accordingly deny such rights if the norm is also aimed at protecting consumers or the public. Under a more tort-based foundation, again, subjective rights are denied unless a specific benefit has accrued on the side of the invader as a result of the violation.Footnote 122
This doctrinal insecurity reflects historical developments. The subject matter of protection in unfair competition law was never satisfactorily defined—a void that, until today, accounts for many misperceptions. As we have seen, the idea of subjective rights protection under unfair competition law dates back to the paradigm of personality rights protection.Footnote 123 Participation in competition was deemed an emanation of the competitor’s personality, which was characterized as a subjective right. And a subjective right was also seen in other elements of the business. In this regard, a look at Swiss law is particularly enlightening. As in Germany, practice had begun to identify competitor personality as the subject matter of protection.Footnote 124 Later on, however, protecting the competitor’s business as such became determinative.Footnote 125 Article 48 of the 1911 Swiss Law of Obligations is characteristic: relations between a competitor and her customers were deemed a property-like entitlement. Accordingly, the improper invasion of customer relations (Geschäftskundschaft) was a tort.Footnote 126
Ultimately, the debate in both Germany and Switzerland lost its focus on what the object of protection should be. Instead, like in the United States, scholarly attention was drawn toward the question of what policy the law should pursue. As we saw earlier,Footnote 127 a trend toward socialization began in the first half of the twentieth century, and the concept of unfair competition law as an area of objective market regulation took over.Footnote 128 But there have always been attempts to reintroduce the concept of rights that are valid “against the world at large.” Among the most prominent examples are Max Kummer’s concept of the competitor’s right to maintain her position in the marketplace (Wettbewerbsstellung)Footnote 129 and Wolfgang Fikentscher’s suggestion that the individual’s freedom to transact should be protected as such.Footnote 130 Both concepts are paradigmatic for the perseverance of subjective-right concepts in unfair competition law.Footnote 131 Kummer’s concept proposing protection for the competitor’s position in the marketplace was an attempt to create a right in intangibles directly under the regime of unfair competition law. As he explained, this right should be founded on an objective norm of market regulation, but it did not provide its own metric for delimiting the scope of protection.Footnote 132 Kummer saw subjective rights and regulatory policy as two sides of the same coin. This, however, was where his concept drifted into circular reasoning: if the competitor’s right is dependent on a case-by-case assessment—that is, if her subjective right exists only as far as rules of fair dealing and honesty prescribeFootnote 133—then its substance is not independent and self-contained. Rather, rights are a reflex of public policy—not genuinely established or preexisting.
Wolfgang Fikentscher, by contrast, drew on an external position—the market participant’s constitutional right to demand free and fair conduct in competition.Footnote 134 The position he conceived of was deemed largely independent of unfair competition policy. Taking individual freedom as a subjective right of the competitor (and the consumer) thus avoided the conceptual conundrum. But it could not escape the practical problem: individual rights do not come with a built-in metric for determining what is fair competition and what is not.Footnote 135 If we want to avoid falling back on the traditional view that standards of honesty and fairness should provide the demarcation,Footnote 136 we must address the fields’ multitude of underlying substantive law policies.
C The Heterogeneity of Policies: Vertical and Horizontal Competition
The debate on the protectable subject matter in unfair competition law reflects a much deeper and older problem. Legal philosophy and private law theory still regularly inquire whether property is decreed by the sovereign or whether it is a prestate institution and thus a natural right.Footnote 137 The question is, does it come from the top down or from the bottom up? Does it ensue from lawmakers’ institutionalization, or is it a preexisting Something?Footnote 138 These and similar questions have been long debated and still await a resolution. Full clarification cannot be provided in an analysis as specific as this one. My focus here—which will, however, provide clarity for the field of trademark and unfair competition regulation—is on the characteristic stratification of policies that helps explain why subjective rights and the process of competition are detached, and how they nevertheless remain interrelated.
1 Two Types of Unfair Competition Cases and Regulatory Policies
Any invasion of a competitor’s marketplace position represents a redistribution of value. Courts have always, and often rather sweepingly, referred to this in terms of free riding, unjust enrichment, or misappropriation. What they have thereby neglected is the fact that the scenarios of such “misappropriation” differ. As we have seen, among the plethora of policies in tort and unfair competition law, different categories exist. Some aim to protect individual rights without giving immediate regard to the market mechanism. Others aim to regulate market dynamics with regard to consumer decision making. Revisiting two landmark cases—International News Service and Apollinarisbrunnen—analyzed in chapters 1 and 2 illustrates the key distinction within the institutional framework.
The majority in International News Service found misappropriation in the defendant’s use of the plaintiff’s “hot” news. The defendant directly usurped what the plaintiff had acquired through the investment of its own resources.Footnote 139 No consumer confusion was involved. Accordingly, the question the court found most relevant was “not so much the rights of either party as against the public but their rights as between themselves.”Footnote 140 The scenario, therefore, can be explained as being situated at the horizontal level.Footnote 141 Seen in this light, the issue was actually whether a right “against the world at large” existed.Footnote 142 Quite differently, Apollinarisbrunnen featured a scenario at the vertical level.Footnote 143 The issue at hand was not limited to an analysis of subjective rights “as between” competitors. In fact, Apollinarisbrunnen was not a two-party scenario at all. Unlike International News Service, the Apollinarisbrunnen defendant had invaded the plaintiff’s domain by means of deceiving the customer. Hence, the dispute concerned the multiangular structure of the market mechanism.Footnote 144
Looking at this difference in light of the concept of economic competition explained above allows us to distinguish the policies involved. Above all, of course, unfair competition law regulates all kinds of market dynamics. Under the Hayekian concept of competition, the law serves as a necessary condition for the formation of a spontaneous order.Footnote 145 Any order delimits individual actors’ spheres of sovereignty. The guarantee of protection against invasion by a fellow citizen or competitor establishes the groundwork for private individual planning. This is the most important function of the rules of just conduct—namely, to make clear which of the citizens’ and competitors’ expectations are justified. In other words, “Good fences make good neighbors.”Footnote 146 This institutional framework, however, is further segmented internally. As von Hayek himself pointed out, a planned order, particularly by concrete legal regulation, is necessary whenever competition cannot work effectively. In this regard, as he explained by reference to patent protection, it will not suffice to recognize private property and freedom of contract alone to uphold a self-contained system of regulation by free competition.Footnote 147 Some areas of economic transacting cannot be adequately provided by private actors. In these sectors of the economy, legal regulation is indicated. In modern terms, the lawmakers’ direct interference will be legitimate only whenever market failures must be corrected. Ultimately, this understanding of the legal order establishes a principle of subsidiarity. It is founded on the priority of self-regulation by the mechanics of competition.
Phrased in terms of unfair competition policy, two categories ensue. Even though both categories are designed to guarantee competition’s unhindered evolution by the correction of market failure, their regulatory qualities differ—only one provides for claims “against the world at large.” Protecting consumer decision making from improper information transmission and undue impact is the core policy. This is also the single specific paradigm of dishonesty reflected in the Paris Convention’s norm on unfair competition in article 10bis(3).Footnote 148 By definition, subjective rights cannot exist under this policy of confusion prevention. The allocation of values in this category is not an issue for the legal order to establish. The process of consumer decision making, rather, is tasked with separating success from defeat and ultimately allocating and distributing values among competitors.Footnote 149
The second category covers regulatory policies beyond competitor-consumer interactions. This is the horizontal level of intercompetitor relations. The Restatement of Unfair Competition (Third) clarifies the demarcation line quite lucidly. As the restatement’s comments explain in general, the function of the law of unfair competition is “to delimit the circumstances in which a person may prohibit the appropriation by another of intangible business assets created through an investment of time, money, or effort.”Footnote 150 Yet while one category of misappropriation concerns “appropriation of another’s good will through misrepresentation” (especially with regard to trademark infringements), the category of “other appropriations can be more direct.”Footnote 151 Within the latter category, patent and copyright laws provide for a delimitation at the level of federal laws. Concerning unfair competition prevention, it is the law on protection of trade secrets, as well as on the “security against wrongful physical intrusions,”Footnote 152 that complements the horizontal level of protection policies. With respect to protection at this level, legislation must expressly decide how to delimit individual competitors’ freedom of transacting and, ultimately, how to distribute resources and values. This second category of policies can thus truly be characterized as allocating and distributing subjective rights.
2 Clarification: The Horizontality of Neminem Laedere
In light of this segmentation, one last point requires clarification. Agreement exists that unfair competition law protects the par conditio concurrentium.Footnote 153 This seems to stand in contrast to tort doctrine, which exclusively protects the right owner. While tort law aims to prevent injury to private rights, unfair competition law upholds the state of a constant competitive struggle. Correspondingly, the tort principle of neminem laedere has been described as inapplicable under unfair competition doctrine. To the contrary, competition is said to require intentional harming of one’s competitors.Footnote 154
This imprecision invites misunderstanding. As we have discussed, tort law does not define absolute limitations on individual conduct; nor does unfair competition law. No absolute rights exist. The determination of individual spheres of activity and freedom is what defines the scope of private entitlements with regard to other individuals’ respective domains. Per se, therefore, the principle of neminem laedere is a rule of relativity at best.Footnote 155 In addition, the principle’s scope of application varies across the field. Again, a distinction between the horizontal and vertical levels is crucial. Horizontal relations (i.e., those among competitors) without a market relation are directly subjected to policy makers’ decisions on how to calibrate the allocation of rights and duties. This is different for the sector of market-related transacting, where the main policy is to protect consumer decision making. At the horizontal level, it may thus actually be a background regime of neminem laedere that provides for a rule of noninvasion in legally determined rights. One example is the protection of trade secrets; another is the quasi intellectual property scenario of International News Service. In vertical relations, by contrast, individual rights are nonexistent by definition. Here, the principle of neminem laedere has no function.Footnote 156
D Summary
Formal distinctions between tort and unfair competition law are not helpful, for they merely scratch the surface. In particular, the practical divergence between remedial relief and the terminological noise concerning absolute and subjective individual rights will not establish a workable distinction between the fields. From a deeper perspective, the contrary is true: the two fields widely overlap. The overall regime of background rules sets the stage for socioeconomic evolution. Tort and unfair competition law alike provide the institutional background for individuals’ conduct to unfold. But depending on the specific situation of improper competitive conduct, these background rules will be drawn from different sources. Within the multiangular model of market-related conduct, protecting unmanipulated consumer decision making is one specific sector of the overall background regime. Consumer decision making is the blueprint for the construction of a liberal order of competition. Other cases of unfair competition, however—particularly those at the horizontal level of intercompetitor relations—must be decided under the rules of a different sector.
II Antitrust and Unfair Competition Law
In light of modern tendencies in both unfair competition and antitrust doctrine, the two fields’ complementary policies are often unduly intermingled.Footnote 157 Yet a functional concept of market effects not only allows for a separation of tort and unfair competition law on the basis of the respective subject matter of regulation but also helps draw a clear line between the sectors of unfair competition and antitrust law.
For a long time, US theory and practice have seen unfair competition and antitrust governed by largely homogeneous policies. By contrast, in Europe, the approximation of policies in modern doctrine constitutes a more dramatic paradigm shift.Footnote 158 Previously, theory used to distinguish between antitrust and unfair competition law on the basis of a so-called specialty rule. Antitrust law was designed to preserve freedom of competition as a legal institution by preventing restraints on trade and abuses of economic power. Unfair competition prevention, on the other hand, was aimed at establishing and maintaining individual fairness in competition. It was deemed to protect only against minor wrongs below the threshold of antitrust violations.Footnote 159 But the picture has recently changed. Under a macroperspective, both areas are described as constituting a uniform system of market regulation.Footnote 160 At the same time, antitrust law has gradually turned toward individual rights protection.Footnote 161 The Court of Justice, early on, began to spur the implementation of private remedies against antitrust violations.Footnote 162 Only recently have European lawmakers enacted a directive allowing for private damage actions with respect to antitrust violations.Footnote 163 As it appears, then, modern antitrust and unfair competition law (including trademarks) are part of a comprehensive framework of rules providing for free and unhindered competition.
The alleged homogeneity of substantive law policies also seems to have spurred uniformity in choice of law. As seen earlier, US law has never adhered to a clear-cut distinction.Footnote 164 Practice has actually made a great effort to align antitrust and trademark conflicts law. The Ninth and the First Circuit, in particular, have extrapolated the Supreme Court’s antitrust-effects argument in Steele, literally applying antitrust conflicts principles to trademark conflicts.Footnote 165 In Europe, even though the merger of the fields has not come full circle, scholarly theory aims at a unification. Yet as the Rome II Regulation illustrates, the rules for conflicts resolution in article 6(1) and (3) are still—at least formally—supposed to differ.
Indeed, as a closer look at the fields’ substantive law policies and their conflicts law structures explains, a genuine effects test must not be imported into trademark and unfair competition choice of law. While an unmodified effects test suits substantive law policies of regulating marketplace activity under a macroperspective, it is problematic for choice of law in trademark and unfair competition conflicts. This is due to the fact that trademark and unfair competition policies are not designed to regulate the marketplace in toto. Their impetus is focused on the microdynamics of market activity, not on the static allocation of market power.Footnote 166 More concretely, antitrust regulation is not concerned with the market information infrastructure. It thus lacks a focus on consumer decision making as a qualitative determinant of both substantive law policy and conflicts structure. With respect to trademark and unfair competition conflicts, by contrast, an accordingly structured qualification of effects is indicated. This qualification must be oriented toward the triangular structure of marketplace transactions illustrated earlier.Footnote 167 Within this structure, the two levels of horizontal and vertical relations between market participants determine the choice of substantive law policies and the correlating choice-of-law principles.
In order to avoid misunderstanding, of course, we must acknowledge that this reconceptualization does not invalidate the model of two overlapping circles of unfair competition and antitrust prevention.Footnote 168 Policy makers may decide to characterize specific antitrust violations as also concurrently violating norms of unfair competition prevention, or vice versa. Nonetheless, at its core, trademark and unfair competition doctrine—characterized by a policy aimed at protecting consumer decision making—does not coincide with the field of antitrust law.Footnote 169
III The Intellectual Property Dichotomy: Innovation vs. Competition
Now that we have explored the relationship between tort, antitrust, and unfair competition law, the next step is to analyze correlations and antinomies between trademark protection and unfair competition prevention. Before addressing this point, however, a closer look at the current model of formally uniform intellectual property rights is necessary. As we will see, several doctrinal frictions emerge from the perceived uniformity and functional homogeneity of rights. Trademark protection on the one side and copyright and patent protection on the other have separate foundations and characteristics. Identifying these demarcations will lay the groundwork for a reintegration of trademark and unfair competition law into the larger field of market communication regulation.
A The Mistaken Concept of Intellectual Property Uniformity
As we have seen, the formal concept of “property” serves as an overarching paradigm between the different categories of intellectual property rights, especially copyrights, patents, and trademarks. Unfair competition prevention, by contrast, appears to be a separate field where no absolute rights exist and, consequently, a different system of protection governs. As a closer look reveals, however, the demarcation does not run between intellectual property and unfair competition law. The gap must be found between the fields of trademark and unfair competition law on the one hand and the rest of intellectual property on the other.
1 Historical Remnants: The “Immaterialization” of Trademarks
The meandering assessment of trademark rights and their ultimate propertization by inclusion in the category of intellectual property reflects a historical struggle. In the first chapter, I explored how Josef Kohler’s theory of personality rights, combined with a paradigm of state-granted privileges, contributed to trademark-as-property protection and, eventually, to the reign of strict territoriality in trademark choice of law.Footnote 170 With regard to the distinction between trademarks, patents, and copyrights, another look at history illustrates yet another facet of doctrinal misconceptions.
Kohler’s conception of intellectual property distinguished between two categories of individual entitlements. The first category, personality rights, comprised the prevention of unfair competition and the protection of trademark rights.Footnote 171 The second category concerned absolute rights in so-called immaterial goods (Immaterialgüter). This was where he located copyrights and patents.Footnote 172 However, his categorization was never universally acknowledged. In particular, the characterization of trademarks as personality rights provoked criticism. Critics contended that trademarks were more akin to tangible business assets than to their owners’ personality.Footnote 173 In the end, they won but did not reject Kohler’s categorization per se—instead, they simply transferred trademarks from the category of personality rights to the class of immaterial goods.Footnote 174 From then on, trademarks were deemed to be immaterial rights alongside patents and copyrights. This would ultimately prove problematic since trademarks seemed to have become somewhat isolated from the issue of marketplace competition.
2 Current Doctrine: Intellectual Property Homogeneity
The historical immaterialization of trademark rights can still be found in modern law. As we have seen, US intellectual property law sometimes tends to neglect differences between trademarks, patents, and copyrights.Footnote 175 In addition, trademark propertization has increasingly diluted the traditional idea of market information protection as the central policy. The trend is to categorize broadly; patents, copyrights, and trademarks are often seen as just another species of property.Footnote 176 The same problem exists in Europe. Overall, intellectual property law provides for the right owner’s effective protection under a concept of absolute and exclusive property rights.Footnote 177 Trademarks are deemed a foundational pillar of this system, equivalent to other categories of intellectual property, particularly copyrights and patents.Footnote 178
Of course, ideas on the functions of trademarks have varied. But ultimately, as the Court of Justice’s case law illustrates, the concept of homogeneity prevailed. The court’s 1971 Sirena decision was still influenced by a certain disdain—and thus an idea of trademark rights being different from other kinds of intellectual property rights:
The exercise of a trade-mark right is particularly apt to lead to a partitioning of markets, and thus to impair the free movement of goods between States which is essential to the Common Market. Moreover, a trade-mark right is distinguishable in this context from other rights of industrial and commercial property, inasmuch as the interests protected by the latter are usually more important, and merit a higher degree of protection, than the interests protected by an ordinary trade-mark.Footnote 179
This cavalier attitude toward trademarks, however, changed twenty years later, in the HAG II decision.Footnote 180 The public’s interest in trademark protection was expressly acknowledged in Advocate General Jacobs’s opinion:
The truth is that, at least in economic terms, and perhaps also “from the human point of view”, trade marks are no less important, and no less deserving of protection, than any other form of intellectual property. They are, in the words of one author, “nothing more nor less than the fundament of most market-place competition”. … Like patents, trade marks find their justification in a harmonious dovetailing between public and private interests. Whereas patents reward the creativity of the inventor and thus stimulate scientific progress, trade marks reward the manufacturer who consistently produces high-quality goods and they thus stimulate economic progress. Without trade mark protection there would be little incentive for manufacturers to develop new products or to maintain the quality of existing ones.Footnote 181
Even though HAG II appeared to introduce a policy-oriented perspective and emphasized marketplace competition as the foundation of trademark protection, it maintained the immaterialization of trademarks. As the advocate general had explained, intellectual property rights were generally conceived of as “dovetailing” public and private interests. Yet whether trademarks and other categories of intellectual property should be further distinguished remained untouched.
B Rectification: A Grounded Intangibility of Trademarks
While historical doctrine may have been justified in rejecting trademarks’ character as personality rights, its lumping together of trademarks, copyrights, and patents under the umbrella of intellectual property is questionable. Trademarks are different from copyrights, patents, and other categories of intellectual property insofar as rights acquisition, protection, and maintenance are inextricably connected to their owner’s ongoing marketplace activity.
1 The Difference in Intellectual Property Incentive Structures
Much ink has been spilled on the economic foundations and doctrinal structures of intellectual property rights, especially with respect to the characteristics of different rights.Footnote 182 What we need to look at closely are the incentives that are provided for under the categories.
Quite early, the internal dichotomy within intellectual property was succinctly and fittingly expressed in the US Constitution, which gives Congress the power “[t]o promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”Footnote 183 At times, this clause may have caused confusion,Footnote 184 but it unequivocally illustrates two things: First, the protection of copyrights and patents concerns the promotion of creativity and innovation. Second, trademarks fall outside this category.Footnote 185 Under the patent regime, the invention itself is the relevant subject matter. If the invention has been reduced to practice, then it is eligible for protection. Application for the patent, its disclosure, and its registration constitute formal prerequisites. In this regard, details may vary among national systems, but the fundamentals correspond.Footnote 186 A similar concept governs in copyright law. The author’s expression of an idea is protected from the moment of promulgation and creation.Footnote 187 Patents and copyrights are granted protection once patentable or copyrightable subject matter has been developed; there are no further requirements.Footnote 188 In this regard, patents and copyrights are true “intangibles.” Their only subject matter of protection is the product of the human mind.Footnote 189
Trademarks are another story. While the public has an interest in encouraging innovation and creativity in general, it does not have an interest in the mere creation of symbols or marketing concepts. As a result, there is no protection for a trademark symbol’s creation or invention as such. In principle, the owner is not selling the trademark—she is marketing a branded product.Footnote 190 In other words, the subject matter of protection is the “trade,” not the “mark.” Consequently, the incentive provided for by the system of trademark protection is different. The use of trademarks in commerce results in an accumulation of goodwill for the branded product and the creation and maintenance of its owner’s reputation. A trademark’s use in commerce builds up a stock of information on product and producer properties. Only upon the accumulation of market information will the owner receive a corresponding share of protection. Trademark protection is thus the quid pro quo for competitive commitment and investment in the marketplace.
Viewed in this way, it becomes clear that trademark protection (unlike patent and copyright protection) does not insulate the right owner from competition. In fact, it encourages—even requires—constant competitive commitment and investment.Footnote 191 Strictly speaking, competition ends with the invention or creation of patentable or copyrightable subject matter; it starts, however, with the acquisition of a trademark.Footnote 192
2 An Apparent Exception: The Trademark Register
Though registered trademarks appear to be more closely aligned with patents and copyrights, in that such rights can be acquired immediately upon registration, the similarities end there. Registration only temporally suspends the correlation between rights and competition. Trademarks remain market related, whether acquired by use or by registration. As we have seen, Eugen Ulmer was the first to point out that registration promotes the development of trademark rights for a registrant’s nascent trade.Footnote 193 In addition, the register informs the public about the stock of existing rights,Footnote 194 thereby providing legal certainty for later-comers and junior users in their choice of new brands and helping avoid the social costs of wasted resources resulting from a duplication of trademarks.Footnote 195 Later on, in the case of trademark collisions, the registration system offers a convenient and practical way to decide on priority disputes.Footnote 196 These functions of the register, however, may run counter to the core trademark policy. Indeed, seen in light of the market information paradigm, the early stage of trademark protection gives the registrant more than she deserves.Footnote 197 Such an assignment goes beyond the markets in which she has done or is doing business. The register-provided benefits exceed the actual investment in market activity. In other words, without prior use of a symbol in the marketplace, the benefits that consumers expect from the trademark cannot come into existence.Footnote 198 Accordingly, rights acquisition upon registration (or application) distorts the natural do ut des of the market-based goodwill mechanism. Registration, therefore, provides an advance performance to the registrant without demanding the counterperformance of goodwill creation and maintenance that the public is interested in. It is just for the early stages of the trademark’s life cycle that the correlation between right protection, market investment, and competition is suspended. Only in this regard will the actual and potential detriments of advance performance to the registrant be outweighed by concurrent benefits of the register.
In the same vein, the ultimate dependence of registered rights on goodwill is also illustrated by the fact that under most trademark regimes there exists only a limited grace period for nonuse after a trademark’s application or registration.Footnote 199 If the trademark is not animated through actual use in the marketplace within a certain period, then it will be subject to cancellation. The same happens in cases of abandonment. The trademark must be used to distinguish products in the market. Registered or not, the trademark is not a property right in gross.Footnote 200 Seen in this light, registration is just a shell. The formal right will be invigorated only as far as equity can resort to a stock of information capital in the marketplace.Footnote 201
C Summary
The field of intellectual property is far from homogeneous. Trademark rights are directly connected to and based on marketplace activities. Market goodwill and information capital are critically important for the acquisition and existence of rights. Although the possibilities of rights acquisition by registration have sometimes clouded these characteristics, the dominance of registration systems in modern trademark regimes around the world has not altered the fundamental conception. Conversely, patent and copyright protection is granted immediately, exclusively, and absolutely, without regard to the owner’s subsequent marketplace or competitive activities. While the unification of intellectual property under a common umbrella of formal rights may not cause many problems in substantive law, this is not the case for choice of law. Here, we must take a close look at the parallel layers of “rights” that exist whenever a trademark is both registered and actually used in commerce. The shell and its substance need to be kept separate. The following section will thus address the relation between legal rights and substantive equity.
IV Trademark and Unfair Competition Law: Framing the Information Infrastructure
European law separates the areas of trademark protection and unfair competition prevention: in principle, one area exists to protect individual property, while the other takes care of the public interest.Footnote 202 This propertization/socialization dichotomy has also been projected into choice of law, particularly articles 6 and 8 of the Rome II Regulation. As we will now see, this distinction is particularly questionable with regard to the two sectors’ common policy foundation. Since both trademark protection and unfair competition prevention, at their core, are aimed at regulating market participants’ use of information infrastructure, a uniform approach to conflicts law is required.
A The Illusion of a Formal Divergence
In European doctrine, the double-tracked system of property rights and conduct regulation has become so deeply implemented that it can be aptly characterized as conventional wisdom.Footnote 203 Here, it is not necessary to fully deconstruct the dichotomy. Instead, I will highlight the most crucial aspects that shed doubt. With respect to choice of law in cross-border and multijurisdictional cases of trademark infringement and unfair competition, we must see the fields as largely homogeneous. The common policy of regulating market communication is what makes this so.
1 Recapitulation: Trademark Property vs. Consumer Protection
As we have seen, European doctrine has never managed to shed the conceptual straightjacket calling for a dichotomy between the fields of trademark and unfair competition law. German law in particular is still caught in this straightjacket. Starting with a doctrine of preemption in Apollinarisbrunnen, the Reichsgericht slowly reversed its approach, moving from a strict prioritization of trademark law to one of unfair competition law. Even Ulmer’s formidable attempt to reconcile the two areas did not manage to establish uniformity or homogeneity. To the contrary, subsequent scholarship and practice have rather deepened the breach than help overcome the formal trademark/unfair competition divide.Footnote 204 Such a bright line has never existed in US doctrine. In the United States, the two areas have generally been treated as homogeneous fields under the common umbrella of passing off.Footnote 205 Section 1 of the current Restatement of Unfair Competition Law (Third) prominently represents this homogeneity, providing for an equation of “deceptive marketing” conduct in general with the “infringement of trademarks and other indicia of identification.”Footnote 206 With respect to the correlation between competitor and consumer protection, US doctrine is also based on interwoven policies. First under traditional common law doctrine and then under the Lanham Act, US trademark law has been seen as promoting a dual policy of protecting both consumers and trademark owners.Footnote 207 Consumer protection and right-owner protection are often described as opposite sides of the same coin and as mutually reinforcing benefits of the regime of trademark protection.Footnote 208 Consumer and right-owner interests thus appear to be in harmony, and consumer protection is seen as the core of trademark purposes.Footnote 209 In European trademark law, such a deep foundation of consumer protection has never been laid out.Footnote 210 Here, neither an individual right of the consumer nor a public policy of consumer protection seems to exist. Theory and practice have acknowledged only reflex protection for the consumer, and the public interest is fostered only by granting the right owner specific individual entitlements.Footnote 211
2 Cracks in the Foundation: A Remerger of the Fields
Upon closer scrutiny, however, this seemingly iron-clad separation between the fields in European doctrine dissolves. If we consider the question of how to define “consumer protection” and the “public interest,” the two fields no longer seem that far apart. In fact, giving close regard to the consumer’s position within the marketplace helps reconcile the seemingly divergent concepts of rights enforcement, conduct regulation, and consumer protection. Seen in this light, the transatlantic dichotomy also shrinks—US and European doctrines then actually no longer differ so fundamentally.
a The Statutory Framework: Unfair Commercial Practices Directive
In fact, recent developments in European trademark and unfair competition law have spurred a remerger. This has also led to alterations in national doctrine. Until the end of the twentieth century, in light of the longstanding tendency of separating the fields, German case law and commentary had agreed that trademark law was the lex specialis to rules of unfair competition prevention. Trademark protection was thus deemed to take strict and formal priority over unfair competition claims (Vorrangthese). As the Bundesgerichtshof explained, issues of unauthorized trademark use were governed by norms of trademark law alone. Remedies under unfair competition and tort law would not be admitted per se.Footnote 212 But this approach has been drawn into question by the 2005 UCP Directive.Footnote 213 Within the directive’s scope of application (B2C), it explicitly provides for the prevention of confusion as a situation of “unfair competition” in cases of unauthorized and confusing trademark use.Footnote 214 It further provides that competitors and consumer associations—not just trademark owners—are generally entitled to apply for relief against confusing trademark use.Footnote 215 As a result, case law and scholarly commentary of late contend a relationship of equivalence (Gleichrang) between the fields.Footnote 216 Even though this Gleichrang also bears the mark of separation—after all, trademark protection and unfair competition prevention are still depicted as autonomous systems of regulation with different policies and different legal consequencesFootnote 217—it cannot be denied that unfair competition doctrine has reconquered a large area. Be it a single theory or two concurrent instruments of protection for information truthfulness, what matters is that, under the 2005 UCP Directive, unfair competition doctrine has been significantly extended into the reign of trademark protection. And even though the extension may be limited to B2C relations, it signals a trend of unification. This surfaces especially in single national regimes, such as Germany, where the directive’s implementation has been more wide-reaching, as it also covers B2B relations.Footnote 218 Important for this analysis is that European lawmakers have increasingly come to prioritize the protection of consumer decision making, which results in a growing overlap between the once deemed separate fields. Hence, the dichotomy’s raison d’être has visibly come under pressure.
b The Consolidation of Interests: Depropertization and Desocialization
The UCP Directive’s consolidation actually represents a more slow and subtle trend. Individual rights protection has not always been the genuine purpose of trademark law. As we have seen, during the nineteenth century, trademark law was explicitly and sometimes almost exclusively concerned with protection of public interests, notably through fraud prevention policies.Footnote 219 And this once “social” impetus was never expressly ousted by a clear change of policies. Rather, it was the formalistic paradigm of trademark-as-property protection that, throughout the nineteenth and twentieth centuries, barred a more visible entry and osmosis of consumer protection concerns. Indeed, even though giving regard to consumer interests is still widely described as a mere reflex of trademark protection, the consumer has never been locked out completely. The trademark owner alone is tasked with enforcing her rights—prima facie, therefore, she is not the avenger of the consumer.Footnote 220 But a part of what she does in her function as right owner mirrors concurrent interests of the public and, thus, necessarily of the consumer. The fading out of consumer protection concerns only a certain kind of consumer interests. If and to the extent that “consumer protection” is understood as protection of the consumer beyond her function as a referee in competition—that is, as a private individual and citizen with civil rights—there is no congruence of interests. With respect to the consumer’s function as a referee, however, trademark protection with an aim of confusion prevention necessarily also caters to the concerns of the consuming public. As my exploration of the market mechanism has illustrated,Footnote 221 the consumer’s decision making is the focal point where both her private and the public interest in free competition coincide.
The picture is similar in unfair competition doctrine, where an excessive protection of consumer interests would also exceed the regulatory scheme. It may have been the foreclosure of consumer interests in trademark law that led to a concurrent socialization of unfair competition law. Ultimately, unfair competition doctrine had to serve as a reservoir for public policies of all kinds.Footnote 222 Most notably, it became an area of consumer protection in terms of civil rights. But this has changed in recent years. In fact, unfair competition doctrine has recently witnessed its own era of desocialization. I will address the integrated model of unfair competition law in more detail soon.Footnote 223 Worth mentioning for now is the fact that modern policies of unfair competition prevention—as trademark protection—are concerned primarily with the unhindered functioning of the market mechanism and with the autonomy of consumer decision making.Footnote 224
In light of this modern depropertization of trademark policies and the concurrent desocialization of unfair competition doctrine, we can identify a common territory of both fields. At the vertical level of the model of marketplace competition, the core policies of both trademark-as-property protection and consumer protection through unfair competition prevention have come to largely coincide.Footnote 225 This common core of both areas is what determines the analysis: trademark protection and unfair competition prevention must give regard to the consumer and to the purpose of protecting her domain as a referee in competition against improper invasion. Accordingly, the trademark owner no longer has exclusive control over a dispute with respect to deciding whether to enjoin infringing uses of her trademark or to not police the violation at all. Since trademark and unfair competition causes of action will coexist without a hierarchical relationship, there is no more priority of absolute rights.Footnote 226
c The Practical Picture: A Subtle Recapture
Court practice further illustrates that the merger is in full swing. In fact, many issues that are today classified as questions of trademark protection started as judge-made doctrines of unfair competition prevention. Antidilution and postsale confusion scenarios are lucid examples.Footnote 227 The homogeneity of policies is therefore not a recent invention of European lawmakers. The UCP Directive has merely institutionalized a practical symbiosis. In addition, in recent courtroom practice, the fields seem to have moved even closer. First, the Court of Justice has increasingly macerated old-age formalisms of traditional trademark doctrine throughout the last decade. While the court still pays lip service to trademark-as-property and exclusive rights protection, its actual implementation of protection structures has widely abandoned formalism. Indeed, under the court’s theory of trademark functions, the paradigm of trademark-as-property protection may dissolve far more quickly than expected. The “functionalization” of trademark rights can be lucidly seen in the list provided in L’Oréal and Google France, enumerating “not only the essential function of the trade mark, which is to assure to consumers the origin of the goods or services (‘the function of indicating origin’), but also its other functions, in particular that of guaranteeing the quality of the goods or services in question and those of communication, investment or advertising.”Footnote 228 Of course, such literal extensions of the scope of protection seem to imply an overextension of rights.Footnote 229 Yet a function-based approach also provides possibilities for rights limitation. One example can be found in cases on “keyword advertising.” The court has started to backpaddle significantly here: the advertising function has been described to no longer be affected, and the question of relevant impact on the function to indicate origin has been referred to a specifically fact-based analysis.Footnote 230 Unlike formal rights protection, functionalism is far more flexible and, as such, receptive to a significant relativization of rights. On this basis, the absoluteness or exclusivity of rights can no longer be explained as a leitmotif. In essence, a trademark’s functions reflect different policies of protection. None of these policies, however, provide for an isolated domain of trademark rights. Consequently, the trademark owner no longer holds a position of “absolute” individual property—instead, her entitlement reflects a bundle of policies of conditional protection.
The last aspect of a fact-based infringement analysis further illustrates that the tests for finding consumer confusion in trademark law and in unfair competition law have become increasingly similar. For a long time, doctrine treated the concepts of consumer confusion in trademark law and of consumer confusion in unfair competition law as distinct. Whereas confusion testing in trademark law was seen as focusing on the abstract comparison between conflicting symbols, confusion testing in unfair competition law was seen as requiring concrete consideration of the factual circumstances of each individual case. The latter was a narrower test and less protective.Footnote 231 Under the Court of Justice’s recent application of trademark law, however, the consumer-confusion standard has begun to resemble its unfair competition counterpart. In its 2008 decision in O2 Holdings and O2 (UK), the court expressly established that consumer-confusion standards should be the same for both trademark and unfair competition doctrines.Footnote 232 This approach was reinforced three years later in the court’s Interflora decision, which set a heretofore almost unknown requirement of market information transparency for trademark-infringement testing. As the court explained, a finding of adverse effects on the trademark’s function of indicating origin will depend “in particular on the manner in which that advertisement is presented.”Footnote 233 Hence, for issues of trademark infringement as well, the trier of facts will actually have to inquire whether an advertisement’s use of a foreign trademark “is sufficient to enable a reasonably well-informed and reasonably observant internet user” to distinguish the sources of the competing parties’ products.Footnote 234 Ultimately, both standards for confusion prevention have come to coincide.Footnote 235
d The Relicts of Antiquity: Pockets of Resistance
Notwithstanding these wide-reaching tectonic shifts, some specific areas of trademark protection still seem to be distinctly isolated and therefore resistant to a merger of the fields. Yet here, too, the perceived obstacles are not as decisive as one might think. Several of the scenarios that have been identified as allegedly uniquely trademark related are founded on a policy that is distinctly separate from the traditional concepts of passing off, confusion prevention, and information economization. They thus fall outside the common domain of consumer decision-making regulation, meaning that their separate treatment under a doctrine of “trademarks only” does not present a challenge to the hypothesis of a trademark/unfair competition merger. In addition, upon closer scrutiny, the remainder of allegedly resistant scenarios can actually be explained as specific instances of a policy merger.
To start with the former category, one oft-enunciated example of the separation of policies is the protection of newly registered and still unknown trademarks. These trademarks tend to be protected only under trademark law.Footnote 236 Protection under unfair competition and like doctrines will begin only upon the accumulation of goodwill—and only with respect to those markets where information capital has actually been accumulated. With respect to the first stage of a registered trademark’s protection, however, the policy at play is of a different kind. It does not directly aim at information economization. On the contrary, protection of newly registered trademarks, as authoritatively outlined by Ulmer, only temporarily overextends core trademark policy in the interest of promoting the development of rights. Over time, however, upon the acquisition of goodwill, the aim of developing nascent trademarks would yield to the principles of preventing confusion.Footnote 237
What seems to be more challenging for the consolidation hypothesis are scenarios where pragmatic cost balancing—not doctrinal reasons—lead to a prioritization of trademark protection rules in practice. One example is a case where competitors with the same name, trade name, or trademark have established separate goodwill in different marketplaces, and where their indications’ geographical reaches suddenly collide (usually due to a growth of markets). These are Tea Rose/Rectanus scenarios.Footnote 238 As contended by case law and scholarly commentary in Germany, a certain degree of consumer confusion may have to be tolerated in order to allow for both parties’ continued use. The only requirement is that confusion must be reduced as far as is possible and reasonable.Footnote 239 Since consumer confusion will never be fully eliminated, one could argue that it is individual rights protection—and hence trademark policy—that prevails.Footnote 240 This, however, is not the full picture. The gist of this doctrine is unveiled only when looking at alternative solutions: coexistence, even though causing a certain degree of consumer confusion, is the result of optimum cost balancing for all constituencies involved in the dispute. Easily overlooked is the fact that completely enjoining one party from using the name or trademark at issue—as the strict enforcement of unfair competition rules might suggest—would not avoid consumer confusion, either. Granting one side the right to use the trademark for the whole market, thereby fully excluding the other party, would invalidate the latter’s goodwill. Not only would this destroy the individual right owner’s investment, but it would also force her customers to renew and rearrange their information capital with respect to the products and brands at issue. Actual consumer “confusion” under such a black-and-white solution would thus be more severe than under coexistence.Footnote 241 What matters here is that an optimal economization of marketplace information can be achieved only by cost balancing. The situation therefore verifies the growing homogeneity of the two fields on the basis of a common core policy.
Similarly, licensing and coexistence agreements, as well as a court’s granting to a trademark-infringing defendant a conversion period during which sale for counterfeits is still admissible, can be explained under a theory of cost balancing.Footnote 242 As in cases where the alleged trademark infringer has raised the defense of unclean hands, laches or acquiescence, or limitation or prescription, it is possible that the degree of consumer confusion is so strong that unfair competition prevention must ultimately kick in.Footnote 243 In all these cases, there is another way to look at it: especially in the latter case, it is difficult to contend that if the trademark owner has lingered so long that her claim for injunctive relief is barred under a trademark-related provision on limitation or prescription, third parties should not have access to claims under the rules on unfair competition prevention.Footnote 244 After all, the public is still interested in preventing confusion and deception. Accordingly, competitors (aside from the lingering trademark owner) and consumer associations should be allowed to litigate unfair competition claims.Footnote 245 Necessarily, interparty relations between a right owner and an alleged infringer are irrelevant with regard to the public.Footnote 246
In sum, none of the “exceptional” cases of alleged trademark priority prevent us from concluding that the fields are doctrinally interrelated—more concretely, that they overlap with respect to the regulation of information infrastructure. In addition, the merger of the fields remains unaffected by the different types of remedial options. While trademark law may grant more far-reaching remedies, particularly concerning the scope and computation of damages,Footnote 247 this does not allow an inference with respect to the unifying capacity of market information policies. The different character of remedies is mostly a result of practical necessities, not of policy differences. Furthermore, injunctive relief dominates both fields in practice and therefore ultimately accounts for the actual effectuation of policies. In this regard, the fields have been in wide conformity for a long time.Footnote 248
e The Myth of the Public Samaritan
Finally, another oft-enunciated argument can be shown to be irrelevant for the fields’ underlying structural homogeneity: despite what is often contended, plaintiffs in both trademark and unfair competition cases act as private attorneys general—no matter whether they sue on the basis of a private right or claim the violation of a rule of fair conduct. Of course, a rational right owner will seldom care about consumer protection when enforcing her right in a trademark. This, however, does not invalidate her function as the proverbial private attorney general of the public interest. She may neither formally nor intentionally play the role of a vicarious avenger of the consumer,Footnote 249 but she does serve the public function of establishing and upholding an environment of truthful market communication.Footnote 250 The enforcement of private rights thereby establishes and maintains the overall order of information economization as part of the information infrastructure within the marketplace. This specific order—not a general, extended, and unspecific concern for public policy—is the institution to be protected under trademark law. In this regard, and under an accordingly delimited scope of consumer protection concerns, the trademark owner’s formal right is the mirror image of public policy. Or, as Ralph S. Brown, Jr. explained in 1948:
[W]hat appear to be private disputes among hucksters almost invariably touch the public welfare. We shall therefore be concerned to ask, when courts protect trade symbols, whether their decisions further public as well as private goals.Footnote 251
Furthermore, a closer look at the incentives at play when private rights are enforced suggests the validity of skepticism toward the idea that consumer concerns would be protected only under a system of unfair competition law. As is commonly argued, unfair competition law—unlike trademark protection—specifically protects the public interest by extending personal standing and enforcement options for competitors in general and for consumer associations in particular. In these cases, competitors are supposed to act as deputies tasked with protecting the public interest.Footnote 252 Upon a second look, however, this idea proves illusory. The incentive to police violations of both unfair competition and trademark norms will be strong whenever investment in goodwill or private interests in general is concerned. Whenever a market participant suffers an individual detriment that is substantial, she will have an incentive to instigate judicial or administrative enforcement. Litigation, however, is not dependent on whether a competitor considers herself as acting on behalf of the public.Footnote 253 Nor does it depend on the existence or nonexistence of formal subjective rights. If no individual investment is at stake, there will be no incentive to privately police a violation. This is not a rare case. Quite often, violations of unfair competition norms will not affect a specific competitor directly, nor will they be detrimental at all. Another example of the disinterested plaintiff can be seen in situations where certain unfair practices are common or have become tolerated within the trade.Footnote 254 In these cases, it is unlikely that competition or intercompetitor litigation will bring about the best result for the public—as there is honor among thieves, there also is honor among unfair competitors.
In any case, finally, one should not overestimate the litigiousness of consumer associations. In light of their usually scarce financial resources, a more practical doubt exists: quite often, associations that have standing to sue are acting undercover on behalf of a single competitor. If litigation is initiated and financed by an individual competitor, however, it no longer fulfills an allegedly exclusively “public” function.Footnote 255
3 Summary
The fields of trademark and unfair competition law have witnessed a tectonic shift away from traditional tort law paradigms toward a modern regime of market information regulation. Whether the paradigm of “property” or “subjective rights” in trademarks should be maintained is not the main concern here. More important is the classification of trademark and unfair competition scenarios according to the underlying policies. The oft-enunciated argument that trademark law provides protection to the consumer only as a reflex of private rights enforcement is unconvincing, both with respect to the private rights/public policy dichotomy and with regard to enforcement efficiency. Protection of the consumer’s role as referee in competition is central to both trademark and unfair competition law. It is the connecting link between both areas. Subsequently, regulating market communication—more concretely, protecting the information infrastructure within the marketplace—is the common core policy. As I will argue in the following, a corresponding separation of policies is necessary to promulgate a guideline for choice-of-law determination.
B The Structural Congruency of Trademark and Unfair Competition Law
Trademark and unfair competition law have increasingly evolved toward the regulation of market communication. In addition to this common denominator, additional policies can be found in close vicinity. These policies include, namely, trademark-as-property protection (e.g., antidilution theory) and consumer protection beyond the referee function (e.g., privacy protection). Before I address each of these policies, I will take a concluding look at the common core: the overarching aim of providing an order for the information infrastructure of the marketplace.
1 The Common Core: Information Economization
I have already analyzed the economic concept of market language.Footnote 256 With respect to trademark and unfair competition law—notably with regard to the common core of policies—the communication function is particularly important. Information truthfulness and correctness are paramount for the functioning of the market mechanism based on consumer decision making. In terms of trademark doctrine, the correlation between market information and efficiency has been described on the basis of the functions of goodwill. A trademark’s goodwill is shorthand for search-cost reduction. It performs the economizing function of facilitating information transmission.Footnote 257 Trademark protection encourages investment in product quality. Once reputations within the market have been established, repeat purchases and referrals will generate higher transaction numbers.Footnote 258 At the same time, the branded product can command a premium price, reflecting the search-cost savings by consumers.Footnote 259 This is a self-reinforcing cycle of reputation creation, maintenance, and sometimes decay and destruction. In addition, trademarks can be used more generally to transfer information, not only by the right owner herself, but also by other market participants. Examples of such transmission are comparative advertising and the descriptive use of trademarks. In essence, the trademark is the most efficient and universal purveyor of market information.Footnote 260
Trademarks are but one segment of the market’s vocabulary, for the marketplace trades on nonbranded information as well. As search terms and information shortcuts, trademarks constitute part of the stock of nouns in the lexicon, leaving ample space for other elements of market language. This is the area of general advertising. It covers all types of communication concerning products and market participants, whether related to trademarks and goodwill or whether consisting of the transmission of non-goodwill-related information. In this respect, as well, information economization is essential. It is evident that if information is unreliable, consumer decision making will remain in the dark. For trademark-based and nonbranded market information alike, it is true that without an “informal unwritten guarantee”Footnote 261 of information truthfulness, the market will not function. Information economization therefore constitutes the common core of policies in both trademark and unfair competition law. Most abstractly, we can say that both sectors, together, establish and uphold the market’s information infrastructure.
2 Beyond Confusion: Alternative Theories of Trademark Protection
But additional policies exist in both trademark and unfair competition law. These policies, especially with respect to trademark protection, are also relevant for the construction of the marketplace’s information infrastructure. As we have seen,Footnote 262 trademark doctrine in particular has recently undergone a process of propertization. Among the most heavily criticized aspects of this development is the emergence of non-confusion-based infringement theories. Antidilution theory, as well as initial-interest and postsale confusion theories, may cover instances where consumers are deceived or confused. Under all theories, however, an infringement can also be found without actual consumer confusion at the point of sale. By this means, theory and practice in the United States and Europe have come to integrate ever more aspects of protection that are disconnected from the fields’ common core policy.
Of course, it is possible to see antidilution doctrine as also preventing a specific aspect of consumer confusion.Footnote 263 One can argue that by preventing distinctive trademarks from being watered down, enjoining dilutive uses also protects the public’s and the consumer’s interest in efficient transacting.Footnote 264 Yet even if one acknowledges this explanation, it is not the direct impact on consumer decision making that will qualify dilution as a violation of market information norms. After all, there is no transmission of genuinely incorrect information, and the consumer’s immediate transaction generally remains presumptively rational. Detriments will materialize only in the long run, if at all. In principle, this is also the case in situations of initial-interest and postsale confusion.Footnote 265 As it appears, the consumer makes a transactional decision without having been misled by incorrect information.
Indeed, it is this detachment from traditional unfair competition doctrine that brings alternative theories of trademark protection closer to other scenarios of intellectual property protection. As is often explained, the protection of intellectual property rights is designed to create scarcity in a certain public good in which it is ordinarily absent. In patent and copyright doctrine, this theory is commonplace.Footnote 266 For trademarks, the idea of scarcity is more complex. In general, the creation of scarcity is intended to release innovative and creative power on the side of prospective right owners and to spur production. However, there is no public interest per se in creating more trademark symbols. Rather, restrictions on trademark use under a theory of preventing consumer confusion create scarcity for a single reason: to establish and maintain transparency in the marketplace.Footnote 267 Yet alternative theories of trademark-as-property protection have changed this picture to gray. For non-confusion-related instances of trademark protection, scarcity is, in fact, also artificially created. But this is intended to promote the creation of value beyond informational transparency. The goodwill protected does not serve as a navigation instrument to aid the consumer’s marketplace search. It is an additional value—a “surplus,” so to speak, that the trademark provides. Protecting famous and well-known trademarks against appropriation by a competitor (absent consumer confusion) provides an incentive for the owner to create or add to the symbol’s prestige by constantly shaping its image and exclusivity.Footnote 268 Let us recall Brown’s famous illustration:
The buyer of an advertised good buys more than a parcel of food or fabric; he buys the pause that refreshes, the hand that has never lost its skill, the priceless ingredient that is the reputation of its maker. All these may be illusions, but they cost money to create, and if the creators can recoup their outlay, who is the poorer?Footnote 269
The creation of such surplus goodwill and the corresponding premium that the consumer must pay is not directly compensated by a concurrent savings in search costs. Rather, it is a true excess payment—in economic terms, it is the creation of deadweight losses. More concretely, the consumer pays for exclusivity, scarcity, prestige, or other aspects that are not directly related to the product’s qualities. This is actually a paradigmatic characteristic of other kinds of intellectual property, particularly copyrights and patents.Footnote 270 Hence, what we can term the surplus goodwill of a trademark is a subject matter different from the information capital required to navigate the marketplace. Accordingly, it is protected under an alternative policy more akin to those underlying copyright and patent laws.
To avoid misunderstanding, of course, we must keep in mind that the parallels to copyright and patent protection are not absolute. Antidilution doctrine provides a good example of the aim to prevent, as Barton Beebe explains, the exhaustion of trademark utility by copying: if branded products are copied dilutively, the trademark will ultimately lose its distinctive character and value.Footnote 271 In this respect, alternative trademark policy differs crucially from the general ideology underlying other sectors of intellectual property law. While it is commonly acknowledged that use of patented inventions and copyrighted works is inexhaustible and nonrivalrous, the quality and quantity of rivalrous trademark uses do affect rights in and use of the original symbol.Footnote 272
Against this backdrop, it is also evident that despite a certain detachment from information economization, the ensuing “property rights” in trademarks and goodwill remain competition related. The umbilical cord between the trademark right and its creating mechanism—marketplace competition—cannot be cut. The value protected under theories other than information economization is still connected to market information. In other words, generating goodwill under the theories of dilution prevention and of initial-interest and postsale confusion requires establishing and upholding a brand image in the marketplace that is strong enough to warrant protection. Here, too, the consumer’s mind determines the extent of trademark protection. The trademark’s “psychological hold upon the public” is what qualifies as protectable subject matter.Footnote 273
3 Two Sides of the Coin: Law and Equity in Market Communication
Seeing trademark protection as based on the overarching concept of market communication implies an inseparability of private rights and public policy. This was demonstrated by Ulmer’s reconciliation model. He may not have done away with the dominant individual rights perspective in trademark law.Footnote 274 However, his concept did contain an important qualification of the value that was to be protected under trademark and unfair competition law. He actually replicated the common law dichotomy between law and equity, whereby the trademark owner is assigned a legal title from the time of registration—but, in the end, equity is what determines her scope of rights. A closer look at the policies at stake helps formulate a more exact metric.
Confusion prevention theory provides for a simple equation. The trademark owner is protected as far as the relevant consumer group is at risk of being confused by a third party’s use of the trademark. The scope of protection is not a static measure; rather, it depends on different parameters. The domain of the right owner may vary according to the target group and to the owner’s investment, especially her past activities in the marketplace. The goodwill may have a different value depending on the psychological connection that exists between a trademark’s or a market participant’s reputation and the relevant group of consumers.Footnote 275 Such a two-sides-of-the-coin perspective is common in US doctrine,Footnote 276 where the right owner’s equitable position has traditionally been protected under a system of use-based—and thus, ultimately, also market-related—rights.Footnote 277 And civil law doctrine is no longer much different. A similar interrelation between scope of rights and substantive law policy was lucidly explained in the Court of Justice’s 1993 decision in Deutsche Renault v. AUDI:
A trade-mark right as an exclusive right and protection against marks giving rise to risk of confusion are in reality … two sides of the same coin: reducing or extending the scope of protection against the risk of confusion simply reduces or extends the scope of the right itself.Footnote 278
The nonexistence of a goodwill paradigm and a different policy foundation of the registered-rights model have led to an initial neglect of the equitable nature of rights in European civil law doctrine. A slightly modified perspective, however, allows us to also understand the trademark owner’s right as a legal title: the applicant or registrant may be the formal proprietor from the time of application or registration. Nonetheless, it is market information capital that ultimately determines the scope of her right.
Prima facie, this issue appears more complicated with regard to theories of non-confusion-based infringement. These theories implement different policies of rights acquisition and protection. Yet even though information economization may not be their primary focus, these alternative theories also contribute to the protection of market information capital. The trademark owner’s right in the brand symbol and its use will ultimately also depend on goodwill—albeit goodwill of a different quality. Any impact on this capital, be it through dilutive use, a bait-and-switch scheme, or invasion of trademark scarcity and exclusivity, will be effectuated by direct communication with the consumer.
This correlation, however, is not yet fully clarified. Initially, European trademark law focused on a trademark’s guarantee of the identity of origin as its essential function.Footnote 279 Yet an analysis in light of non-confusion-based theories also considers other trademark functions.Footnote 280 As explained earlier, the Court of Justice further specified and amended the list in L’Oréal and Google France:
[Trademark] functions include not only the essential function of the trade mark, which is to guarantee to consumers the origin of the goods or services (“the function of indicating origin”), but also its other functions, in particular that of guaranteeing the quality of the goods or services in question and those of communication, investment or advertising.Footnote 281
It is particularly the advertising and investment function that requires qualification. In this regard, as the Court of Justice elaborated in Interflora, the “advertising” function of a trademark is the owner’s “opportunity of using [her] mark effectively to inform and win over consumers.”Footnote 282 In addition, the investment function—though possibly overlapping with the advertising function—empowers “its proprietor to acquire or preserve a reputation capable of attracting consumers and retaining their loyalty.”Footnote 283 Reading this literally, one might expect the trademark owner to be allowed to skim all profits ensuing from investment in the trademark.Footnote 284 But this would neglect the trademark’s roots in market communication. Interflora highlights this point: as the court explained, the investment function of a trademark will be invaded only if its reputation is affected and maintenance of the reputation is jeopardized.Footnote 285 No detrimental effect can be found if use of the trademark occurs “in conditions of fair competition that respect the trade mark’s function as an indication of origin” and if “the only consequence of that use is to oblige the proprietor of that trade mark to adapt its efforts to acquire or preserve a reputation capable of attracting consumers and retaining their loyalty.”Footnote 286 This understanding of the investment function implies that the right embodies its owners’ goodwill as the active and effective information capital in the marketplace only. Accordingly, investment in a trademark is protectable only within the confines of the trademark’s capacity as a search term and instrument of market communication.Footnote 287 What determines the scope of rights is the trademark’s being part and parcel of marketplace information infrastructure—ultimately, only directly communication-related investment matters.Footnote 288
Seen in this light, the European understanding of trademark rights resembles Brown’s allegory of the trademark as a bridge for advertising.Footnote 289 A trademark establishes communicative relationships between market participants and serves as an information-transmission instrument. The value protected is the information capital as a keystone of the information infrastructure within the marketplace. Formal rights, as ironclad as they may have been described to be under statutory or judge-made rules, will never be absolute. It is the relativity of market conditions and the equities of goodwill that determine their boundaries.
C Summary
The illustration in Figure 2 (on the next page) summarizes the policies at stake in the fields of trademark and unfair competition law.
Figure 2 The Interrelation of Trademark and Unfair Competition Policies
The common core of protective purposes in trademark and unfair competition law is information economization. This is competitor-consumer relations at the vertical level of the competitive process. In this respect, trademark rights are legal entitlements and are just a formal shell. The equitable substance is provided for by trademark and unfair competition law’s core policy of confusion prevention. I have characterized the information capital at stake in these cases as navigation goodwill.Footnote 290 Beyond this core area, the two fields harbor additional policies. Theories of non-confusion-based trademark infringement have been developed in order to protect surplus goodwill. Here, information economization has fallen out of the picture. Nevertheless, non-confusion-based theories are still founded on market information and its transmission to the consumer. As we will see, therefore, all communication-based theories of trademark and unfair competition law are subject to a similar structure of choice-of-law and conflicts rules. The outer rim of policies in unfair competition law, finally, is the protection of fairness in intercompetitor relations. This is the domain of non-information-based regulation of competitive activities—the horizontal level of the competition process. Since scenarios of this kind are situated beyond the market mechanism of consumer decision making, they are usually governed under genuine tort conflicts rules.
Section 3 Application—Functional Structures in Trademark and Unfair Competition Doctrine
The following dissection of trademark and unfair competition policies will lay the groundwork for the resolution of choice-of-law questions in the last chapter. It will take a closer look at different scenarios of trademark infringement and unfair competition violations, pointing out the respective functional structures of the policies involved. Independent of national law peculiarities and differences in substantive law doctrine, a functional perspective of international trademark and unfair competition disputes provides a consistent and comprehensive guideline for choice-of-law and conflicts analysis.
I Trademark Protection
By looking at information infrastructure and its function in the marketplace, we can identify two different kinds of information capital or goodwill. The traditional passing off and confusion prevention policy protects “navigation goodwill,” which is utilized by the consumer to navigate the market. The subject matter of protection under alternative theories of trademark law, by contrast, concerns “surplus goodwill,” which comprises all other instances of protection under modern theory that are not founded primarily on the idea of preventing consumer confusion.
A Navigation Goodwill: Confusion-Based Infringement Theory
At their core, the fields of trademark and unfair competition law serve the same purpose: protecting free and unhindered consumer decision making, which is the quintessence of competition. This protection determines trademark right extensions and competition fairness standards. US doctrine in both areas remains founded on a practical concept of trade diversion by confusion. While search-cost analysis has taken over in legal theory, the notion of goodwill has come to capture the common functions of trademark protection and unfair competition prevention in practice. The proprietary goodwill of the owner and the psychological goodwill in the public’s mind is the object of protection. Even though the debate over propertization and the misgivings of extending trademark rights is far from resolved, the concept of goodwill has remained the ultimate connection between individual rights, markets, and competition.Footnote 291 In Europe, by contrast, trademark and unfair competition doctrines have never been comparably linked by a common denominator. Although there have been attempts to overcome the separation, the dichotomy has, to date, remained almost insurmountable. One major reason may be the lack of a technical concept functionally similar to goodwill. Indeed, a comparison of the systems suggests that the interrelatedness of confusion prevention and rights protection could far more easily be constructed and explained under the concept of trademark goodwill than under the civil law doctrine of state-granted privileges and conduct regulation.Footnote 292 Notwithstanding these differences in doctrinal instruments, US and European regimes have both moved toward a common core policy of protecting consumer decision making. Indeed, looking at the systems in total, the idea of protecting the market mechanism by establishing conditions for optimal consumer transacting can be explained as a transnationally uniform paradigm. With respect to trademarks, information capital provides for consumer navigation within the marketplace. Since the consumer is the one who determines the individual market transaction, impact on information capital will occur at the place of consumer decision making—or, more precisely, at the place where the consumer turns her decision into a market transaction. This, as we will see in chapter 6, is determinative for attachment in choice of law.
B Surplus Goodwill: Non-Confusion-Based and Time-Shifted Infringement Theories
The consumer’s decision-making process is similarly central for conflicts resolution on issues arising under alternative theories of trademark protection. Yet the doctrinal and structural foundations are different. For a clear determination of the point of attachment in choice of law, we must dissect the relevant subject matter of protection. As discussed earlier, trademark rights have been extended beyond the concept of confusion prevention. Examples include the practical recognition of actionable confusion prior to and after the point of sale, as well as antidilution theory. Regardless of whether these theories adequately fit into a balanced system of trademark protection, none of the alternative concepts will diverge from the confusion prevention doctrine insofar as the consumer always stands at the center of infringement analysis. Alternative theories of trademark protection, therefore, are accordingly founded on policies designed to protect the market information infrastructure. This is what ultimately also matters for choice of law and conflicts resolution.
1 Antidilution Doctrine
As discussed earlier, US and European trademark and unfair competition laws have extended infringement theories beyond the idea of confusion at the point of sale. The development of antidilution doctrine in particular has pushed the protection of trademark goodwill beyond the strict limitations of consumer confusion. Different types of dilution have been acknowledged ever since Frank I. Schechter laid the doctrinal foundation in 1927 with his explanation of trademark uniqueness and singularity as a protectable value.Footnote 293 The determinative issue for all types is whether the dilutive use of a famous trademark results in a deterioration of distinctiveness. Under US doctrine, a trademark’s distinctiveness (i.e., its ability to clearly distinguish the source of a product) can be reduced through blurring or tarnishment.Footnote 294 Both variants require probable harm or injury to the mark.Footnote 295 Dilution by blurring further requires that the mark’s ability to denote only one source of the product be diminished by third parties’ use in a nonconfusing way.Footnote 296 Here, the harm involved is not due to what traditional doctrine describes as consumer confusion.Footnote 297 Rather, it is due to the actual or potential erosion of trademark strength—the weakening of consumers’ mental association between mark and product.Footnote 298 Dilution by tarnishment occurs where the unauthorized use of a trademark has the potential to degrade positive consumer associations of the mark, thereby harming its reputation.Footnote 299 Sometimes, in addition to blurring and tarnishment, a third variant of dilution has been suggested: free riding on a famous trademark’s reputation may also be found to improperly appropriate the owner’s goodwill.Footnote 300 As in the United States, blurring and tarnishment are two recognized forms of dilution in European law. In addition, the Court of Justice has expressly acknowledged a doctrine of free riding and misappropriation prevention wherever a defendant takes “unfair advantage of the distinctive character of the repute of [a] trade mark.”Footnote 301 Under European law, therefore, “exploitation on the coat-tails of a mark with a reputation” may suffice for an infringement; actual injury to the famous mark is not required.Footnote 302
This typology reflects a principal distinction between two markets that can be affected by dilutive trademark use.Footnote 303 In the first market, where the famous mark functions as a product signifier, dilutive use will only indirectly affect consumer decision making. The idea is not to prevent consumer confusion in the direct sense—it is to prevent the long-term loss in efficiency of market information. When the consumer sees, for instance, a “Tiffany” fast-food restaurant or a “Chanel” used-car dealer, she will think both about the original trademark owner and the restaurant or car dealer. Even though she will not be confused, connotations of the name might blur and the trademark’s communicative value for its owner could diminish. Detrimental effects to the consumer’s perception will develop only after illegitimate use of a trademark has been made. Over time, the trademark may lose its function as an extraordinary signifier of quality and source.Footnote 304 With respect to antidilution doctrine in the second market—that is, the market for the diluter’s product—a different rationale governs. Here, under both European doctrine and parts of US theory, a policy of preventing misappropriation, free riding, and parasitism plays the most significant role. The primary legal purpose is not to reduce search costs but to prevent unjust enrichment and misappropriation of another’s investment.Footnote 305
Conflicts law does not need to clarify whether the protection of surplus goodwill is sound. What must be done instead is the spelling out of the exact structural foundation of protecting information capital. If surplus goodwill is captured through the dilutive (ab)use of a trademark, depending on the perspective, the infringement may be found in two different ways. It could be based on either the potential diminution of information capital (in other words, the trademark’s distinctiveness) in the original brand’s market or the misappropriation of information capital for the purpose of transacting in a different market (the marketplace where the second-comer’s product is marketed). As my conflicts typology for dilution scenarios in chapter 6 will reveal, it is the situs of the respective goodwill substance that matters for determining the applicable law.
2 Temporal Extensions of Goodwill Protection
In addition to antidilution doctrine, trademark-as-property protection has been extended under at least two more theories: initial-interest confusion and postsale confusion. Typical cases of confusion affect the consumer’s mind and decision making at the point of sale. With initial-interest and postsale confusion, however, confusion occurs before and after the point of sale, respectively. To accommodate these scenarios, US case law has extended trademark infringement theory accordingly. For its part, European trademark practice has been more cautious in considering such incidents for the issue of trademark infringement.Footnote 306 The bulk of initial-interest and postsale confusion cases, particularly in German doctrine, tends to be covered by norms of unfair competition prevention.Footnote 307
a Postsale Confusion
Succinctly defined, postsale confusion is confusion experienced by the consumer upon viewing the trademarked product after purchase. In principle, postsale confusion theory—similar to point-of-sale confusion—is founded on the idea of information truthfulness. One variation is bystander confusion, which comprises sales to nonconfused consumers who use the product in the company of potential purchasers who are or might be confused regarding the source of the product. If these potential purchasers, by viewing the product, do or could acquire a negative impression of its qualities and thus refrain from a transaction, the injury to the trademark owner is clear.Footnote 308 A similar problem exists with downstream confusion, in which the nonconfused purchaser resells the product in a secondary market, where the sale results in consumer confusion.Footnote 309 Even though the impairment occurs during and through the postsale spreading of incorrect information,Footnote 310 the scenario of potential damage to the trademark’s goodwill is still founded on a genuine concept of consumer misinformation.
Practice, however, has extended the doctrine to situations where the risk of confusion is doubtable or even nonexistent.Footnote 311 In this regard, as with antidilution doctrine, a different category of goodwill is affected. The decision of the US Court of Appeals for the Sixth Circuit in Ferrari S.P.A. v. RobertsFootnote 312 provides a telling example. The defendant had been selling construction kits for full-scale Ferrari replicas. Once assembled, the kits were to be attached to the chassis of other cars. In this case, however, none of the purchasers were confused about the product’s originality at the point of sale. Further, it seemed obvious that the kits, even once combined with the car chassis, could be reasonably distinguished from an original Ferrari. But the court majority nevertheless ruled that the likelihood-of-confusion test for trademark infringement was not limited to a finding of purchaser confusion. As the court explained, confusion of “members of the public” would suffice for finding an infringement.Footnote 313 It particularly emphasized the detrimental effects that a cheap imitation’s poor appearance could have on the original’s reputation for prestige and quality:
Since Congress intended to protect the reputation of the manufacturer as well as to protect purchasers, the [Lanham] Act’s protection is not limited to confusion at the point of sale. Because Ferrari’s reputation in the field could be damaged by the marketing of [the] replicas, the district court did not err in permitting recovery despite the absence of point of sale confusion.Footnote 314
The court continued, sharing the district court’s conception of scarcity and exclusivity protection:
If the country is populated with hundreds, if not thousands, of replicas of rare, distinct, and unique vintage cars, obviously they are no longer unique. Even if a person seeing one of these replicas driving down the road is not confused, Ferrari’s exclusive association with this design has been diluted and eroded. If the replica Daytona looks cheap or in disrepair, Ferrari’s reputation for rarity and quality could be damaged.Footnote 315
In his dissenting opinion, Judge Kennedy pointed out the central issue of postsale confusion doctrine. He acknowledged that cases of actual postsale confusion could ultimately transmit detrimental misinformation to the presale and point-of-sale levels. He had no doubt that if potential purchasers saw a cheap imitation or replica of the original, the original manufacturer’s reputation might be damaged.Footnote 316 Yet, as he continued, the transfer of confusion among and over different stages of the consumer’s decision-making process must find a limit in the fact that, under traditional doctrine, it is confusion with regard to a purchase that is required for finding an infringement. At the time of the court’s decision, statutory causes of action under the Lanham Act were still limited to confusion prevention; there was no cause of action for dilution. The majority, as Kennedy concluded, had thus transformed traditional confusion theory into an extra legem version of antidilution protection and protection of product exclusivity and scarcity.Footnote 317
Looking at the different scenarios of postsale confusion infringement, it is clear that the theory bears a distinct element of information-economization policy: bystanders may acquire incorrect impressions of the original’s qualities when observing an imitation after the point of sale. Sales in downstream markets may ultimately also reflect negatively on consumers’ perception of the original product. In both cases, incorrect information is transmitted and the consumer’s decision making could, at least in the long run, be distorted by the deterioration of trademark information value. Quite often, however, consumers do not bear the slightest risk of either point-of-sale or postsale confusion—the market will then not be subject to misinformation. In these cases, the competing products are qualitatively equivalent or clearly distinguishable at the point of sale and in their postsale environments.Footnote 318 Nonetheless, courts have increasingly come to grant protection to prestigious and reputed trademarks in such cases. In these cases of so-called status confusion, it is not the information value of trademark communication but the social signaling function of the trademark that is protected. Here, the rationale differs, for it is based on the preservation of distinctiveness and reputation.Footnote 319 Ultimately, the brand is substituted for the product.Footnote 320 The trademark owner is selling the luxury and prestige of the product, not the product as such.Footnote 321 Trademark scarcity, exclusivity, and prestige ultimately constitute the surplus goodwill that is protected under an extended theory of postsale confusion.
In Germany and other European jurisdictions, similar cases of product imitation have been found actionable, albeit under a doctrine of unfair competition prevention.Footnote 322 I will address both postsale confusion and unfair imitation cases in more detail in an instant.Footnote 323
b Initial-Interest Confusion
Similar to the prohibition of initial-interest confusion under US trademark law, civil law unfair competition doctrine has established a prohibition on bait-and-switch schemes.Footnote 324 Both initial-interest confusion and bait-and-switch schemes are characterized by a common element of consumer diversion by improper information. The element of “misinformation,” however, will usually dissolve before the consumer reaches the ultimate stage of decision making.Footnote 325 The inherent unfairness stops short of actual point-of-purchase confusion insofar as the consumer usually realizes her initial error, corrects a potential misperception, and ultimately transacts on the basis of correct and complete information. It appears as if no harm is done. Yet the trademark owner may still be injured: First, she may lose on sales if the consumer is actually diverted to a competitor. Second, she may suffer the loss of a sale if the consumer fails to complete a transaction with both the competitor and—as initially intended—the owner based on the assumption that the competitor’s product (with inferior characteristics) was the original.Footnote 326
Here as well, different scenarios must be distinguished. In the first, the consumer’s confusion dissipates quickly and there is no cost attached to the reshifting of her attention to the original product, so she reorients herself. In the second, she stays with the violator, despite being aware of the difference in products. In both cases, initial-interest confusion may add an economically rational element to the process of decision making.Footnote 327 If the confusion dissipates early enough and at low enough costs, the initial disorientation will present just another alternative for transacting. Market information has not deteriorated. A typical example is internet advertising: even if the consumer has been improperly directed away from the original brand, she usually easily reorients herself and completes the initially intended transaction.Footnote 328 The situation is different, however, in cases where the “switching costs” are so high that they keep the customer with the alleged violator. Whenever the inconvenience of initiating a new search for the genuine product is so substantial that the consumer will literally not “go out again” to search for the original, instead consummating her transaction with the violator, consumer decision making in the relevant market has been negatively affected.Footnote 329 An example of this situation is a billboard advertising a brand-name fast-food chain on the highway but actually directing the consumer to a far-away no-name establishment. Once there, the misguided consumer may stay with the fake.Footnote 330
3 The Common Denominator
All theories of antidilution, postsale, and initial-interest confusion share a structural element: consumer perception determines whether an infringement has occurred. This reflects the fact that trademark rights remain grounded to the marketplace. In terms of information infrastructure, the trademark as a communication channel will begin its transmission as soon as—often even before—the branded product enters the market, and it will not stop transmission at the point of sale.
Two different scenarios can thus be distinguished. The first consists of cases where the consumer is actually or potentially confused. In these situations, the consumer’s referee function is impeded; damage will occur as a result of distorted decision making and transacting. What is affected in these cases is navigation goodwill. The second scenario, by contrast, comprises cases where the consumer’s market transaction remains unmanipulated in terms of information correctness and the freedom of decision making. These cases may be characterized as protecting a different category of trademark goodwill—concretely, surplus goodwill. Protection then especially focuses on a trademark’s prestige, association-creating capacity, or scarcity-signaling properties.
What is important to note, however, is that despite the two categories’ doctrinal differences, the relevant (mis)appropriation always takes a detour through the consumer’s mind. No matter which kind of goodwill is affected, dilutive uses and initial-interest and postsale confusion cases always constitute an appropriation of market information capital. There may be no direct loss to the right owner. Instead, the usurpation of her trademark’s reputation suffices as an infringement. Hence, regardless of whether one wants to subscribe to the numerous rationales of alternative protection theories, they share a common characteristic: market information infrastructure is usurped.
In terms of choice of law as well, two categories must be distinguished. Some of the alternative categories still directly relate to the consumer’s decision making. This is the case for initial-interest confusion if it prevents or impedes an unmanipulated decision. If the “confused” consumer is affected in her transacting by excessively high reorientation costs, the infringement at issue has ultimately diverted a transaction away from the market where it would have been consummated without manipulation. Hence, like in genuine confusion-based infringement theory, the market is affected at the place of alternative transactions. This is the place of attachment for conflicts determination. In the second category of alternative theories, substantive law policy is not necessarily focused on regulating a competitive relationship. This is the case for antidilution theory under a paradigm of preventing the watering-down of a famous trademark or for postsale status confusion. These categories are usually founded on the deterioration of information capital in a different market or at a later point. Regarding choice of law, it must accordingly connect to the place of damage to trademark distinctiveness, reputation, or scarcity. In principle, this place must be distinguished from the place where the concrete transaction occurs or where alternative transactions were supposed to occur. Even though, in practice, these places may often coincide, choice-of-law analysis must take note of the difference.Footnote 331
II Unfair Competition Prevention
With regard to the information infrastructure of the marketplace, both trademark protection and unfair competition policies widely overlap. Beyond the common area of protecting the consumer’s decision making on the basis of unmanipulated market information, however, a number of additional policies can be found in traditional unfair competition doctrine. I have already identified cases that concern intercompetitor relations at the horizontal level—this is related to the issue of what can be characterized a bilateral tort.Footnote 332 The following analysis of information infrastructure policies will allow us to further differentiate cases within the categories situated at the vertical level of the competition model.
A Recapitulation: Stages of Decision Making and Policy Differences
In practice, the bulk of scenarios covered by unfair competition doctrine concerns information transmission and collection. This is a part of the common domain of trademark and unfair competition law. The most common cases of misinformation beyond trademark infringement are those regarding otherwise confusing or deceptive advertising. In all these cases, information economization is at stake—in other words, protection of the first stage of the decision-making process.Footnote 333 Moreover, unfair competition law includes unfair practices that do not directly influence information transmission but that may still affect consumer decision making in subsequent stages. Examples include unsolicited home visits or phone calls, undue psychological pressure, and aggressive advertising.Footnote 334 In principle, none of these examples concern the transmission of incorrect information. What policy makers argue when cases of this kind are classified as unfair competition is that certain marketing methods may cut short the consumer’s second thoughts or search for alternatives, causing her ensuing transaction to then be irrational. The distinction between what is acceptable and what exceeds the boundaries of due influence is part of an age-old debate on the benefits and detriments of advertising. In a sense, in many cases the issue is still, as Justice Holmes said almost a century ago, “a question of how strong an infusion of fraud is necessary to turn a flavor into a poison.”Footnote 335 In addition, legal thought in some of these scenarios is influenced by concurrent concerns that relate only marginally to consumer decision making. The most often-referenced question may relate to the right to privacy: the prohibition of unsolicited phone calls is one example where a court decision may appear to be based on unfair competition, but where the substance is actually trespass to privacy. An exact demarcation of the different policies is difficult. Of course, an overly censorious perspective is arguably no longer adequate. After all, the modern consumer is seldom manipulated by officiousness, extra benefits, or giveaways to such an extent that her capacity to make rational decisions is obstructed. Yet the determination where admissible influence turns into undue manipulation may still vary depending on the national culture or other peculiarities.Footnote 336
For choice of law, one thing is paramount: although we need not resolve all contested issues in substantive law, we must separate the policies actually or allegedly involved in the different categories of “unfairness.” This is the necessary foundation for consistent conflicts attachment. The model of the competition process (with its triangular structure), as well as the market-mechanistic structure of relations at the vertical level, will guide the way. Accordingly, the remainder of the discussion will highlight substantive law policies and their impact on conflict law for the most common unfair competition scenarios.
B An Integrated Model of Unfair Competition Law (Including Passing Off)
As a consequence of the strong socialization tendencies during the twentieth century, European unfair competition law used to aim at protecting the “public interest” in many different respects. In order to explain conduct as “unfair,” courts regularly referred to concerns such as public health, morality, and general decency. Quite often, the purpose of unfair competition prevention was seen as preventing undue deviations in competition in general (Auswüchse des Wettbewerbs).Footnote 337 Over time, however, a more focused perspective has come to dominate. Public interest, though still accepted as a concern of unfair competition law in principle, is limited to the free and unhindered functioning of the market mechanism.Footnote 338 But even on the basis of this more economized doctrine, a problem persists. Particularly in European law, the fields of consumer protection and unfair competition have become increasingly intermingled.Footnote 339 Until today, the relation between freedom of competition and consumer protection appears almost inseparable. One example of this intermingling can be found in the 2005 UCP Directive’s recitals:
This Directive directly protects consumer economic interests from unfair business-to-consumer commercial practices. Thereby, it also indirectly protects legitimate businesses from their competitors who do not play by the rules in this Directive and thus guarantees fair competition in fields coordinated by it.Footnote 340
Prima facie, the text prioritizes consumer concerns. It thereby appears to allow for—even require—an extension of consumer protection policies beyond the domain of mere decision-making autonomy.Footnote 341 Correspondingly, scholarly commentary has found a priority of consumer protection in both primary community law and secondary law unfair competition doctrine.Footnote 342 Proponents of this theory reject the idea that the UCP Directive is founded mainly on the freedom of competition. Instead, they posit, consumer protection is supposed to be an independent and equivalent aim among unfair competition policies. In this regard, they point out that the directive’s “black list” of unfair commercial practices emphasizes an overarching concern for consumer protection.Footnote 343 In addition, they refer to other European regulations—particularly in the fields of tobacco, alcohol, and health-related advertising—as examples of universal consumer protection policies.Footnote 344
But the directive does not go this far. The instrument’s prioritization of consumer interests is expressly qualified: it focuses on the consumer’s economic interests,Footnote 345 not her civil rights or any other concern. At its core, therefore, the directive does not demand across-the-board protection. Rather, it is founded on a two-sides-of-the-coin conception of consumer and competitor protection as constituent elements of an institutional guarantee of undistorted competition. Hence, protection of the consumer’s position as a referee—not as a citizen—is what stands at the center. In essence, therefore, the instrument is aimed at a functional regulation of competition.Footnote 346 Of course, exceptions to this implementation exist, for European unfair competition law has yet to be comprehensively harmonized. Since the UCP Directive concerns B2C relations only, the field of B2B relations remains widely an issue of member states’ laws. In addition, the directive has implemented escape provisions for national lawmakers in several fields, notably with regard to health-related regulation and “legal requirements related to taste and decency.”Footnote 347 Yet these examples do not require a fundamental reconceptualization. On the contrary, unfair competition doctrine in Europe—more than ever—seeks primarily to rationalize consumer decision making; other policies will prevail in exceptional situations only.
The situation appears different with regard to the English doctrine of passing off. A law of unfair competition, as is often explained, is unknown in the UK. Courts are said to shy away from drawing clear lines between what is “fair” and “unfair” competition.Footnote 348 Only in cases of consumer deception is court-moderated regulation considered acceptable and legitimate.Footnote 349 Such scenarios are traditionally treated under the doctrine of passing off.Footnote 350 However, a closer look at the “classical trinity” of passing off—goodwill, damage, and misrepresentation—unveils that the doctrine is also founded on a conception of consumer decision making.Footnote 351 While the subject matter of protection, at least formally, seems to be goodwill (as private property), the basis of the action has always been misrepresentation, most commonly with regard to the source or the qualities of a product.Footnote 352 And even though, over time, the field has become increasingly complex, the gravamen of a claim is still misinformation in the marketplace: in order to succeed, the plaintiff must show that the conduct at issue is deceptive.Footnote 353
Indeed, seen in light of these foundations, the divergence between passing off and the UCP Directive or the bases of unfair competition prevention in civil law doctrine no longer seems very large. Of course, liability for passing off exists only between competitors; consumers and consumer associations have no claim and no standing to sue. One might thus conclude that passing off should simply coexist with the directive for lack of overlap between B2B and B2C relations.Footnote 354 But such a formal perspective is too narrow. Looking at the policies involved actually highlights the congruency. Preventing deception under a doctrine of passing off requires, among other things, that the misrepresentation at issue be “material”—hence, apt to actually influence the prospective consumer.Footnote 355 In this regard, passing off corresponds with the modern approach of protecting consumer decision making from “material distortion” under articles 5 et seq. of the UCP Directive.Footnote 356 Consequently, most scenarios decided under the traditional doctrine of passing off will also qualify as unfair under the directive’s focus on the market mechanism.Footnote 357
For choice of law, this implies a simple rule: in cases that directly concern consumer decision making, it is the place of transacting—more concretely, of transaction alternatives—that determines the applicable regime. However, in cases where the concrete policy at stake is not primarily aimed at the protection of consumer decision making, a different rule may govern. This distinction can be explained by taking a closer look at the heterogeneous nature of harassment prevention policies in unfair competition doctrine.
C An Amalgam of Policies: Harassment, Privacy, and Decision Making
Undue harassment and coercion have traditionally been deemed improper under many national unfair competition regimes.Footnote 358 Modern examples of undue consumer harassment through unsolicited contact include cold calling and e-mail spamming. Under the UCP Directive, harassment is generally analyzed in light of the prohibition on aggressive practices. For a commercial practice to be regarded as aggressive, it must have the potential to significantly impair the average consumer’s freedom of choice or conduct in a manner that will lead to a transactional decision that she would not have otherwise made.Footnote 359 Seen in this light, the prevention of undue harassment may be an issue of protecting consumer decision making.Footnote 360 But harassment may also be characterized as infringement of the consumer’s right to privacy. A prohibition will then have to be founded on a quite different policy.Footnote 361 Indeed, the UCP Directive implies that there may be even more relevant policies beyond the scope of protecting consumer decision making. Notably, undue harassment can also be found “for reasons of taste and decency,”Footnote 362 even if no actual or potential impact on the decision-making process is to be feared.Footnote 363
At this point, again, the heterogeneity of policies—and its importance for choice of law—surfaces. The consumer may be protected either as a person or in her function as a referee in competition; sometimes, both policies may work together. This complexity illustrates the segmentation that will govern the following analysis on choice of law. The prohibition on harassment is not homogeneous in terms of the protectable subject matter at stake, which could be consumer decision making, individual privacy, or a more general concern for decency in competition. Accordingly, the point of conflicts law attachment may vary.
D Beware of the Consumer’s “Economic Personality Right”
The heterogeneity of policies in harassment prevention illustrates the manner in which the consumer’s position has been transformed in recent decades. Her status has evolved from being a mere parameter in intercompetitor dispute resolution to being the center of unfair competition doctrine. However, as we have seen, this development has been partially reversed in recent years. Today, all-encompassing consumer protection has become outdated. Desocialization entails at least a certain degree of depersonalization.Footnote 364
As we have seen, under historical German doctrine, a competitor’s rights in the field of trademark and unfair competition protection were genuinely founded on her personality. This theory was perpetuated under the guise of unfair competition individualism: the analysis of economic rights and interests was focused on the competitor side alone. As a result, the understanding of personality rights doctrine was lopsided. While the competitor could claim violations of fairness standards and an intrusion of personality rights, the consumer’s personality was—if at all—regarded with a view to its noneconomic dimension. Individual rights protection within the marketplace was not available for consumers, at least not on the basis of personality rights.Footnote 365 This changed with the advent of consumer protection policies in the second half of the twentieth century. Examples of the early acknowledgment of a sacrosanct sphere include the protection of privacy and the rights to be left alone and to be free from undue harassment.Footnote 366 This protection was initially limited to noneconomic aspects; the consumer had no domain of an “economic personality right.” But the final decades of the century brought change.Footnote 367 Against the backdrop of the former myopia concerning consumer rights, this extension was revolutionary. The economic personality right comprised not only the consumer’s right to be left alone but also a right to engage in autonomous transactional decision making. Hence, consumer personality and freedom were to be protected both generally with respect to noneconomic activities and more specifically within the marketplace.Footnote 368
Over time, many cases came to be described as invasions of personality rights. These invasions were most commonly attributed to subliminal advertising and psychological pressure.Footnote 369 Overall, however, the scope of protection was unclear. One example was deceptive advertising. As some proponents of economic personality rights theory contended, deception alone—unlike, for example, physical or psychological manipulation—would not directly infringe on the freedom of decision making as such and hence would not invade the consumer’s personality right.Footnote 370 Yet such a differentiation was duly criticized as inconsistent: after all, both physical/psychological pressure and deception appeared similarly apt to degrade the consumer to an “object” of market competition.Footnote 371 Some scholars went even further, describing emotionally loaded advertising as a violation of personality rights.Footnote 372 In essence, the problem with economic personality rights doctrine was its tendency to dilute the demarcation between the consumer’s civil rights and her freedom of transaction. Ultimately, almost any impact on the consumer, regardless of its effect on the decision-making mechanism, would qualify as a violation as long as the practice could be found harassing, compelling, or otherwise manipulative.
Quite differently, under the integrated model’s functional approach to competition regulation, the referee function—not the consumer’s status as an individual and as a citizen—is to be protected. Two examples illustrate this difference. Proponents of consumer personality rights protection have contended that consumer rights will be violated by hidden data collection concerning consumption habits.Footnote 373 This is correct in terms of privacy protection. Conduct deemed improper under such a civil rights perspective, however, need not necessarily result in a manipulation of the market mechanism or a distortion of competition. On the contrary, offering the consumer exactly what she desires can be rather efficient from a perspective of information economization. After all, there is no undue impact on the decision-making process as such. Another example of “unfair” competition within this category is “shock advertising” (or shockvertising). The use of shocking communication vis-à-vis the consumer is a problem primarily with regard to her personality rights. After all, drastic communication may be offensive and unwanted. It may sometimes affect the decision-making process, but this need not necessarily be the case. The fact that the content of commercial communication is outrageous will not necessarily lead to an irrational transaction. Both examples illustrate that at least two spheres of normative concern exist. One is the market mechanism, which has become the genuine domain of modern unfair competition policy. The other comprises policies beyond this core domain. This sphere, which involves protecting the consumer as an individual and as a citizen, is determined by many different policies (e.g., privacy, property, and so on). Not all of these individual civil or constitutional positions will coincide with the interest in free competition.Footnote 374
What is important for this inquiry is that in a triangular model of the market mechanism, the field of individual and civil rights protection must be located beyond the categories of horizontal and vertical market relations. To the extent that consumer protection does not cover referee decision making, its specific policy will be neither an issue of intercompetitor relations nor one of the integrated model of unfair competition doctrine. Therefore, choice-of-law doctrine needs to inquire about a different aspect—this implies choice of a different point of attachment.
E Quasi IP Rights: The Gray Zone of Product Imitation
Like US trademark doctrine, German unfair competition law has implemented a specific aspect of quasi IP protection under the concept of preventing misappropriation and free riding on a competitor’s achievements. The problem is usually debated in the context of allegedly improper product imitation. This category overlaps significantly with the theory of postsale confusion.Footnote 375 The analytical challenge here is to clearly distinguish relevant policies with respect to the consumer’s referee function and concerns beyond the protection of the market mechanism.
The category of product imitation relates to activities that attempt to appropriate a competitor’s market share by imitating her product. By reproducing, for example, a specific shape or other property of the product, the competitor may (without infringing on copyrights, trademark, design, or patent rights) acquire value that may be deemed to belong to the market participant who established the market position of the original product. The mere exploitation of another’s achievement is not, in itself, inconsistent with a system of free-market competition. As is regularly explained, imitation is a genuine form of competition.Footnote 376 Nevertheless, excessive imitation must be prevented in order to assure that the incentives to innovate remain sufficient.Footnote 377 The question, however, is how to demarcate admissible from excessive imitation. A basic tenet seems uncontested: imitation of a product alone will usually not suffice to characterize it as a case of unfair misappropriation.Footnote 378 A finding of improper imitation always requires additional elements of “unfairness.” Several categories of misappropriation cases can be distinguished; the relevant aspect of unfairness varies across these categories.
One category of product imitation involves consumer deception. For example, the statutory provision in section 4 no. 3(a) of the German Unfair Competition Act (UWG) provides for a case of unfairness if a competitor “offers goods or services that are replicas of goods or services of a competitor [and] if he … causes avoidable deception of the purchaser regarding their commercial origin.” Here, the necessary prerequisite qualifying an imitation as improper is purchaser deception. This standard resembles the test for confusion in trademark infringement analysis.Footnote 379 Yet the debate over the underlying policies has never been resolved. And the issue has become even more complicated under the UCP Directive.Footnote 380 Again, choice-of-law analysis does not require a comprehensive solution of the problems at the level of substantive law. Regardless of whether avoiding consumer confusion is a relevant policy, any case of product imitation entails instrumentalization of the consumer’s mind. It is the consumer’s transaction that ultimately leads to an invasion of the competitor’s right. Accordingly, conflicts attachment will have to give regard to the localization of this last stage of the consumer’s decision-making process.
A second category of product imitation centers on the exploitation or impairment of the original product’s reputation or goodwill (Rufausbeutung and Rufbeeinträchtigung).Footnote 381 While such cases may include an element of consumer confusion, this is not a prerequisite. What is required and sufficient is the exploitation or deterioration of the genuine product’s reputation. Parallels to the US postsale confusion theory, notably the Ferrari doctrine,Footnote 382 are manifest. An oft-cited case in German doctrine, the Tchibo/Rolex decision, illustrates the structure. In this case, a producer of cheap wristwatches had imitated the specific design of the Rolex originals and was selling the copies for approximately 1% of the original price. The Bundesgerichtshof deemed the original’s appearance sufficient to constitute a distinctive indication of commercial origin and, accordingly, found in favor of the plaintiff who claimed that the defendant’s product was an improper imitation. Remarkably, however, the court did not require confusion about product origin to exist among consumers. Instead, it was enough that the bystanding public—that is, the social environment of the imitation’s buyers—may have been confused. On this basis, the imitation was deemed a misappropriation of the original product’s reputation for quality and prestige.Footnote 383 Here as well, a structural analysis points to the consumer’s mind as most relevant for choice of law. As the court acknowledged, the Rolex imitations may not have created a risk of consumer confusion at the point of sale, and consumer decision making may not have been unduly manipulated with respect to its economic rationality. Further, the court left undecided the issue of whether the plaintiff’s (and her product’s) reputation or goodwill was actually injured by the defendant’s free riding.Footnote 384 Hence, at least prima facie, no problem of information (mis)economization existed.Footnote 385 Nevertheless, consumer perception was what made invasion of the firstcomer’s position improper. The information-related capital accumulated by the producer of the original Rolex was utilized for a different product market. It is the situs of this surplus goodwill that determines the point of attachment in choice of law.
A third category of product imitation is the direct or immediate appropriation of a product’s design or properties (unmittelbare Leistungsübernahme). Under German law, this category appears to have been jettisoned in large part.Footnote 386 In some jurisdictions, however, direct appropriation may still be deemed unfair per se. The lack of an alleged infringer’s own efforts in creativity or investment then qualifies the scenario as unfair. Sometimes even the modus operandi—for example, the ordering of samples from a victim-competitor in order to imitate the product—may suffice.Footnote 387 Accordingly, these cases will often imply neither consumer confusion nor goodwill misappropriation.Footnote 388
Against this backdrop, it is clear that widely differing policies may apply in cases of product imitation. The relevant policy might be information economization, goodwill protection, or genuine misappropriation prevention. Moreover, the different policies may be at work concurrently. In many cases, of course, the consumer’s mind is the link that connects conduct and effects. This might lead one to conclude that the customer side of the market is affected in all cases of product imitation.Footnote 389 This perspective is duly rooted in the market connectivity of the conduct at issue. However, it risks disregarding the relevance of consumer decision making as a more specific element of the market mechanism. If consumer decision making per se is not being influenced, there is no element of unfairness with respect to the vertical relationship. Notably, the policy involved in the prohibition of direct appropriation or improper use of know-how will seldom affect the consumer’s referee function. This also makes a difference with regard to conflicts resolution. As we will see in more detail in the last chapter, the points of attachment depend on whether the substantive law policy at issue is aimed at protecting consumer decision making or at something else.Footnote 390
F The Continental Dark Horse: Breach of Statutory Duties as Unfair Competition
Finally, it is necessary to explore a concept of “unfairness” that exists primarily in civil law systems. Under this model, unfairness may be found if a competitor breaches a statutory duty and (as result of the violation) attains an advantage or head start in competition. As its proponents argue, the breach of a statutory duty or provision may distort the overall equality of competitors under the par conditio concurrentium.Footnote 391 Yet the issue of “unfair statutory breach” has received little attention in common law doctrine. In English law, for instance, the breach of a statutory duty is acknowledged as giving a right of action in tort if the claimant has suffered a loss as a result of the breach of an administrative or criminal norm.Footnote 392 A court may also grant injunctive relief.Footnote 393 Such relief, however, will be granted under general tort law, not as a device to prevent unfair competition.Footnote 394 Besides, the category has not been included in the UCP Directive. Accordingly, it may no longer be comprehensively evoked in member states’ national doctrine.Footnote 395 In Germany, for instance, only the breach of a norm that is intended to regulate market conduct can qualify for the category.Footnote 396 Hence, violation of a statutory provision as such—for example, speeding or tax evasion—is not sufficient to establish a case of unfairness.Footnote 397 This was not always the case, though. During the twentieth century, the scope of norms found eligible to establish an anticompetitive breach was still quite extensive.Footnote 398 Courts and legal scholars, however, increasingly adopted a policy-oriented selection of norms that could qualify.Footnote 399 In particular, the prerequisite that the norm at issue must be in the “interest of market participants” has proven complex. After all, almost any norm that regulates market conduct will also affect the public interest in one way or another. More recently, the debate centers on the question whether only norms protecting the consumer’s referee function should qualify or whether norms more generally protecting “the public” could also be eligible.Footnote 400
Here again, a closer look at substantive law policies is relevant for choice of law. One aspect is paramount: the finding of unfairness depends on the breach of a norm as such. Such a breach will, however, not necessarily affect consumer decision making. One example is professional regulations (e.g., rules on admission to the bar for lawyers). If admission to the profession is achieved without the fulfillment of formal requirements (and thus in breach of the regulation), an instance of unfair competition will be found even without actual activity in the “professional market.”Footnote 401 In essence, therefore, the category of statutory breach is to be distinguished from other scenarios of unfair competition where the consumer’s decision making or competitor-related concerns are the direct beneficiaries of protection. Choice-of-law determination will be accordingly detached.Footnote 402
III A Hybrid Category: Geographical Indications
Finally, it is important to address the law on designations of origin and geographical indications as a field at the crossroads of trademark protection and unfair competition prevention. A number of international agreements exist, and the European Union has introduced regulations dealing with designations of origin and geographical indications for food and agricultural products.Footnote 403 Although national laws are still not uniform, the underlying policies are well reflected in a cursory categorization of geographical designations: the most general subject matter of protection is found in designations indicating a certain product’s geographical origin.Footnote 404 Such a designation will be protected against use that is misinforming with respect to the product’s geographical origin.Footnote 405 In addition, an incorrect designation may further infringe on a geographical designation if it also signals certain properties or qualities and if the product offered does not, in fact, fulfill these standards.Footnote 406 Finally, national laws may provide for the protection of famous geographical designations against nonconfusing uses if their special reputation could be injured or misappropriated.Footnote 407
Beyond this categorization, a more formalistic debate is going on with respect to the legal nature of geographical designations. Some describe geographical designations as subjective rights, comparable to intellectual property.Footnote 408 Others view them as distinct from trademarks and trade names and hence from the category of intellectual property. Under this perspective, the subject matter of protection is the collective goodwill of a designation’s beneficiaries; yet no absolute and exclusive rights exist.Footnote 409 Admittedly, with regard to terminology, the Court of Justice and the European Commission appear to classify geographical designation as “intellectual property.”Footnote 410 Terminology, however, hardly determines doctrinal characterization. By contrast, a closer look at the underlying policies indicates that geographical designations are largely part of the sector of unfair competition prevention. Several aspects are determinative: by definition, geographical designations cannot grant exclusive rights since they do not establish a single “owner” or a definite group of “owners.” The number of beneficiaries is potentially infinite, for the nearly unlimited group of producers situated within the given geographical area may make use of the indication.Footnote 411 The number of “owners” may grow or shrink at any time, depending only on the amount of producers moving in or out of the geographical area. In addition, depending on the respective national law, an “infringer” may be enjoined by both the beneficiaries of the designation and, for instance, a consumer association.Footnote 412 This latter fact points toward a characterization as unfair competition prevention.Footnote 413 An exception may be found in the protection of geographical designations with a special reputation—for instance, Champagne.Footnote 414 Protection of such reputed indications establishes a non-confusion-based theory of infringement that protects additional value. Here, too, therefore, two different kinds of goodwill—navigation and surplus—can be distinguished.Footnote 415
Thus, with respect to choice of law, the specific character of geographical designations—notably the difference in underlying policies—requires a treatment either in accordance with the marketplace-effects rule or with close regard to the locus of the collective goodwill. While the former is an expression of a policy protecting consumer navigation, the latter concerns the surplus goodwill provided by a geographical designation.Footnote 416
Conclusions
Two dimensions of competitive activities exist—horizontal and vertical. While the horizontal level concerns cases of intercompetitor wrongs, the vertical level is where the cynosure of competition can be found; this is where market transactions occur. This vertical/horizontal demarcation highlights many contested issues concerning the interrelations between tort, unfair competition, trademark, and antitrust law.
Looking at consumer decision making and transacting as the most determinative element of the market mechanism will resolve these issues in both substantive law and choice of law. Let us start with the seemingly inseparable nexus between tort and unfair competition law: it is only through a close look at the consumer’s decision making and transacting that a disentanglement can be undertaken. A large part of civil law unfair competition doctrine still covers tortious conduct that does not have an immediate impact on consumer decision making. These areas must be distinguished from the core area of unfair competition policy. They can be found at the horizontal level of the market mechanism. Policies on the vertical track, by contrast, regulate conduct that immediately affects consumer decision making and transacting. This is the actual domain of “competition” with a direct connection to the market.
These micromechanics of market transacting also explain the segmentation of the field of intellectual property rights. In light of their common core policy, we can say that trademark and unfair competition law protect the information infrastructure of the marketplace. Looking at the fields under this lens reveals that both areas are complementary sectors of a regulatory regime governing the currents of communication between market participants.
Several important points arise. First, with regard to the separation between trademarks and other intellectual property, it is important to acknowledge that there is no uniform category of “intellectual property.” The granting of trademark rights is driven by a concern that is fundamentally different from general intellectual property theory. Rights creation and protection under trademark doctrine is intended to provide an incentive to invest in marketplace competition. Unlike patents and copyrights, the system of trademark protection is not a time-limited perpetuum mobile of individual entitlements in creative or innovative intangibles. Rather, trademark protection is founded on a continuum of goodwill creation and maintenance.
Such a market-mechanistic perspective also helps clarify inconsistencies in unfair competition doctrine. While consumers’ interests generally coincide with the public’s interest in unhindered competition and free markets, the policy of “consumer protection” is not homogeneous. It is founded on different conceptions of the “consumer.” One aspect concerns the protection of the private citizen—notably, the protection of personality and privacy. Another facet involves the protection of the consumer as a referee in competition. Protective policies beyond this narrow focus are detached from the market mechanism and from the integrated concept of modern unfair competition law. In addition to distinguishing between citizen and referee, we can identify further policies that are not concerned primarily with protecting consumer decision making. Both trademark and unfair competition doctrines host such additional policies of goodwill protection. This is the field of surplus goodwill, often characterized as brand reputation, prestige, scarcity, or exclusivity. Examples include antidilution, postsale confusion, and product-imitation doctrines. Policies concerned with protecting such surplus goodwill are not immediately aimed at protecting consumer decision making. Yet they are nevertheless bound to information.
Choice of law must closely follow these demarcations in substantive law policy. Competitive conduct can consist of competitor-related activity that bypasses the market mechanism of consumer decision making. This is the category of bilateral torts that makes up competition at the horizontal level of the market-mechanism model. Under choice-of-law doctrine, tort conflicts rules will accordingly take precedence (see article 6(2) of the Rome II Regulation). At the vertical level, impact on the decision-making process, including the final stage of transacting, can affect the market mechanism at its core. This is the cynosure of competition and, as we will see, the epicenter of choice-of-law analysis for all policies that are designed to establish and protect the information infrastructure of the marketplace (see article 6(1) of the Rome II Regulation). In addition, however, beyond this common core of trademark protection and unfair competition prevention, a wide array of additional policies exists. Among them are regulatory restrictions on matters related to the public interest in general—for example, the prevention of consumer harassment in order to protect civil rights concerns of privacy. Another example is the prohibition of competitive conduct deemed offensive, immoral, or otherwise indecent. Further categories comprise elements of postsale confusion and antidilution doctrine, as well as quasi IP rights protection against product imitation. Undue manipulation of consumer decision making will be unlikely in many of these cases. For choice-of-law analysis, the underlying policies must be kept separate and will, accordingly, lead to an attachment that is—at least in principle—different from the choice of law in market-oriented unfair competition.
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