![The Cost of Defending Your Brand in Court [Trademark Infringement Lawsuits]](https://www.ama.org/wp-content/uploads/2018/12/Trademark-Image.jpg?resize=720%2C295 "The Cost of Defending Your Brand in Court [Trademark Infringement Lawsuits]")
Companies routinely turn to the courts to protect their trademarks from imitation, competitors’ false claims, or counterfeiting. Large companies know that brand erosion can lead to consumer mistrust and revenue losses. For example, brand losses to counterfeits alone are estimated to be $250B in the U.S. each year and as much as $1 trillion globally.
More than 3,000 trademark infringement lawsuits are filed each year in US district courts, with litigation that advances to trial costing between $375K to $2M per case. While these lawsuits signal that companies are willing to take swift action to protect their brands, they also send a secondary signal to stakeholders that a brand attack has occurred and is material enough to require significant, expensive intervention by the legal system. In this scenario, investors use limited publicly available information to make inferences about a company’s future, including potential revenue loss, damage to brand equity, and any relief that may result from the lawsuit.
Our research team evaluates how investors respond to these conflicting signals upon learning about a new lawsuit and again how they react when the lawsuit is either settled, typically confidentially, or ended by court verdict. We are the first to categorize all the major types of trademark infringement a brand can face in the marketplace and to quantify the financial consequences of protecting a brand in court.
We use data from Lex Machina, a comprehensive database of legal cases with information on all intellectual property lawsuits filed in U.S. district courts. We analyze 1,918 trademark infringement cases filed between 2009-2014 by 540 publicly traded U.S. firms across 214 different industries. We focus on U.S. firms for the study because many U.S. brands are high-value targets for infringers, and the U.S. has a well-developed legal system that can help trademark owners defend their brand assets.
Our research finds seven different threat categories: counterfeiting, gray markets, brand misappropriation, brand imitation (copycats), false advertising, cross-industry brand misappropriation, and cross-industry imitation. In our study sample, the two most common threats were brand misappropriation (38.7%) and counterfeiting (31.1%). Litigation outcomes included settlements (51.62%), plaintiff wins (46.19%), and defendant wins (2.2%). Most lawsuits involving counterfeiting and gray market goods were won by the plaintiff, while the majority of false advertising, copycat, and brand misappropriation cases ended in settlement.
From Wharton Business Radio
Alina Sorescu, Professor of Marketing at Texas A&M, joins host and Wharton Prof Americus Reed to discuss her brand infringement research outlined in recently published paper “Hands Off My Brand! The Financial Consequences of Protecting Brands Through Trademark Infringement Lawsuits” on Marketing Matters.
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Filing a trademark infringement lawsuit negatively affects a firm’s stock price because investors put greater weight on the negative signal of the lawsuit, which reveals the problem to the market, than the positive information of potential relief as a result of the lawsuit. The average cumulative abnormal return (CAR) at the time of filing were -0.12% and -0.13%, which corresponds to an average loss of $33 million in firm value. For firms that filed five or fewer cases in the six months prior to the focal case, the CAR were more severe—between -0.18% and -0.19%. Firms that filed five or more cases in that time period did not experience significant abnormal movements in their stock prices at the time of filing, as investors expected that firms would take legal action to protect their brands.
Furthermore (and counterintuitively), investors react negatively to plaintiffs winning trademark cases and being awarded damages. In the case of settlements, investors have no clear information about case resolution or the prevention of a future infringement, as the terms of settlement agreements are confidential, and there is no significant abnormal movement in stock prices. In contrast, when plaintiffs win a trademark infringement case, this confirms the validity of the threat and causes investors to downgrade their expectations of the firm’s future cash flows or discount rate, at least in the near-term. The average excess returns were -0.24%, which corresponds to an average loss of $69 million in firm value. These numbers dip to -0.52% if the plaintiff was awarded damages, which equates to an average loss of $119 million in firm value for that particular subsample.
At the same time, the long-term performance of firms that win such lawsuits is positive, suggesting that stopping a brand threat pays off despite short-term losses. We predict that is because investors update their analysis of a firm’s prospects as more information, such as earnings releases, becomes available. If the threat has been effectively stopped by the lawsuit, the earnings should eventually recover from any potential decreases due to the infringer’s actions. We revisited the CARs of plaintiffs six months after the end of litigation. We found that winning firms experienced positive average monthly abnormal returns of 0.38%, which corresponds to average monthly gains of $112 million. Once again, the excess returns of firms that settled or lost a case did not differ significantly from zero.
The positive net effect suggests that managers should fully leverage legal action to protect trademarks. However, they should also educate investors that losses with these lawsuits are temporary and that the legal actions are beneficial in the long-term.
Larisa Ertekin, Alina Sorescu, and Mark B. Houston, “Hands Off My Brand! The Financial Consequences of Protecting Brands Through Trademark Infringement Lawsuits,” Journal of Marketing, 82 (September).
Go to the Journal of Marketing
Larisa Ertekin is a doctoral candidate, Texas A&M University.
Alina Sorescu is Professor of Marketing and Paula and Steve Letbetter ’70 Chair in Business, Texas A&M University, USA.
Mark B. Houston is Professor of Marketing and Eunice and James L. West Chair in Marketing, Texas Christian University, USA.