Pumping the Brakes on IP Infringement in the Fast Moving Consumer Goods Industry

Fast Moving Consumer Goods FMCGWith leading-edge, tech-savvy companies in the internet, social networking, and e-retailing space often dominating headlines nationwide, it is easy to overlook the myriad businesses competing in the Fast Moving Consumer Goods (“FMCG”) industry, and to dismiss them as somewhat out-of-touch with the modern consumer. However, FMCG companies have combined revenues nearly on par with those in the more highly-publicized technology-based sectors, and have been thriving in the retail space for decades.

The umbrella term “Fast Moving Consumer Goods” applies to nearly every category of consumer goods, from food and beverage to household cleaning products, medicines, cosmetics, clothing, consumer electronics, and more. FMCGs are products which are sold in high volume, and at a relatively low cost. Turnover of such products is especially high on account of the goods’ short shelf-life, fleeting consumer appeal, and/or built-in obsolescence and rapid technical advances. Due, in part, to these characteristics, the FMCG sector is one of the most crowded, and one of the most competitive. Effectively securing, managing, utilizing and protecting one’s intellectual property rights (“IP Rights”) can help FMCG businesses differentiate themselves and secure a competitive edge.

IP Rights are critically important in the Fast Moving Consumer Goods industry because businesses operating in this sector rely heavily on brand awareness and brandy loyalty for their success. It makes sense then that IP Rights are pivotal in any FMCG company’s long-term strategy for success. While FMCG businesses can utilize numerous IP Rights, including copyrights and trade secrets, this article will focus on patents and trademarks in two crucial stages — the initial product development stage, and the subsequent product marketing stage.  The article will then conclude with a discussion of two often over-looked threats to these IP Rights.

Product Development Phase – Patents

Patents, including utility and design patents, are a key IP Right that Fast Moving Consumer Goods companies should focus on in the product development phase. A patent grants an inventor a property right to exclude others from making, using, offering for sale, or selling the invention.

An effective patent strategy for FMCG companies should consider both utility patent protection and design patent protection for their products.  Utility patents are especially important in the pharmaceutical, medical device, and electronics segments of the FMCG industry, as these products take a significant amount of time and money to research and develop, and manufacturers of these products often require longer periods of time to recoup their costs and realize significant profits. Design patents are particularly relevant to the toy industry, as well as to the commercial goods sector (e.g., household cleaners, food, beverages, etc.) because they can protect the “ornamental” appearance of these products or their packaging and can include color and shape.

Patent rights may be less helpful in highly innovative industries with rampant turnover due to the fact that product life cycles are so short – by the time a company is able to secure a patent and effectively enforce that patent through litigation, the particular product at issue may have already become obsolete. While perhaps obvious, patents last for only a finite period and will eventually expire. Therefore, it is important to combine development of patents rights with other IP Rights such as trademark rights or copyrights. Even long after a patent has expired, consumers may continue to seek out a particular product, regardless of similar competitive products on the market, if a company has been diligent in cultivating trademarks rights in its products. These trademarks rights, and the associated goodwill and connotation of consistent quality they provide, help establish this brand awareness and loyalty.

Product Marketing Phase – Trademarks

Trademarks, including product design trade dress, and product packaging trade dress, are often the most visible, and longest-lasting, IP Right that FMCG businesses should take advantage of and utilize. Trademarks are relevant to companies in all sectors of the FMCG industry, and are often the single most important differentiator between competitors.  Aside from distinguishing the source of goods or services from those offered by others, trademarks embody the accumulated goodwill of a business and represent the significant investments that companies have made in a particular product or service, both in terms of time and resources. Trademarks, unlike most other IP Rights, can be maintained in perpetuity provided their use and/or registrations are maintained. As the external representation of a company’s investment in a product, trademarks can continuously resonate with consumers and provide them with a reason to choose a particular company’s products over those of a competitor, yielding value when other IP Rights have ceased.

Threats to Fast Moving Consumer Goods IP Rights

Once businesses in the Fast Moving Consumer Goods industry have established robust intellectual property portfolios for their products and associated brands, it is equally as important to police those IP Rights and recognize when third-parties begin to infringe upon them. While direct trademark, patent, and copyright infringements are often the most prevalent hazards to a company’s IP Rights, the following threats can be equally as damaging.

Counterfeits

Counterfeit goods present a ubiquitous problem for FMCG companies, although certain products, such as apparel and fashion accessories, are affected by counterfeit goods more than others. Broadly stated, counterfeiting can be generally described as the business of manufacturing, exporting, distributing, selling, or dealing in goods, usually of inferior quality, under a trademark which is identical or nearly identical to a registered trademark, without the approval of the trademark owner.  The fact that counterfeit goods are often of inferior quality can present safety and health concerns to the end consumer, especially when the goods being imitated are important medications, items used around children, or parts for machinery. Brand owners in the FMCG industry may also suffer the consequences of counterfeit goods when, as a result of these inferior or non-authentic products, their reputations and consumer confidence in their established brands are affected.

Protections against counterfeit goods in the United States are available in Sections 34 and 35 of the Lanham Act (15 U.S.C. §§ 1116, 1117) and under the Tariff Act (19 U.S.C. § 1526) which enables FMCG businesses to record registered marks with the U.S. Customs and Board Patrol to stop infringing products from entering the United States market. Under Section 34 of the Lanham Act, a U.S. court can also authorize the seizure of goods sold, offered for sale or distributed using a counterfeit mark, and Section 35 provides for statutory damages as an alternative to actual damages, and treble damages for the intentional sale of counterfeit goods. The Tariff Act itself also has a seizure and forfeiture provision, in addition to its own civil fine provisions.

Gray Market Goods

Gray Market goods, or “parallel imports”, are trademarked goods which are obtained from one market, but are then imported and sold in a different market without the consent of the trademark owner.

Although these gray market goods often do not pose the same level of danger to consumers and brand owners as counterfeit goods, given that these are typically authentic goods which originate from the brand owner, they can still be detrimental to FMCG businesses. For instance, FMCG businesses are unable to control the quality of the goods that are re-sold in the unintended market.  Indeed, the gray market goods may harm the brand image and company reputation if the product was formulated differently for the intended market, and is not well received or does not function properly in the unintended market. Finally, gray market goods may run afoul of government requirements if they were formulated for use in a different market, but are sold in an unintended market without required labeling or disclosure information.

Protections against gray markets goods are available through Sections 32, 42 and 43(a) of the Lanham Act (15 U.S.C. §§ 1114(1)(a), 1124 and 1125(a)(1)). Under Section 42, a FMCG business can prevent the importation of goods if it can demonstrate that the imported goods are physically and materially different than the authorized goods sold in the U.S.  However, recent copyright case law from the Supreme Court of the United States interpreting the “first sale doctrine” has made it difficult for a copyright-owning business to stop the importation and sale of a copyrighted work (e.g. books) which was first sold outside the United States with the business’ authorization.  Under Sections 32 and 43, an FMCG business can obtain monetary relief, including disgorgement of profits.

Conclusion

IP Rights are critically important to achieving sustainable growth, profitability, and competitiveness in the Fast Moving Consumer Goods industry. Companies can help bolster their chances for success by taking steps to protect their intellectual property and policing and enforcing their IP Rights against third party infringers. The ability to recognize threats to these IP Rights, and understand how to effectively deal such threats, should they arise, is vital to an FMCG company’s long-term success.

The Author

Paul J Reilly

Paul J Reilly is a Partner and the Section Chair for trademarks at Baker Botts. His practice focuses on trademark, copyright, trade dress, advertising, branding and unfair competition litigation and counseling He has represented clients in numerous intellectual property litigations in federal courts throughout the United States. He also has expertise handling rights of privacy and publicity, and design patents. Paul has extensive experience rendering opinions on the clearance of trademarks and copyrights, rebranding of companies domestically and internationally, licensing, and the prosecution of trademark applications globally, including in the United States Patent and Trademark Office. He has also litigated hundreds of oppositions and cancellation proceedings before the Trademark Trial and Appeal Board and foreign trademark offices on behalf of his client.

Paul J Reilly

Zarah Rasool is an Associate at Baker Botts. She has a broad-based intellectual property practice covering contentious and non-contentious matters across all areas of the IP field including patents, trade marks, copyright, designs and confidential information.

Zarah’s professional experience includes patent litigation before the High Court and Court of Appeal, and multijurisdictional patent litigation within the telecommunication and pharmaceutical sectors. She regularly advises on the adoption, registration and enforcement of trade marks and has represented clients in trade mark infringement and passing off actions before the High Court and in proceedings in the UK Intellectual Property Office and OHIM.

Zarah’s non-contentious practice includes advising on IP aspects of corporate transactions as well as stand-alone R&D, licensing, franchising, sponsorship and other exploitation agreements and general IP counseling work, including brand management and advertising issues. Zarah has also advised on a wide range of outsourcing matters, including transactions in the software, manufacturing, chemicals and fashion retail sectors, IT licensing, systems and software acquisition and agency and distribution agreements.

Prior to joining Baker Botts in September 2013, Zarah worked at another international law firm. She has also spent time working in the legal department of the UK’s largest fashion retailer.

Paul J Reilly

Tyler M. Beas is an associate with Baker Botts in their Dallas office.

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