Christian Louboutin Decision Shows Trademark Law Is Out of Control

by Nigel Bolton-Shaw on September 6, 2012

Christian Louboutin wins appeal to trademark signature red soles (unless the shoe itself is the same colour) … Christian Louboutin CAN trademark signature red soles after winning appeal. – UK Daily Mail

We’ve written about problems associated with copyright law as regards the Megaupload (Kim Dotcom) case. In this article we’ll focus on patent and trademark law – especially from an investment point of view.

Here’s a legal definition of a “mark” from Lawmart.com:

A trademark is a word, name, symbol or device which is used in trade with goods to indicate the source of the goods and to distinguish them from the goods of others … The terms “trademark” and “mark” are commonly used to refer to both trademarks and servicemarks … Trademark rights may be used to prevent others from using a confusingly similar mark, but not to prevent others from making the same goods or from selling the same goods or services under a clearly different mark.

A patent is a similarly restrictive legal encumbrance. Only it is issued for an invention and can last for 20 years or more. It may sound reasonable to use the force of law to reward original thinkers, but as these laws grow more complex, many small entrepreneurs are finding they are being used to restrict innovation not expand it.

Of course, both patent and trademark law are, in fact, a form of price fixing. The state is giving a franchise of one sort or another to the winner of the patent case and depriving the loser of revenue. It is a wealth transfer mandated by force.

Should the market itself decide? This is not a merely hypothetical question as patent law grows more complex and arbitrary. Western judiciaries are involving themselves in business methodologies of production and marketing more and more.

Investors will have to take this into account in the future unless this trend is reversed. Of course, investors deal with the impact of patent law on company prospects anyway. But extrapolate the trend and you will see that sooner or later patent law becomes as important or more important than other parts of company operations.

Patent law, especially, is bad from a free-market standpoint not only because it constitutes an enforced wealth transfer but also because it is subject to change over time based on various forces affecting government.

A good example of this is a recent decision (late last year) of the US government to change from “first to invent” to “first to file.” Here’s how Forbes put it at the time:

New Patent Law Means Trouble For Tech Entrepreneurs … Last Friday, President Obama signed into law the Leahy-Smith America Invents Act, which passed the Senate last week by a large bipartisan majority, 89-9. Normally, when both political parties agree on anything, it’s time to celebrate. I wish that were the case here. To the contrary, this law will undermine one of the things that has made America unique and our economy strong: technology entrepreneurship …

Proponents of this bill argued that all other industrialized countries are on the first-to-file system, so we should be too. If we look at the evidence from other countries, we should be grateful that we dodged the bullet of past attempts to change to FTF since it has not gone well for them by several measures. Canada changed to FTF in 1989, and two studies concluded that it was bad for small companies and individual inventors. A 2010 Canadian study also said “long-term returns in the Canadian venture capital industry are such that capital has fled the market.” We invest 10x more venture and angel capital per capita than Europe does. Clearly technology entrepreneurship blossoms here to a much greater extent than every other country other than Israel — and Israeli companies rely on our patent system way more than their own.

There is other evidence from Europe that their patent system is not working for their start-ups. In May, the U.K.’s Small Medium-sized Entity Innovation Alliance sent a letter to their prime minister complaining that they “know only too well the failure of the patent system and have given up.”  Two years ago, a European research organization published a study titled “Lost property: The European patent system and why it doesn’t work.”  In February, the EU declared an “innovation emergency” due to how far behind us they are falling in innovation and in R&D investments. This is whom we are “harmonizing” with? Our government has not done its homework.

The recent Christian Louboutin decision once again highlights the increasing encroachment of government on the private sector and its operations.

Why on earth is a court deciding whether only one company can produce shoes with a red sole? And why is this same court deciding that other companies can produce red-soled shoes but only if the rest of the shoe is red?

As these sorts of decisions become more invasive, the downside of this sort of law is becoming more apparent. Many entrepreneurs do not hold high opinions of much of patent and trademark “law” these days. It is seen as an impediment to creativity and invention though initially the patent system was supposed to protect ideas and their creators.

These days, large companies with deep pockets can win competitive arguments in court rather than in the marketplace. It is one more evolution towards bigness and global complexity and a kind of trend that over time will surely stifle innovation and skew opportunities toward those with financial resources and influential connections.

If this trend continues, investors will surely have to consider companies not only within the context of market opportunity but also within the context of their exposure to intellectual property rights.

Someday perhaps deep pockets will trump innovation on a regular basis. At least that seems to be the evolving trend …

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