Musical Conversions

By Larry Downes  |  Posted 05-09-2006

Opinion: Larry Downes on What the Apple v. Apple Decision Means

A British court recently decided a case that pitted Apple Computer against Apple Corps, the latter being the record company created by the Beatles and owned today by the band's former members. (The complete and only occasionally incomprehensible decision is available here) Apple Corps argued that Apple Computer's entry into the music business with its iPod and iTunes violates the terms of a trademark agreement the two companies signed in 1991.

In his May 8 opinion, the judge disagreed, finding that Apple Computer's entry into the music business does not breach the terms of the agreement—or at least not yet.

The case raises interesting questions at the intersection of trademark law and technological innovation. As we'll see, however, it has even more to say about the dangers of turning over decisions about business strategy to lawyers, especially in industries where technology is rapidly changing the rules.

But first, some background. What is a trademark? Most legal definitions describe it as a word, term, name or symbol that uniquely identifies the source of a product or service. Marks have ancient origins, going back to cave paintings identifying the owner of particular bison. Throughout commercial history, such marks have been used to designate the artist, craftsman or guild that made or endorsed particular goods. Today, a mark can be as simple as the Nike "swoosh" or as complex as the layout of a fast-food restaurant. The modern practice of brand development and management simply updates for the global, consumer economy the ancient practice of marking.

When companies use marks consistently, consumers associate the quality of goods and services with the mark of its provider, thus reducing consumer search costs for future purchases. I expect that the experience I might have at a McDonald's restaurant anywhere in the world—price, speed, quality, taste and decor—will be roughly the same, and to the extent that is true, the brand and its marks become valuable indicators. This is one reason why companies with strong brands are so obsessed with ensuring consistent experiences, and it explains why they work so hard to make sure consumers are not given false signals by other companies using marks that are the same or similar. If my experience at a McDonald's, or at a McDonald's knockoff, varies from the norm, the brand loses value and the mark loses meaning.

Trademark law protects marks because doing so benefits consumers, not because the marks are a kind of "property." Trademarks, unlike copyrights and patents, never expire, and need not be registered to be enforceable. They can, however, fade away: If consumers no longer associate a mark with a particular source, the mark loses its meaning and its legal protection. In Canada, for example, "Aspirin" is still the brand name of a product sold by the Bayer Group, but in the U.S., where the aspirin mark became synonymous in consumers' minds with all forms of acetylsalicylic acid, the term can be used by anyone. This is yet another reason why companies are so keen to maintain a strong association between their marks and their products and services. If the association ends, the mark loses legal protection.

The holder of a mark can sue to stop misleading uses of their own or similar marks, but only because the law recognizes the holder as having the best incentive to protect consumers. That is why, in order to prove trademark infringement, the plaintiff must demonstrate that the defendant's mark creates a "likelihood of confusion" in the minds of relevant consumers, leading to consumers mistaking the defendant's product or service with the plaintiff's. In other words, no matter how close two marks are in appearance (or how far apart), the only relevant test for courts is whether consumer search costs are materially increased by the defendant's activities. If not, with certain exceptions, there is no infringement.

If Apple v. Apple rested on this bedrock principle of trademark law, there would be no case at all. Apple Computer's mark is the well-known profile of an apple with a bite taken out of it; Apple Corps' mark is the equally well-known green apple. It's hard to imagine that a survey of any relevant group of music or technology consumers would find anyone having trouble distinguishing between the two. For purposes of the present dispute, Apple Corps would have to prove that consumers seeing the Apple Computer logo on the iTunes Web site were likely to be confused into thinking that Apple Corps was somehow involved in the enterprise.

But as it turns out, the case has little to do with trademark law. After earlier litigation, and protracted negotiations, the two companies decided in 1991 to leave unresolved whether or not there was any likelihood of confusion. Instead, they chose simply to carve up their respective markets and keep them separated. In particular, they agreed that Apple Computer's exclusive fields of use included "computer software of any kind on any medium," while Apple Corps' exclusive fields of use included "music and/or musical performances; regardless of the means by which those works are recorded, or communicated, whether tangible or intangible."


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Musical Conversions

There can be no doubt that iTunes and the iTunes music store sell songs in the form of "computer software." Nor can there be any doubt that iTunes are music "recorded or communicated" in an "intangible" form. Indeed, Justice Edward Mann, the British judge who has overseen the case thusfar, noted that if the intention of the lawyers who drafted the 1991 agreement was "to create obscurity and difficulty for lawyers to debate in future years, they have succeeded handsomely."

Apple Corps was formed in 1968; Apple Computer was launched in 1976. It's possible that Apple Computer's lawyers thought the 1991 agreement saved the younger company's logos. But as far as we know (the complete 1991 agreement has not been made public, and a spokesperson for Apple Computer was not aware of any later modifications), the companies agreed not to use their respective marks in each other's fields of use until the end of time.

Neither side seems to have considered what would happen if those fields converged, as they so clearly have. Make no mistake: Justice Mann found no silver bullet in the evidence presented by the two companies to make his decision obvious, or his opinion clear. This is a mess, and a mess created by the two companies—or rather, by their lawyers. As the judge put it with trademark British understatement, "The parties cannot have imagined that technology would stand still, even if they could have predicted its direction. [Apple] Computer itself was known for its innovatory propensities."

Ironically, had the parties left themselves to the law of trademarks, which adapts itself quite nicely to changing market conditions and changing consumer perceptions, Apple Corps would be hard-pressed to make any case today.

Unfortunately, an agreement seemingly designed to forever avoid resolving the trademark issue has tied Apple Computer's current management to restrictions on their business that no longer make sense—and that no longer have anything to do with protecting consumers from confusing marks, the source of the conflict in the first place. Once again, technology has undone the work of lawyers unable to see even a few years into the future.

Short-sightedness in this case may prove expensive for Apple Computer, but not in the way most commentators and news reports of the case predict. Up until now, Apple Corps has refused to license any of its catalog—notably, recordings by the Beatles themselves—for digital distribution. At trial, however, Apple Corps admitted it is now remastering in preparation for digital release. iTunes, the first commercially successful digital distributor, would be the natural distribution partner. My guess is that the lawsuit is actually just part of the negotiations.

Following Justice Mann's decision, in fact, a statement from Apple Computer CEO Steve Jobs noted that "We have always loved the Beatles and hopefully we can now work together to get them on the iTunes Music Store." Apple Corp, meanwhile, promised an immediate appeal. Helter-skelter, baby.

Larry Downes is Associate Dean of the UC–Berkeley School of Information. He is the author of Unleashing the Killer App and The Strategy Machine. His next column will appear in July.