Is Trademark Infringement Fraud?

By Megan McArdle

So, as I could have predicted, the comments section on my post about "non-rivalrous" goods and the nature of property rights has turned into a a rather contentious brawl.  It currently has 600 comments, and counting.


One of the most common responses has been "that's not theft, that's fraud"--for example, with regards to identity theft.

This simply isn't true.  As you can see, many of the relevant statutes in fact refer to "taking", "stealing", or "theft" of another person's identity--it's not just, as I was informed yesterday, a colloquialism.  Moreover, upon any reflection, I think it's clear that this is the correct interpretation.  Of course, identity theft usually involves another crime--a fraud--such as obtaining services or credit under a false name.  But the fraud is against the bank.  The person whose identity was used has not been defrauded.  

Instead, you've taken the reputation (usually financial) that they've spent a great deal of time and effort building up.  This taking is in some sense non-rivalrous--you can both use the identity, though of course, if you fail to make payments, you'll destroy the value of that asset.

They have suffered real harm from this non-rival appropriation of something that we generally recognize as their property: their good name.  Only they have the right to decide how it will be used.

The fact that identity theft usually involves another crime--fraud--does not mean that it is "really" fraud; many crimes often involve other crimes as well.  For example, burglary usually also involves either fraud on innocent buyers of the stolen objects, or (in the case of buyers who do know or suspect the provenance) unlawful receiving of stolen goods.

A more interesting case, however, has to do with trademark.  As is common in these debates, a lot of the pro-file-sharing group argued that IP protections were far from necessary to assure that new works would be created.  Instead, they pointed to other possible revenue streams:

  • Selling t-shirts and other band themed merchandise
  • Live performance (band concerts, speaking gigs)
  • Special editions with liner notes, calfskin binding, or whatever
  • Advertising-supported streaming
  • Selling book or song rights to the movies
  • Merchandising to McDonalds, BMW, or what have you
Of course, as many readers hastened to point out, with the exception of live performance, all of these things themselves rely on IP protection for other media.  While hard core fans might well only pay for authentic band t-shirts or signed editions, this is a tiny market.  The reason that bands can sell t-shirts to make money is that it is illegal for anyone else to slap their name and artwork on a piece of cotton.  McDonalds cannot put your song into an ad, or your character into a Happy Meal, unless you give them permission.  

Moreover, many of the industries that it is proposed they sell into in order to make up the sales lost in the consumer market are themselves creatures of robust IP protection--including McDonalds, which could not exist in its current form without ruthless trademark enforcement.

To which one commenter sensibly replied:

Trademarks are an entirely different type of IP. One that most weak-IPers don't have a problem with, because trademark infringement is essentially fraud.
As far as I know, it is true that most weak-IPers don't have a problem with trademark, perhaps because very few weak-IPers are interested in opening up retail establishments, insurance brokerages, or fast-food franchises.  And yet, I find this argument very interesting, because the person making it seems sincerely unaware that it is entirely circular.  Trademark protections are okay because trademark infringement is fraud.  But of course, trademark infringement is only fraud because trademark protection exists.

Imagine a parallel universe, entirely like our own except that there are no trademark protections.  I own a super-successful hamburger stand which, for the sake of convenience, we will call, "McMegan's".  McMegan's is actually a small regional chain--I have multiple locations, all with my signature "Golden M" right out front.  Everyone in town knows that due to my obsessive-compulsive quality control, no matter which McMegan's they go into, they will get an identical experience: clean restrooms, crispy fries, and one of my signature burgers, such as the "Big Mick".  

Probably, there's a better burger in every one of the towns where I operate.  But that's not my value proposition.  My value proposition is that you know exactly what you are going to get, and it's always better than okay.

So you go ahead and front run my next expansion, opening up your own McMegan's, complete with identical "Golden M" out front and the same menu.

(Even in our universe, this has frequently been a popular strategy--there's still a "Kennedy Fried Chicken" in Lynn, Massachusetts with a sign that looks suspiciously like the old Kentucky Fried Chicken logo.  Presumably the change to the new "KFC" signs with the colonel's picture were aimed at just these sorts of imitators.)

Are you committing fraud?  No, because in our alternative universe, no one has a reasonable expectation that a "McMegan's" with a golden M in front of it is actually run or franchised by my company.

Is my imitation a good thing?  Well, my behavior, replicated thousands and millions of times, will probably make it impossible to build the kind of national chain that we're all used to.  This would be good for some people--independent operators who don't want to operate chains, and the authors of travel guides--and bad for others, namely people who frequently travel outside of very small local geographic areas.  Going outside of your small town or neighborhood would be a lot like, well, like travelling used to be: anyone new to the area would be at the mercy of a lot of really terrible food, unreliable retail, and filthy hotels.  If you are older than 35, and you travelled on the interstates as a child, you know what I am talking about.

But whether you think that the absence of trademark would make the world better or worse, such copying would not be fraud.  No one could claim to have been unjustly deceived, any more than you think it's "fraud" for furniture stores to mark up their products 30% and then have a "sale".  

It makes no sense to argue that I want to erode IP laws, but of course not trademark, because that's fraud.  Like file sharing, trademark infringements are misappropriation only if law and custom say they are.  If you question the one, then you should also question the other.

Which goes to what I said yesterday: the rules of property are not written in indelible ink across the human heart.  It's a somewhat haphazard system that evolved over centuries.   And yet, we tend to assume that whatever bits of it we approve of are not merely well-functioning rules that enhance human flourishing, but instead, are fundamental moral laws.  Trademark infringement is obviously wrong because it's fraud.  File sharing is obviously right because no one's allowed to tell you that you can't lend your friend your book.

I actually think that this is necessary to a well-functioning system: norms have to have moral force.  Real moral force, where we actually believe--often quite angrily!--the violators are doing something very wrong.

But when circumstances change--when, for example, it becomes possible to make infinite, perfect copies of creative works to which we have purchased well-defined rights--this tends to make the discussions rather lively.

Update:  A reader writes

Good post, but I have a nitpick: McDonalds absolutely •can• put your song in their ad without your permission: this is what "compulsory licensing" discusses. However, use of the compulsory license is expensive. What McD can't do is use your song without either (1) getting your permission and negotiating a rate or (2) paying the (much higher) c. license fee.

This changes nothing in the argument, but it is often misunderstood, even by many in the music industry. Weird Al gets permission because he's nice, not because he has to.
Update II:  Another reader says:

Live performances would also be hurt without an IP regime. Lots of oldies bands already have this problem because they didn't properly protect themselves back in the day and so you have no idea who it is performing while claiming to be "Sha-Na-Na."

Interesting. I had no idea that was an issue.

This article available online at:

http://www.theatlantic.com/business/archive/2012/01/is-trademark-infringement-fraud/251358/