Monday, June 12, 2017

Jeanne Fromer: Should We Regulate Certification Marks?

Teaching trademark law for the first time this spring, I fielded several questions from students on a lesser known corner of trademark law: certification marks. For those who have not encountered certifications marks, they are a special type of trademark, whose role is to certify that goods or services comply with a particular standard. Precisely how are certification marks obtained, students asked, and how closely does the PTO scrutinize the chosen standard? What if a company wants to certify its goods, and the mark owner refuses out of an arbitrary dislike for the seller rather than the contents or quality of its offerings? So it was a fortuitous event that I came across Jeanne Fromer's article The Unregulated Certification Mark(et)published in January in the Stanford Law Review.  Former's paper answers these questions and much more.


What is a certification mark?

Along with ordinary trademarks––marks that identify the source of goods or services––the Lanham Act protects so-called certification marks, whose role is not to indicate source, but to certify compliance with a particular standard.  As defined in Lanham Act § 45, a “certification mark” is
any word, name, symbol, or device, or any combination thereof—
(1) used by a person other than its owner, or
(2) which its owner has a bona fide intention to permit a person other than the owner to use in commerce and files an application to register on the principal register established by this chapter,
to certify regional or other origin, material, mode of manufacture, quality, accuracy, or other characteristics of such person’s goods or services or that the work or labor on the goods or services was performed by members of a union or other organization.
15 U.S.C. § 1127.

One of the most well-known certification marks is the kosher food certification operated by a nonprofit company called the Orthodox Union (OU). The OU kosher mark consists of a U within a circle. When this mark appears on foods, it tells consumers that the OU has certified that the food satisfies the rather complex requirements of Jewish law.

Certification marks like the OU's kosher certification exist to make it more efficient for sellers to certify that their goods and services meet a standard that is particularly relevant to consumers. Certification marks provide (in Fromer's apt phrasing) "shorthand information to consumers that certified goods or services comply with standards about which [consumers] might care[.]" (p. 127). As Margaret Chon discussed in her 2009 article, Marks of Rectitude, certification marks theoretically should resolve two asymmetries implicated by consumer transactions: an information gap (incomplete information about a market offering) and a trust gap. (Chon, p. 109) ("Consumers are not often in a position to be able to assess the truthfulness of a claim made about a product’s qualities[.]").

Imagine that a start-up company wishes to sell frozen foods for orthodox Jews who only eat food that is kosher. Consumers of the food may not want to take the seller's word that the food is actually kosher, and may not themselves even know precisely what kosher food must contain or not contain. All sellers and buyers of kosher foods would be in a similar predicament. Under the Lanham Act, an entity that does not itself produce, sell, or market food or kosher goods (e.g. the OU) could apply to the PTO for a certification mark, setting out a specific standard that food would need to meet in order to be certified kosher. (Fromer, p. 160, n. 219) (“In an application to register a certification mark . . . the application must . . . include a copy of the standards that determine whether others may use the certification mark on their goods and/or in connection with their services.”) (quoting (37 C.F.R. § 2.45(a) (2015)). Once the PTO approves the proposed standard, the owner of the mark would be charged with policing uses of the mark. Sellers could legally use the mark only upon paying fees (to help fund the certification program) and proving their food meets the standard. Otherwise, the mark owner will likely bring a legal action against them. (Note that the certification mark can also be protected under Lanham Act § 43(a), as a matter of common law, even without a registration.)


Ideally, everyone is made better off by this system. As Fromer explains, prohibiting certification mark infringement serves the interests of all three players. (p. 128). Certifiers (the entity that runs the kosher certification program in the example above) get to collect licensing fees from sellers of certified goods and services. These fees can run into the millions of dollars. (p. 123). Sellers of certified goods and services (here, sellers of kosher products) can more easily attract the right consumers. And consumers (here, aspiring Orthodox Jews) are protected "from experiencing confusion in the marketplace as to certification." (p. 128).

Market breakdown.

But Fromer argues the system is not working very well. Her central concern is that sellers are currently at risk of being excluded from the market for the wrong reasons, and that this will negatively impact free competition and unfairly deny consumers quality goods and services.

For instance, imagine I make a terrific ice cream-like dessert that clearly meets the kosher requirements, but that I am denied the right to use the kosher certification because I am a newcomer to the kosher foods market and do not have the right connections, or because fees are set so high that only a few large food sellers can afford them. This would make it difficult for new entrants such as myself to compete in the kosher foods market. Orthodox eaters would have fewer and lower quality food choices. Prices would likely be higher due to less competition.

Essentially, what Fromer identifies is a market suffering from over-exclusion: sellers who should rightly be able to compete, and whose presence in the market would benefit consumers, are prevented from entering the market due to another entity's right to exclude.

Fromer identifies two culprits for this exclusionary problem. First, certification mark owners have too much discretion in defining a certification standard because the law permits them to keep the standard vague and open to interpretation. "[T]he PTO," she writes, "permits certifiers to secure certification mark protection by exposing a wisp of information in vague and general terms as its certification standard." (p. 183).  Second, once the standard is defined, even if it is quite clear and specific, certification entities have too much discretion in deciding which uses/ers to prohibit and which uses/ers to permit. The second problem of discretionary enforcement is in turn aggravated by the first problem of open-ended standards. The possibility of wrongful exclusion for reasons unconnected to the certification at hand "is more worrisome the more flexible the certification test[.]" (p. 189-90).  Again, the upshot is fewer and lower quality offerings and higher prices.

The case studies.

Fromer uses three case studies to illustrate her thesis of dysfunction: the Orthodox Union (OU), the Motion Picture Association of America (MPAA), and the Federation of the Swiss Watch Industry.  When read together, her case studies indicate that several large certification entities may currently have significant control over which sellers can obtain certifications in their respective industries. Fromer further observes that some entities might have so much market power in the certification market that they effectively have market power in the downstream market for their respective goods and services. (p. 167). In other words, returning to the kosher example, the power to deny a seller the right to use the mark "certified kosher" might effectively constitute the power to deny a seller the right to sell kosher foods.

Fromer's first case study is the kosher certification. Fromer tells a story in which the major certifier of kosher foods, the OU, sued a restaurant called "Jezebel" not because Jezebel was not offering kosher food, but because Jezebel was using a name and trade dress that were mildly anti-religious. (pp. 135-140.) Obviously this is just one instance of exclusion by the OU, but Fromer suggests the OU's actions against Jezebel indicate the OU is both willing and able to use its certification mark "in troublesome ways that exceed the scope of its certification and might hurt both consumers and fair competition." (p. 140.) Fromer argues one reason this arbitrary enforcement was possible at all is that the OU mark's standard for kosher is remarkably open-ended. Even though there are quite specific rules defining what is and isn't kosher, the OU's kosher certification is defined simply as indicating “that the production of said goods and that the rendering of said services has been supervised by the rabbinical supervisors of the applicant, under the direction of . . . Rabbinica[l] Council of America, Inc.” (p. 138). It is no wonder the OU has "significant flexibility to declare exactly what is and is not kosher each time it is called upon to certify, in ways that may or may not remain consistent over time." (Id.)

Fromer's second example is movie ratings, which are certified by the MPAA.  Films that seek to certify their films as less than X (or now NC-17) have to go through the MPAA. This task is made difficult by the subjective nature of the inquiry. How do we know whether Basic Instinct is more or less disturbing than The Big Lebowski? People likely have different views. But Fromer argues that, even given the subjective nature of the inquiry, the standard is too open-ended to be meaningful. For example, the G rating certifies that a movie has “nothing in theme, language, nudity and sex, or violence which would, in the view of [the MPAA’s] rating board, be offensive to parents whose younger children view the film[.]” (p. 141). Like the OU's kosher standard, this standard is circular, akin to "it's G if we say it's G." Fromer shows that "the ratings standards’ opacity has given rise to many claims of inconsistent or indefensible movie ratings, such as harsher ratings for movies with sexual content or foul language than for films with gruesome violence." (p. 142). Independent producers, in particular, have alleged that "films made by major movie studios and filmmakers are rated more favorably than similar films made by independent producers." (p. 144).  In other words, Die Hard, starring Bruce Willis as an f-word-using cop who blows up a lot of buildings, is fine; but not those nude French films.

Fromer's third example is the geographic certification of Swiss Watches as being made in Switzerland. In U.S. law, certification marks perform the function of "geographic indicators" (GI's): marks that indicate to consumers that a product is made in a certain geographic region or using products or methods of a certain geographic region. GI's do more than impart information about a product to consumers. They also operate as a form of subsidy for local producers. See Justin Hughes, Champagne, Feta, and Bourbon - the Spirited Debate About Geographical Indications. Despite their slightly different purpose, Fromer argues that many of the same problems plague certification-as-GI-marks. In particular, she argues that they suffer from overly flexible and open-ended standards, despite the fact that a geographic region's boundaries would seem to automatically provide a clear standard. For example, in the SWISS watches case, she shows the standard is not crystal-clear and has changed over the years in response to pressure from certain watchmakers in Switzerland. (pp. 147-148). Moreover, as in the movie ratings example, it is small watchmakers who are less able to meet the standard. (p. 149-150). This leads Fromer to wonder if the SWISS MADE standard "is being manipulated to exclude competitors, not to indicate quality differences between the watches. ... If nothing else, the example of Swiss watches indicates that despite Switzerland’s clearly delineated geographic boundaries, the standards of SWISS and SWISS MADE for watches are malleable. In this regard, GIs—despite possibly appearing otherwise—are not that different from certification marks more generally." (p. 150-151).

Is more regulation really the answer?

I do not have reason to disagree with Fromer's contention that certification mark entities currently have too much discretion in defining and enforcing their certifications, or with her concern that at least some of these entities have obtained an unhealthy degree of control in their respective markets. Obviously, more than three case studies would ultimately be required to prove this thesis with certainty.  However, one might quibble with Fromer's premise that certification marks are troubled by too little regulation, and that the solution is more regulation.

As Chon has observed, using certification entities to police product standards is an alternative both to "first-party" certification by sellers and to full-on governmental regulation. (Chon, p. 105). Congress could have decided to leave the task of standard setting to sellers themselves in a "buyer beware" market. Congress could also have decided that agencies like the Food and Drug Administration should set standards regarding the contents of major foods, or for the Federal Communications Commission to set up movie ratings. But in drafting the Lanham Act Congress decided to delegate authority to private entities to design and police standards for market offerings.

Certification marks operate in a middle ground of mixed public-private regulation, permitting government to essentially outsource the function of standard-setting to a "third-party" certifier. Chon, p. 115 ("Third-party certifications to standards are key components of this private form of regulation. ...[The] certifier [is] conceived as a trustworthy expert who can verify for outsiders that a firm is performing to standard.")  So it seems counterintuitive to then turn around and regulate certification mark entities.

To some degree Fromer recognizes this perversity. She comprehensively assesses, and then resoundingly rejects, introducing more substantive regulation by government. Having government set substantive standards, Fromer writes, "would directly thwart flexible certification standards and the problems they enable but at the too-heavy price of the benefits that can also come from certification standard flexibility: agility and awareness to respond to changing or unexpected conditions out of responsiveness to consumer welfare and competition, the precise goal of protecting certification marks in the first place." (p. 174). She also recognizes that many standards, such as movie ratings, can only realistically be articulated as open-ended standards, even as others (such as standards involving food contents) are more amendable to strict rules. (p. 184).

Nonetheless, Fromer suggests introducing a significant level of oversight of certification marks. Indeed, Fromer seems to be suggesting the same level of regulation as we see in the context of standard setting organizations (SSOs) in high technology industries. She makes the analogy explicitly, writing that "[i]n many ways, the anticompetitive worries here are similar to those that antitrust scholars address with regard to standard setting." (p. 171). I can certainly see the logic behind the analogy,* so maybe an equal amount of regulation is required. In the SSO context, the Department of Justice (DOJ) oversees SSOs and IP licensing entities in various ways, mainly by enforcing SSO's obligations to license rights on "fair, reasonable, and non-discriminatory" (FRAND) terms to ensure no one is cut out unfairly. Here, we could at minimum have agencies try to limit arbitrary denials of certifications. Nondiscriminatory licensing of certification is already expressly required by the Lanham Act. See 15 U.S.C. § 1064 ("A certification mark owner may not “discriminately refus[e] to certify or to continue to certify the goods or services of any person who maintains the standards or conditions which such mark certifies.”).

But Fromer goes even further than than. She advocates introducing several new layers of "procedural" regulations, including, to name just a few, requiring certification entities to submit more detailed certification tests; an opportunity for notice and comment by third parties on certification standards; and greater protections for sellers in certification enforcement, such as robust appeal processes for certification denials; and random audits by the government of certification decisions. (pp. 180-195.)  Unsurprisingly, given her concerns about anti-competitive denials and enforcements, Fromer also recommends more robust antitrust scrutiny to ensure that certification mark owners aren't permitted to wield too much power in a given market. (p.195-198). The DOJ or the Federal Trade Commission, she writes, "should be emboldened to institute investigations of and enforcement actions against certifiers in these circumstances." (p. 197).

This seems like a lot of new regulation. The costs of regulation, along with government's limited knowledge and lack of flexibility in responding to market conditions (p. 174), include greater expenditures of taxpayer dollars, agency costs (e.g. the costs of monitoring the DOJ in carrying out its mission), and more red tape for certification mark entities and, indirectly, for sellers seeking certifications.

Maybe less is more.

Or we could go in the opposite direction. Instead of more regulation of certification entities, we could just get rid of them altogether. To resolve the information and trust gaps implicated by consumer markets, we could leave certification determinations entirely to sellers themselves, and leave "regulation" of sellers entirely to consumers through their buying decisions.  Chon calls this alternative "first-party" (versus third-party) certification. (Chon, p. 105).

This idea may seem crazy.  But this is what we already do in trademark law proper. We rely on source-identification as the primary means of regulating sellers. Strong trademark protection is a double-edged sword. Sellers protect their trademarks in order to ensure customers return to them rather than pretenders; but by strengthening consumers' association between offerings and source, sellers also necessarily make themselves more accountable to consumers. The more distinctive the brand, the easier it is for consumers to boycott it.** As Judge Easterbrook puts it, "[t]he value of a trademark is in a sense a 'hostage' of consumers; if the seller disappoints the consumers, they respond by devaluing the trademark. The existence of this hostage gives the seller another incentive to afford consumers the quality of goods they prefer and expect." Scandia Down Corp. v. Euroquilt, Inc., 772 F. 2d 1423, 1430 (7th Cir. 1985).

Here is how trademark's "regulatory function" works in this context. If I want to sell kosher ice cream to Orthodox eaters, then I heavily market my ice cream, presumably under some eye-catching brand, and "self-certify" that it is kosher. If it turns out I'm lying or wrong about my ice cream being kosher, then consumers can not buy my brand ever again, and can sue me under tort or contract for any harm they suffer. If a movie studio labels a movie as "suitable for children", and the movie has severed heads in it, then unwitting parents who take their children to the movie can sue the movie studio for damages, and never go to a movie by that studio again. In cases where the risk of error is too great, such as food and drugs with serious health and safety consequences, then we may turn to full-on substantive regulation. However, first-party-certification is likely to provide sufficient protection to many categories of consumer products due to sellers' fear of adverse repetitional or legal consequences. To put it another way, movie ratings just doesn't seem like a place for government.

This first-party-certification option may not lead to a perfect world. This is why Chon, like Fromer, argues for more regulation of the certification process. (See, e.g., Chon, p. 142, arguing that trademark law suffers from "overdelegation of quality assurance of private standards to first-, second, and third-party certifiers," and has "not encouraged consistent quality, accountability, or transparency."). But the self-certifying option has its own advantages. The problem with the current "third-party" certification regime is that certification mark entities don't seem to have enough skin in the game. They are mainly after certification fees. If a certification mark isn't sufficiently or accurately enforced, consumers can't as easily find the goods they want, and sellers can't as easily sell consumers the goods they have. But the certification mark entities don't feel the pain from these failed transactions––only consumers and sellers do.*** Relying on robust, self-identifying branding and the buying power of consumers, rather than third-parties, to call out sellers whose products aren't what they claim them to be would better link decision-makers to the consequences.

Anyway: I loved Fromer's (and Chon's) articles on this fascinating corner of trademark law, and found them to be invaluable for understanding certification marks and for deepening understanding about trademark theory generally.

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* In the SSO context, SSOs create standards for technologies, such as smartphones or computers, in order to permit efficient inter-operability, and SSOs or separate IP-licensing entities license sellers the IP rights necessary to meet the standard. The anti-competitive issue raised by SSOs is that entities involved in the standard setting operation might collude with one another, or that certain businesses will be arbitrarily prevented from obtaining the rights necessary to meet the standard and thereby prevented from competing. (p. 171.) This looks similar to the anti-competitive concerns Fromer describes of the certification mark market.

** Chon has recently written about the potential for consumer boycotts of products for social responsibility reasons.  I am referring here to the more general buy-or-don't-buy regulatory function of source-identifiers, which is highlighted in Judge Easterbrook's (and Judge Posner's) "law & economics" interpretation of trademark law.

***Chon points out to me in an email that certification entities also have their reputation on the line as as standard enforcers.

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