Trademarks, Signaling, and Innovation

13-year old Rachel Zietz was a skilled lacrosse player who became frustrated after spending hundreds of dollars on lacrosse equipment that was of low quality and would quickly break down. So in December of 2013, she decided to start her own lacrosse equipment company, Gladiator Lacrosse. And in 2015, at only 15 years old, she went on ABC’s hit TV show Shark Tank to pitch her product. While all the sharks turned her down, she seems to be doing more than fine without it, with over $2 million in sales in 2016 and a projected over $10 million in sales in 2017. Even without directly investing, the Sharks seemed to foresee her imminent success, as most of her answers to their questions directed at her made them seem more and more impressed with her vision and overall character. But there was one question she wasn’t asked by the Sharks that might have saved her a lot of time and annoyances in legal disputes.

Do you have a patent or trademark?

Without fail, this is usually one of the first couple questions asked by the Sharks to any hopeful entrepreneur on Shark Tank. There are many reasons for why someone may get a patent or trademark, but arguably the most important reason is the signaling effect it has on innovation for investors. Innovation is historically and notoriously difficult to measure, and as such, companies looking to invest in R&D through acquisitions often use proxies to measure the value of innovation. These proxies include metrics such as patent count, citation-weighted patent count, R&D Expenditure, and market response to new patents. While the traditional viewpoint held that patent and citation weighted panted counts were the best proxy for innovation, a new study out of George Washington indicates that may in fact not be the case.

Do you have a patent or trademark?

James Poetpa and Kyle T. Welch, both of whom are assistant professors of accountancy as George Washington, used a variety of measures to figure out the most suitable measure for measuring proxies. Their study, “Innovation Worth Buying: The Fair-Value of Innovation Benchmarks and Proxies,” found no compelling evidence that patent count, citation-weighted patent count, and research and development expenditures relate consistently and significantly to innovation. They were useful, but only as far as showcasing the capture of technological developments already developed.

Meanwhile, Poetpa and Welch found that trademarks are “positively and significantly associated with innovation.” In an interview with World Trademark Review, Potepa further explained why he believed trademarks were a better proxy for innovation that patent counts besides just the raw data in the study. Patents represent technology that has already been developed, are often hidden from competitors, and technology is starting to move toward an open source platform. Comparatively, trademarks represent a combination of recognition and what customers anticipate a company to do moving forward, trademarks help capitalize on advances in a way that competitors can’t replicate, and even if major companies’ products can be patented with the move to open source, large brand names will still be widely recognizable. Poetpa concludes by stating that it is quite possible trademarks are undervalued.

Do you have a patent or trademark?

Rachel Zietz was never asked this question and didn’t file for a trademark until December of 2015. The mark was eventually registered a year later, but Rachel and Gladiator Lacrosse soon after faced opposition and a trademark infringement lawsuit. Sports Guard, which sells custom mouth guards under the “Gladiator” brand, filed suit in February of this year. The case was ultimately dismissed a few months later, but the case serves as an important reminder about the function of trademarks: regardless of how substantial trademarks are for signaling innovation, trademarks are still very important for brand protection.

Billy Whyte is entering his 3L year at Duke University School of Law. Billy previously attended the University of Alabama, where he graduated Summa Cum Laude while majoring in accounting and economics. He once got fourth place in the second grade spelling bee.

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