Trademark Ownership: The Legitimacy of the "Free-Rider" Argument and its Significance in Canadian Jurisprudence

Vincent Doré is a JD/MBA Candidate at Osgoode Hall Law School and Schulich School of Business.

Professors Mark A. Lemley and Mark P. McKenna have identified an area of American trademark law that has, in their opinion, received insufficient attention: the “free-rider” argument. This argument contends that trademark owners should be protected from parties that use the mark to make money in unrelated markets, effectively precluding the owner from capturing those markets. In their paper, “Owning Mark(et)s,” Lemley and McKenna examine the “free-rider” argument in the context of U.S. trademark jurisprudence, and find that several cases have been decided on the basis of this argument alone (or under market preemption arguments), and remedies have been awarded even when there is no harm done to either the consumer or the trademark owner. 

To award a remedy in such cases, it is argued, does not coincide with the spirit of trademark legislation. As the authors astutely point out, trademark law is not designed to protect owners’ interests in the same manner as copyright and patent legislation because “in the patent and copyright contexts: we affirmatively want to encourage the creation of new works, and we’re concerned that free riding might undermine incentive to create them. But we don’t have any reason to affirmatively encourage the creation of new brands.”


An American case from 2010 cited in the paper is Au-Tomotive Gold Inc. v. Volkswagen of America, Inc. In this case, the defendants had purchased genuine Volkswagen badges from a Volkswagen dealer and placed them on license plate frames, which the defendants then sold and “packaged the frames with labels making clear that the frames were not produced or sponsored by Volkswagen.” Clearly, the consumer was not harmed, because there would be no confusion about who produced the frames. Additionally, the trademark owners were not harmed because they received compensation for the badges and showed no intention of entering the Volkswagen license plate frames market. The decision to award a remedy to Volkswagen was based on the “free-rider” argument: Auto Gold should not be allowed to profit from the use of the “VW” mark, even though the badges were paid for. Lemley and McKenna point out the flaw in logic inherent in the decision: “[t]he claim that trademark owners are injured by not being able to control a remote market is circular – mark owners are injured if, but only if, we define their trademark rights ex ante to include control over that remote market.” As the authors suggest, such decisions give trademark owners control over markets, even those they may never enter, and not simply the trademark itself.

In their paper, Lemley and McKenna show similarities between the judicial approaches to the “free-riding” argument of American, European, and Canadian courts, stating that “it is not just in the United States that courts strive to prevent free-riding even absent a theory of harm to the plaintiff.” The authors first cite a 2009 case from the European Court of Justice (L’Oreal, S.A. v. Bellure NV), where the court “declared that EU law prevents companies from taking advantage of the prestige of well-known marks in order to boost sales, even if the copycat products do not directly harm the owner of the mark or create a likelihood of confusion.” Here, the same issue occurs as has been described in the United States. First, there is no harm to the consumer in the form of confusion, and second, there is no harm to the mark owner in the form of brand dilution or lost revenues. However, what distinguishes this case from the most problematic U.S. cases discussed in the paper is the similarity of the products in question. Bellure had packaged its own perfumes in a manner that mimicked the packaging of L’Oreal’s most popular perfumes. The authors do not suggest that American law has failed in the area of directly competing goods, so this example seems immaterial to their argument. (For a discussion of the L’Oreal case, see this IPilogue blog post from earlier this year).

Lemley and McKenna then cite a case from the Exchequer Court of Canada (Clairol Int’l Corp. v. Thomas Supply & Equip. Co.). Not only does this case also involve matching product classes (hair dyes), but it is from 1968, and thus cannot be used alone to represent Canada’s judicial stance on “free-riding” arguments in the modern trademark context. A more comprehensive review of Canadian jurisprudence reveals that in recent cases involving dissimilar products (the types of cases that are the object of the authors’ primary concern in the paper), the Supreme Court of Canada has not used the same logic in deciding cases as the U.S. courts, despite acknowledging the “free-rider” argument. For example, in Veuve Clicquot Ponsardin v. Boutiques Cliquot Ltée. (2006), a mid-priced women’s clothing boutique (“Cliquot”) was found to not infringe the trademark of a prestigious champagne producer (“Veuve Clicquot”). Therefore, while the “Cliquot” clothing boutique may benefit from the prestige of a world-renowned champagne producer, there is no infringement for different product classes without the likelihood of harm to the consumer (confusion), or to the trademark owner (brand dilution or lost revenues). The court also made it clear that “[d]espite the undoubted fame of its mark, the likelihood of depreciation was for the appellant to prove, not for the respondents to disprove, or for the court to presume.”

In contrast, U.S. courts have made decisions based on “free-rider” arguments without any onus of proof placed on the plaintiff. Another American case cited by the authors is Stork Rest. v. Sahati (1948). In this case, involving two non-competing clubs (one in San Francisco and another in New York), “[t]he conclusion [was] inescapable that the appellees [were] seeking to capitalize on the publicity that the appellant ha[d] built around the name.” Clearly, this approach differs significantly from that of the Supreme Court in Veuve Clicquot. Lemley and McKenna attribute the expansion of U.S. trademark law beyond direct competitors, and the growing influence of the “free-rider” argument, to earlier cases like Stork.

Lemley and McKenna propose a “trademark injury” requirement in such infringement cases, which would be one step beyond the onus on the plaintiff in the Supreme Court of Canada’s decisions: proof of a likelihood of depreciation, or of a likelihood of confusion. Under the proposed “trademark injury” test, the plaintiff would “have to demonstrate that the defendant’s conduct causes material confusion in the minds of consumers, and allegations of other types of ‘harm’ should be insufficient.” Such a requirement would prevent decisions based solely on the “free-rider” argument (like that in Stork). And while this standard would be harder to meet than the test employed by the Supreme Court of Canada, both approaches would put the onus of proof on the plaintiff.

The Supreme Court of Canada has recognized the need to protect trademark owners “not only from free-riders but from those who, without any intention of free-riding, nevertheless use in their own business distinguishing marks that create confusion or depreciate the value of the goodwill attaching to those of the appellant.” (from Veuve Clicquot, above) All these considerations mirror those of American courts; however, the Supreme Court of Canada’s application in cases involving distinct markets is markedly different. Therefore, while the authors have advanced valid arguments that warrant further discussion, Canadian jurisprudence appears to be less influenced by “free-rider” arguments, and maintains a higher threshold for a finding of infringement in such cases.