Market Value of Trademarks Measured via Trademark Litigation

Background
Firms have an incentive to invest in brand equity because it is believed to provide long-term financial benefits. We examine the brand equity associated with trademarks, and we specifically relate the stock returns of firms to the filing of lawsuits to defend trademarks from infringement. Using the event study methodology of finance, we evaluate the average returns of plaintiff and defendant firms from the filing of lawsuits. The returns have been adjusted for movements in the overall stock market.

Firms that have valuable trademarks find it worthwhile to file lawsuits to protect them from being copied by competitors. These lawsuits provide many signals to the stock market. First, it indicates that the plaintiff firm is serious about fighting any encroachment by competitors on its trademark. Second, it suggests that any observed loss in market share is due at least in part to trademark violations by competitors and not to any inherent faults of the firm. Thus, investors might feel that the firm can regain its market share by filing the lawsuit. Conversely, the filing of the lawsuit is likely to have negative implications for the stock value of the defendant's firm.

Results and Managerial Implications
Our results suggest that, when challenged in court, trademark infringement does not pay. The mere filing of a lawsuit leads to a drop in the value of the defendant firm which can be significant for large firms. When the lawsuit is resolved, the value of the defendant firm drops significantly. When the verdict goes against the defendant, the loss is considerable. When the verdict is in favor of the defendant, there is no significant positive gain in returns. Thus, trademark infringement lawsuits produce a net negative effect on the defendant both upon filing by plaintiffs and the passing of the verdict.

Although some of the analyses suggested small gains for the plaintiff from filing the lawsuits, in general, their gains were not significant. The effect of lawsuits were not symmetric. In other words, the loss of value faced by the defendant are not matched by gains for the plaintiff. The total financial effect of lawsuits, considering both the defendant and the plaintiff, is negative. These results are consistent with those observed in antitrust lawsuits. For instance, a Houston jury ruled that Texaco interfered in Pennzoil's plan to buy Getty Oil. In the seven stock trading days following the verdict, the market value of Texaco dropped by $1.8 billion and the market value of Pennzoil rose only $600 million. Consequently, the aggregate total stock value of the firms fell by $1.2 billion.

The asymmetry of losses due to trademark infringement lawsuits suggests that the plaintiffs are unable to take advantage of all of the potential restrictions imposed by the verdict. Negative publicity for the defendant does not necessarily translate into positive publicity for the plaintiff. Lawsuits highlight the fact that trademark violations are a problem for the industry and that the possibility of future violations may erode the value of the firm. These results suggest the need for better cooperation among firms within an industry to avoid lawsuits that result in no clear winners and only some losers.

Sanjai Bhagat is Professor of Finance at the University of Colorado, Boulder. U. N. Umesh is Associate Professor of Marketing at Washington State University.

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