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Legal Matters: Trademarks and Direct Selling
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Legal Matters: Trademarks
and Direct Selling
by Jeffrey Babener

From Nothing to Everything
At first, a trademark may be the least valuable of assets. Famous marks such as Coca-Cola, Microsoft or IBM were nearly valueless at one time. However, for a mature company, the brand name may be its single most valuable asset. Valued names such as GE, Disney or Intel add billions of dollars to the balance sheet.

Similarly, there was a time when the names Avon, Mary Kay or Tupperware had little or no value. And yet decades later, the goodwill associated with those direct selling brands would allow their products, if the companies so chose, to be sold in any retail venue in the world. As they say, "mighty oaks from small acorns.."

Protection of trademarks is as vital to direct selling companies and distributors as trademark protection in the retail field. Customer or distributor recognition of unique names or logos may well be responsible for generating billions of dollars in additional sales.

For this reason, all leading direct selling companies have devoted substantial budgets to protecting their trademarks in the United States and throughout the world. In addition, distributors will note that direct selling and network marketing companies go to great lengths in distributor agreements and policies to outline permissible and licensed distributor use of company trademarks.

It is a good idea for direct selling companies and distributors to have a basic understanding of how our trademark system works in the United States.

The Origins of Trademarks
The use of trademarks originated in medieval England when craft guilds required their members to place their individual mark on products so that a craftsman could be traced in the event a product proved defective. In time, second-rate craftsmen realized the benefit of associating their products with the mark of a quality craftsman. As a response, the English common law system attempted to develop a body of law that would protect the trademark associated with a craftsman's goods. Today, in the United States, a trademark is protected both by common law as well as federal and state trademark registration statutes.

A trademark may be a word, phrase, logo, etc., that is strictly associated with a product or service. It may be defined as a word, name, symbol, or device, or combination, used by a manufacturer or merchant to identify his goods and distinguish them from those sold by others.

Protecting the Trademark
To receive trademark protection, the mark must be distinctive and distinguishable from others. The most distinctive of marks are those that are purely arbitrary or fanciful. Such marks would include those that have no meaning or connotation other than that of identifying the source of a particular product. For instance, in the field of cameras, the mark "Kodak" is purely arbitrary and distinctive. As a general matter, the name of a company will not receive protection. Generic and descriptive terms are generally not distinctive and are therefore not considered worthy of protection. For instance, a company could not receive trademark protection for the generic word "Beer."

Some descriptive marks have, however, received protection because they have acquired a secondary meaning that is solely associated with the source of the product, rather than with the dictionary meaning. For instance, "TV Guide" has probably acquired a secondary meaning. Advertising slogans such as Wendy's "Where's the beef?" also likely achieved a secondary meaning.

Trademark protection is not achieved by adopting a trademark, but by its "use" in association with the product. Thus, the first user of the mark will probably receive primary protection. In addition, an "intent to use" application may be filed. With subsequent demonstration of "actual use," the protection will relate back to the "intent" filing.

However, a mark that is improperly used or adopted into the general language can lose its protection. For instance, such famous marks as "Aspirin," "Thermos" and "Escalator" have lost protection because the public now views them as descriptions of generic products. In one case, the U.S. Supreme Court ruled that the mark "Monopoly" was lost because it had become the generic description of board games in general.

Once a trademark has been used and adopted, it receives common law trademark protection against confusingly similar use. Federal legislation that protects trademarks is known as the Lanham Act, under which a company can file paperwork to register its trademark with the Patent and Trademark Office, submitting a drawing of it, with specimens or facsimiles as it is actually affixed on or used in connection with the goods, and a filing fee. Assuming there is no objection, the company is issued a certificate of registration and it may use the symbol ® in conjunction with the trademark. This registration is prima facie evidence of the registrant's right to the exclusive use of the trademark. A registered mark that has been in continuous use for a period of five consecutive years generally becomes incontestable. After the fifth year, the trademark owner must apply for continued use of the mark. The registration period is for 20 years and the mark can be continually renewed.

As a general matter, common law and federal trademark protection should suffice. However, if the trademark owner desires, trademarks may also be registered under state law granting rights similar to those of the Lanham Act. The trademark owner may enforce his rights under common law, federal law or state law by suing an infringing party for either monetary damages or for an injunction prohibiting infringement, or for both. In some cases, the trademark owner will be entitled to punitive damages and attorney fees.

Early Investment Yields Big Dividends
The costs of a trademark search pale in comparison to the potential damage from inattention. As with other industries, the direct selling industry has its share of stories in which direct selling companies have built valuable assets in their brands only to be forced to abandon their brand usage after being sued by another company with superior trademark rights. Not only will the careless company find that it has lost its valuable brand, but it may also be forced to pay huge damages for trademark infringement.

Any direct selling company contemplating use of a distinctive mark associated with its product or service should engage trademark counsel to do a trademark search before expending large sums of money on printing, advertising and other promotion. At the earliest possible date, companies should file a trademark application for "intent to use" or "actual use" to protect its mark. Companies should also register their trademarks when they enter international markets.

Jeffrey A. Babener, of Portland, Oregon, www.mlmlegal.com, is the principal attorney in the law firm of Babener & Associates. He represents leading U.S. and foreign companies in the direct selling industry. He has lectured and published extensively on direct selling and can be reached at contact@mlmlegal.com.

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DSA Current Events

Business Education on the Web
This month, October 3 through 31, the Direct Selling Association takes advantage of advances in technology to offer its first Webinar: Multilevel Compensation and Legal Issues. Participants will be able to view six half-hour streaming-video presentations over the Internet on topics such as the basics of direct selling law, compensation, cooling off laws, independent contractor reporting and much more. Electronic handouts, as well as PowerPoint presentations, will also be available with the video presentations.

The innovative program is the perfect format for busy executives involved in evaluating their companies' compensation structure or monitoring corporate taxation, or who play a role in their companies' legal needs. With several sessions on a variety of topics, executives can find the information they need without having to get on a plane. A few of the presentations for this seminar include:

Direct Selling Law 101
Marjorie Fine, Senior Vice President and General Counsel for Shaklee Corp., will review the basics about the laws and regulations that impact the direct selling industry, both at the state and federal level.

Compensation Plans and Related Issues
Jane Furgeson, a partner with Gardere Wynne Sewell L.L.P., answers questions about compensation plans. Your company's compensation program can help drive recruitment, retain consultants and keep your company on steady ground. Learn what every direct selling executive needs to know about compensation programs in this important session.

The Spiderweb of Nexxus
John Allan, a partner with Jones Day and an expert in multistate tax issues, will untangle the web of tax laws. Legislation changes every year, making this an even stickier issue. Be sure you have a handle on the laws that determine your nexxus, and what could happen if you're wrong, by attending this educational presentation.

Cooling-Off Legislation: One Hot Topic!
Lem Dowdy, an expert from the Federal Trade Commission (FTC), will contribute a presentation on one of our industry's most important- and highly technical-regulations. Learn how to stay out of hot water by complying with the FTC's Cooling- Off Rule. Find out what you and your sales force need to know by listening in on this important presentation.

Direct Seller Issues Regarding Business Opportunity Statutes
Attorney Gerry Nehra will discuss how to avoid being subject to business opportunity statutes. This experienced direct selling law attorney will offer insights on exemptions, exclusions and business opportunity thresholds in this informative session.

Marketing Dietary Supplements and the Law
Spencer Reese, a partner with Grimes & Reese will discuss regulations dealing with dietary supplements. From advertising and labeling to claims and their substantiation to the use of testimonials, this session will offer clarification regarding the laws surrounding this industry.

Intellectual Property: What a Direct Seller Needs to Know
Robert Brouillette of Brouillette & Partners will cover trademarks, copyrights, patents and designs and their importance to direct selling companies. The basics of intellectual property, trademark registration and regulations regarding international registration and more will be covered in this presentation.

A Practical Guide to Preserving the Independent Contractor
and Direct Seller Status of Your Salesforce
Lew Janowsky a partner with the Law Offices of Rynn & Janowsky, offers his expertise in independent contractor status law and will provide valuable information on independent contractor agreements and preserving your salesforce's IC status. From the importance of written agreements between companies and direct sellers to challenges including handling unemployment claims from your salesforce, this session will help you better understand and work within the laws concerning independent contractor status.

Independent Contractor Reporting
John Webb, Associate Legal Counsel & Manager of Government Affairs with the Direct Selling Association, will look at how welfare reform's reporting requirements for employers has been extended in some states to companies that engage independent contractors. The discussion will also include recent legislative action concerning independent contractor registration and how these changes affect direct selling companies.

An Updated Image and Tools for Better Communication
The Direct Selling Association Board of Directors voted unanimously to move forward with an industry image enhancement program, proposed at a recent meeting. The first stage of the program targets the general public, women ages 25 - 49 and the business community. A two-page advertisement spread in USA Today's "Weekend Life" section was the first in a series of ads that are part of the program to increase awareness of current opportunities in the direct selling industry.

More details about the program and the research that led to its development will be discussed in a general session at the upcoming Salesforce and Communications Seminar. The seminar will be held at the USA Today/Gannet Corporation Headquarters in McLean, Va., December 7 - 8. Informative sessions will be conducted by industry peers who, as experts in their fields, share ideas on topics such as how to choose and work with a PR agency, best practices in prospecting and recruiting and creating an effective catalog.

For more information, or to register for the Issues of the Day Webinar or the Salesforce and Communication Seminar, go to www.dsa.org and click on the Meetings and Seminar link.

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