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Proving Market Penetration: Another Reason to Federally Register Your Trademark

July 17, 2017Basic Trademark Matters

Photo of man pushing rock uphill symbolizing uphill battle with common law trademarks

There a real advantages to federally registering your trademark. Unfortunately, those advantages are usually described in vague legal terms that may not mean much. The practical import is missing, and the benefit of federal registration cheapened. For example, one of the benefits of federal registration that gets touted is constructive nationwide use. So what? What does that even mean anyway? And why is it so great? Because if you don't have a federal trademark registration and you are relying only on your common law trademark rights, you are going to have to deal with a big freaking headache: proving market penetration in order to establish your common law trademark rights in a geographic area.

Common Law Rights: Seniority and Market Penetration

If you do not have a federal trademark registration, then you are limited to your common law trademark rights as either a plaintiff or a defendant in a trademark infringement lawsuit. To establish common law trademark rights, a party will have to establish two things: (1) that it is the senior user, and (2) legally sufficient market penetration in a certain geographic market to establish those trademark rights. Hanginout, Inc. v. Google, Inc., 54 F. Supp. 3d 1109, 1118 (S.D. Cal. 2014); Gold Club-SF, LLC v. Platinum SJ Enter., 2013 U.S. Dist. LEXIS 134379, *20 (N.D. Cal. 2013). To be clear, these are two independent showings. Id.

The first prong of seniority requires showing that the party was the first to actually use the trademark in connection with its goods or services. While that sounds straightforward, it's actually not and I will address this prong in a later blog post. What's interesting is that, even if a party manages to prove seniority, it still has to show sufficient market penetration in a specific geographic area. In other words, a party could prove that it is the senior user (i.e., that it used the trademark first), but if that party did not have sufficient market penetration in any specific geographic area, then it may not have any common law trademark rights at all.

Market Penetration: You Gotta Do A Lot More Than Show Some Sales in a Geographic Region

In order to determine if a party has sufficient market penetration in order to establish common law rights in a specific geographic area, federal courts consider the following factors: (1) the volume of sales of the product or service made under the mark, (2) the growth trends of the product or service, (3) the number of persons buying the product or service in relation to the total number of potential customers, and (4) the amount of advertising in a given market for the product or service. Hanginout, 54 F. Supp. 3d at 1121; Gold Club-SF, 2013 U.S. Dist. LEXIS 134379 at *20. Notably, the burden to prove sufficient market penetration is on the party asserting common law rights. Id. Oh, and by the way, you have to do this for each geographical area, which is defined rather narrowly.

Let's look at the Hanginout case. In that case, the court found that Hanginout proved that it was the senior user before turning to the market penetration prong. When analyzing that prong, however, the court held that Hanginout failed to prove market penetration in any geographical area. In other words, Hanginout had no common law rights. The problem was Hanginout simply couldn't meet its burden on any of the four factors:

First, with regard to total sales, or in this case registered users, although Hanginout represented that it had over 200 registered users of its web-based platform as of May 2011, and nearly 8,000 registered users of its iTunes application as of the filing of the preliminary injunction, Hanginout has never identified the state of residence of these alleged registered users. . . . Hanginout's evidence of "site visits" fairs no better. Although this evidence pins down the state (and city within California) of the consumer that viewed Hanginout's mobile profile, the Court is at a loss as to how these statistics identify the location of Hanginout's registered users. Therefore, although evidence of site visits shows that consumers are actually looking at Hanginout's website and/or products, and supports Hanginout's seniority of use argument, it is insufficient to show actual sales/registration for Hanginout's product necessary to establish market penetration.

Second, with regard to actual growth trends of the product at issue, although Hanginout never specifically commented on this factor, the Court finds the evidence submitted by Hanginout speaks for itself. For example, the Google Analytic Audience Overview report shows a dramatic decline in the overall number of views of the HANGINOUT application, with the number of visits the highest in or around October 2012, then nearly flat-lining in or around October 2013. This analysis is then confirmed by sales statistics that were reported to Hanginout by iTunes. These sales reports indicate that 6,926 individuals downloaded the HANGINOUT application in 2012, and that 1,235 individuals downloaded the HANGINOUT application in 2013. This represents a 82.17% decline in the number of registered users, or 5,691 fewer registered users from 2012 to 2013. Therefore, based on these statistics, all of which were produced by Hanginout, there appears to be a negative growth trend for the HANGINOUT product.

Third, with regard to the actual number of consumers actually purchasing/registering for the product in relation to the total number of potential consumers, Hanginout once again did not produce or direct the Court to any evidence indicative of this factor. Instead, the only evidence the Court is left to consider is that 6,926 individuals registered for the HANGINOUT iTunes application in 2012, 1,235 individuals registered for the HANGINOUT iTunes Application in 2013, and that 61,601 individuals viewed HANGINOUT Mobile between September 2012 and December 23, 2013. However, as these numbers do not directly overlap, nor did Hanginout present any evidence regarding its market share, this weighs against finding Hanginout had sufficient market penetration to warrant immediate injunctive relief.

However, with regard to marketing and advertising, Hanginout fares much better. . . . Although the Court finds the evidence presented above exemplifies Hanginout's marketing and intent to use the HANGINOUT mark in commerce, none of the evidence is sufficient to support a finding of market penetration in a specific geographic market. Therefore, because marketing and advertising is but one factor to consider in determining market penetration of an unregistered mark, without evidence as to the actual location of Hanginout's registered users, the Court cannot determine Hanginout's market penetration. Accordingly, although the Court is cognizant of the complexities posed by the use of Internet, the Court does not agree with Hanginout that marketing, advertising, and promoting an unregistered mark over the Internet is sufficient to find nationwide market penetration. The Court also does not agree with Hanginout that it has sufficient market penetration in Southern California by virtue of the location of its office and/or the number of site views originating out of Southern California.

As a result, the Court finds Hanginout had not presented sufficient evidence to permit the Court to determine its market penetration in a specific geographic area, and as a result, the Court need not consider Hanginout's natural zone of expansion.

Hanginout, 54 F. Supp. 3d at 1122-1124 (citations omitted).

Another example is Glow Industries v. Lopez. In Glow Industries, Glow Industries was the senior user using the GLOW trademark for body and facial care products. Glow Indus. v. Lopez, 252 F. Supp. 2d 962 (C.D. Cal. 2002). However, despite clearly making bona fide sales of the GLOW trademarked products in commerce, it simply wasn't able to prove market penetration:

Glow, Inc. offers little evidence regarding the market penetration or sales of the three products at issue. Specifically, it has proffered no evidence detailing the volume of products it has sold. Similarly, save for the InStyle and Los Angeles magazine pieces, it has adduced no evidence regarding the manner in which the products have been advertised. The majority of the evidence it has submitted, which concerns the advertising and sale of GLOW products generally, also provides little information that would assist the court in quantifying market penetration, sales levels, growth trends, or the number of people who purchased the company's products in relation to the number of potential customers.

Williamson states that Glow, Inc. began to sell its products at its Los Angeles retail store in 1999, at Bergdorf Goodman in New York City in the Fall of 2000, and on the national beauty website <www.gloss.com> in the Spring of 2000. She further states that GLOW products are currently sold at an unspecified number of Nordstrom stores and Ritz Canton Hotels, at retail stores in eleven states, and on Glow, Inc.'s website <www.glowspot.com>. Williamson asserts that GLOW products are physically present in thirteen states, and that sales have been made in all fifty states. She proffers no evidence, however, as to the volume or level of sales in any location, nor how Glow, Inc.'s market penetration compares with that of its competitors. Williamson also contends that Glow, Inc. has participated in "cobranding ventures" with national companies such as Reebok and Ritz Carlton; once again, however, she does not quantify the sales made as a result of the arrangements, nor specify the geographical territories that they covered. Other than Williamson's general testimony regarding the company's nationwide sales, the record reflects only that Glow, Inc.'s Los Angeles store or certain of its products have been mentioned briefly in a variety of national magazines, including Mademoiselle, Marie Claire, Seventeen and Redbook. Viewed in its totality, the evidence is not adequate to establish that Glow, Inc. has legally sufficient market penetration in any territory to assert common law trademark rights.

Id. at 984-85.

The Last Word

Proving market penetration is difficult and very costly. And it's a compelling reason for even the cheapest trademark owner on the most shoestring budget to find the funds to federally register its trademarks (at least the most important ones).

The market penetration requirement means that it is entirely possible for a party to be the first to use a trademark, make bona fide sales of its product or service under the mark in different geographical areas or even across the United States, and still not have sufficient market penetration in any single, specific geographic area—leaving the party with no common law trademark rights. It makes the constructive nationwide use that comes along with a federal trademark registration sound like a pretty damn good deal.

Alternatively, even if the party claiming common law trademark rights can prove sufficient market penetration to be afforded common law trademark rights, the party will have expended an enormous amount of money to do so. The cost of filing a federal trademark application will pale in comparison.

A trademark owner may never realize the real benefit of a federal trademark registration until it has to litigate priority. Only then will the very significant advantages conferred by a federal trademark registration be truly appreciated. And any trademark owner that passed on filing a federal trademark registration to save a few bucks will feel the intense pang of regret.

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