Beanie Case Provides Trademark Lessons

While the unauthorized use of another company’s trademark can cause a business serious headaches, a federal appeals court decision indicates that those involved in “secondary market” businesses can safely use such trademarks, at least within certain limits.

The case in question arose when Ty Inc., the manufacturer of Beanie Babies, brought suit for trademark infringement against Ruth Perryman, the owner of an Internet-based business that sells second-hand beanbag stuffed animals. Perryman’s business primarily sold Ty’s popular Beanie Babies, but also has other brands of bean bag toys.

Ty’s primary concern was with the name of Perryman’s business and its Web site bargainbeanies.com. The suit was brought under a federal statute, which protects famous trademarks from commercial uses that cause dilution of the mark’s value.

The Seventh Circuit Court of Appeals spent little time determining that indeed Beanie Babies was just the type of famous trademark the statute was designed to protect. The court noted, however, that this was not a case where consumer confusion was an issue. Perryman was not a maker of beanbag toys and had placed a disclaimer on her Web site making it clear that her business was in no way affiliated with Ty, Inc.

Further, the court pointed out that Perryman was a seller in a “secondary market,” that existed in part because of Ty’s own marketing strategies. Ty sells Beanie Babies in small quantities so that the demand for the items at “retail price” is never met. This strategy leads to a secondary market in Beanie Babies - a market where collectors have been know to pay exorbitant sums to obtain one of the scarce toys.

The court ruled that trademark law does not provide a basis for impeding sellers in an aftermarket from selling trademarked goods. In essence, the court said, a secondary market cannot function efficiently if the sellers cannot use trademarked terms associated with products in their advertising. Imagine if a used car dealer could not advertise that it sold a particular brand of used cars, such as Chevrolets or Hondas. The used car market would be severely curtailed or even destroyed.

However, there was also a victory for Ty Inc. The court found that Perryman’s use of the term “Beanies” on her Web site, with respect to products made by companies other than Ty, was misleading and false advertising. An injunction against such advertising was found to be proper.

In part, the court was responding to Ty’s concern that its trademark might become a generic term for all bean bag stuffed animals. If a company does not remain vigilant in defense of its trademark, it’s possible for the mark to fall into common use as a name used to describe the type of product, rather than the brand. When this occurs, the trademark ceases to exist.

There are numerous common words that began as trademarks, including thermos, yo-yo, escalator, cellophane, and brassiere. Companies, such as Xerox, Coca-Cola, and Johnson & Johnson expend a great deal of effort to assure that the words Xerox, Coke, and Band-Aid retain their status as trademarks and don’t become generic terms.

The 2002 Beanie Babies case provides important guidance to companies in two very different positions: Sellers in a secondary market and trademark holders.

Sellers in a Secondary Market. Using the trademark of another company is permissible to advertise the fact that trademarked products are for sale.

Placing a disclaimer on all advertising, and on company Web sites that contain another company’s trademark, helps limit the possibility that a trademark holder will be able to successfully claim that use of the mark causes confusion.

It may even be permissible for a business to use another company’s trademark in its business name or Web address - as long as the bulk of the business is involved in the sale of the trademarked product and the trademark isn’t used to describe products of a competitor of the trademark holder.

Trademark Holders. Being vigilant against any use of a trademark to describe a similar product sold by a competitor is the best weapon in the battle to keep a trademark from becoming a generic term.

When deciding on a trademark, choose unique words and avoid those that already have a meaning. This decreases the likelihood that a trademark will become a generic term. This has helped in the cases of Kodak and Exxon. (Although Xerox has fought many battles over the years to keep its trademark from becoming a generic term).

Using a generic term in advertising alongside the trademark (for example, Band-Aid brand adhesive bandages) helps reinforce the fact that the brand name is a trademark and not a generic term.