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Reputation Theory: Is it Just Part of Market Penetration or a Separate Basis for Common Law Trademark Rights?

August 14, 2017Basic Trademark Matters

featured image for blog post on reputation theory as a basis for common law trademark rights

This is the third blog post in a four part series on the difficulty of proving common law trademark rights in trademark litigation. Originally, I had only planned on three posts covering (1) seniority, (2) market penetration, and (3) natural zone of expansion. But in researching and preparing these blog posts, every so often a federal court would reference reputation theory in its opinion. For completeness, I decided to add a fourth post on reputation theory—a very murky theory that may or may not provide another basis for claiming common law trademark rights.

What Is the Reputation Theory?

Under the reputation theory, if the senior user’s reputation has penetrated a geographic area prior to the junior user’s first use of the mark, then the senior user prevails. Laurel Capital Group, Inc. v. .BT Fin. Corp., 45 F. Supp. 2d 469, 482 (W.D. Pa. 1999). In other words, a senior user can build up an identifiable public image with activities conducted solely in that user’s own market, yet have that image travel to other markets via advertising and word of mouth. MNI Management, Inc. v. Wine King, LLC, 542 F. Supp. 2d 389, 406 (D.N.J. 2008).

It’s not entirely clear how the reputation theory emerged as a potentially separate basis for common law rights. It probably stems from an oft-repeated phrase that a trademark owner cannot preempt markets “before it actually enters them by advertising, reputation, or actual sales.” Accu Personnel, Inc. v. Accustaff, Inc., 846 F. Supp. 1191, 1206 (D. Del. 1994) (emphasis added); J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 26.01[4]. Another similar repeated refrain states that “a common law mark is to receive no greater protection than its reputation in any specific area warrants.” Natural Footwear, Ltd. v. Hart, Schaffner & Marx, 760 F. 2d 1383, 1398 (3d Cir. 1985). But how the reputation theory separated itself from market penetration remains murky.

Reputation Theory as a Separate Basis for Common Law Rights

After establishing seniority, a common law trademark owner must establish where it owns rights. It can do so by establishing market penetration in one or more geographic markets and by establishing a natural zone of expansion in one or more geographic markets. However, some federal courts also allow a trademark owner to do so under the reputation theory. These three theories have been dubbed the “zones of protection.” Laurel Capital, 45 F. Supp. 2d at 482; MNI Management, 542 F. Supp. 2d at 406 (“reputation in a particular market” listed as separate basis for rights); Commerce Bancorp, Inc. v. BankAtlantic, 285 F. Supp. 2d 475, 501 (D.N.J. 2003) (“Even if the senior user has not established market penetration, ‘it may still possess superior rights in the mark in the remote territory via two additional theories,’ that is, reputation theory and the ‘zone of natural expansion’ theory.”); SMJ&J, Inc. v. NRG Heat & Power, LLC, 912 F. Supp. 2d 189, 205 (M.D. Pa. 2012) (recognizing reputation theory as a separate basis); Lucky 13 Unlimited, LLC v. Comly Rd. Holdings, LLC, 2016 U.S. Dist. LEXIS 6643, *12 (E.D. Pa. 2016) (“With reputation, when a senior user demonstrates that it has established a reputation beyond its own market area, reputation alone, without market penetration or physical presence, may afford it superior trademark rights in the remote market of the junior user.”)

In Laurel Capital, the Western District of Pennsylvania analyzed reputation theory as a zone of protection separate and apart from market penetration:

Rights in a mark can extend beyond the geographic area of actual sales and customer residences if the user's reputation is carried via word of mouth and advertisements. When a senior user demonstrates that it has established a reputation beyond its own market area, reputation alone, without market penetration or physical presence, may afford it superior trademark rights in the remote market of the junior user. A user can build up an "identifiable public image" with activities conducted solely within its own market, yet have that image travel to other markets.

Id. at 492 (citations omitted).

Another interesting wrinkle is that some courts that identify reputation theory as a separate basis for common law rights discuss the theory in the context of a national reputation. Sunearth, Inc. v. Sun Earth Solar Power Co., 2013 U.S. Dist. LEXIS 120439, *38 (N.D. Cal. 2013). For example, in Glow Industries, the Central District of California initially refers to the reputation theory as requiring a national reputation:

Where the trademark user has acquired a national reputation associated with its mark, it may assert trademark rights even in areas where it has no sales.

Glow Industries v. Lopez, 252 F. Supp. 2d 962, 983 (C.D. Cal. 2002). But the Court then appears to back off the requirement of a national reputation:

Glow Inc. would not need to establish such penetration if it could demonstrate alternatively that is mark had acquired a national reputation, or a reputation in certain designated geographic areas.

Id. at 985.

Reputation Theory as Part of the Market Penetration Analysis

Some courts hold or imply that reputation theory is just part of the market penetration analysis, rather than a separate basis for rights. See, e.g., Accu Personnel, 846 F. Supp. at 1206 (stating that the market penetration factors reflect the principle that a senior cannot preempt a market it has not entered by reputation).

Other courts imply that finding market penetration is a prerequisite to reputation theory and/or that the market penetration test should be used to assess reputation theory. Natural Footwear, 760 F. 2d at 1397 (“[T]he district court’s decision about the extent of Root’s reputation cannot be sustained for three reasons. First, the court failed to consider Roots’ market penetration in regard to specific market areas.”).

Making matters even more confusing, even courts that identify reputation theory as a separate basis for rights have then simultaneously equated it with market penetration. Laurel Capital, 45 F. Supp. 2d at 482, 492 (“This theory is simply an arm of the market penetration test” and “[l]ogically, if the senior user’s reputation has extended into the junior user’s territory, then the senior user has achieved market penetration …”); MNI Management, 542 F. Supp. 2d at 406 (“This theory is an arm of the market penetration test”).

Many Other Courts Simply Haven’t Had an Opportunity to Address Its Validity

Even an extensive search of all federal cases on reputation theory will return only a smattering of cases (i.e., basically the ones cited in this post). There’s just not much law interpreting the theory. And most courts have not addressed the validity of the reputation theory and whether they would adopt or reject it. See, e.g., Schmidt v. Finish Line, Inc., 2000 U.S. Dist. LEXIS 6248, *12 n. 4 (identifying the zone of reputation as an “alternative theory” to market penetration but calling into question its validity).
In fact, as you can tell from the cases cited in this post, the vast majority are from district courts in the Third Circuit. That leaves a lot up in the air with regard to reputation theory in district courts in other circuits.

The Last Word

Can you guess what the last word is? Register your trademark and don’t rely on the reputation theory. It’s validity is questionable. It’s application is shrouded in mystery. Don’t be loco.

Even if your trademark is so freaking popular that it’s known extensively in a market or throughout the U.S., it would still be risky to bet your trademark rights on the reputation theory. And if you’re in this category, why wouldn’t you have registered your trademark?

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