Product placement: the case of short-termism versus longevity

Those who believe that product placement is the gold standard for subtle brand promotion may have been alarmed to read in Brandchannel this week that Dreamworks Animation has backed out of placements. In "'Megamind' Confirms Dreamworks Animation Has Abandoned Product Placement", Abe Sauer writes, in relevant part:

"The Dreamworks Animation studio's box office hit Megamind took it to the bank this weekend, taking in close to $50 million and contributing to setting a first weekend of November box office record.

Megamind also represents a landmark in product placement for animated films. Not because Megamind is chock full of product placement; but because the film is almost completely free of recognizable products. In fact, the only brand name that can be found in the whole film (Jean Paul Gaultier) is spoken in a passing joke about men's cologne.

What's more, Megamind also has no product placement "jokes," the likes of which were so prevalent in the Shrek series. That is, until the most recent Shrek film, another brand-less children's film that signaled the trend that Megamind now confirms. Product placement in animated children's films might be dead.

The last decade of Dreamworks Animation films is a perfect case study of how the popularity of product placement in children's films has waned and brought the studio back to where it began.

None too subtle: product placement in Tommy Boy (1995)

In 2001, the studio's first film, Shrek, featured zero brands. There were a few jokes about Disney, but mostly the film was clear of product placement. Three years later, that all changed with the release of the studio's blockbusters Shark Tale and Shrek 2. Both films featured only a few real product mentions, yet were packed to the gills with product placement jokes. For example, both spoofed versions of Burger King ("Burger Prince," "Fish King") and Old Navy ("Old Knavery," "Old Wavy"). Shark Tale, a movie that takes place underwater, features an improbable product placement joke about the donut brand Krispy Kreme ("Kruppy Kreme") Parents began to grumble. A year later, Dreamworks' Madagascar featured over 20 product placements, including the real Krispy Kreme. Only the "Spalding" joke on Castaway's "Wilson" was forgivable. ...

But then in 2008, something started to change. The studio released two films (Madagascar: Escape 2 Africa and Kung Fu Panda) that between them only featured one branded product (Apple). This trend continued a year later with the Dreamworks' film Monsters and Aliens with only one visible product.

Now, 2010, where all three of Dreamworks Animation studio's blockbusters, Shrek: Forever After, How to Train Your Dragon, and Megamind, share but a single product placement amongst them. Next year will prove once and for all if Dreamworks Animation has gone product-free as the studio will release both Kung Fu Panda 2 and Shrek-offshoot Puss in Boots.

Dreamworks may have transitioned its films to remove product placement as an answer to parent criticism. But there is a practical reason to keep animated films free of product placement too: Longevity.

In fact, when it comes to product placement, Dreamworks Animation's films are beginning to resemble those of the market leader, Pixar. ... Pixar's undersea film, Finding Nemo, remains a children's favorite, while Shark Tale loses relevance with each passing year ...".

There's an interesting trade-off here.  Product placement = money on the table before the movie is launched and is therefore certain income.  In the case of animations, the movie's commercial success, and therefore the value of the placement, is likely to be higher than in the hit-and-miss market for films aimed at general release or for the adult market.  By not cashing in on product placement opportunities, a studio "buys" the prospect of longevity, but income from longevity depends on the ability to keep on cashing in on sales, broadcasting and other mainly traditional business models that are struggling to deliver the cash in the new digital environment.

One technically feasible solution, if longevity is sought, is to ensure that the movie is not rendered stale by the products placed within it.  How about short-term product placements, renewable only if the placed brand fulfils criteria laid down by the studio when the film is first made?  Come to think of it, why not segment the market and release the same movie with different branded products to suit the cultural and commercial preferences of local audiences?

Meet the Trademark Troll

We have patent trolls and copyright trolls (especially in jurisdictions that provide for statutory damages). Now it is the turn of the trademark troll.

Consider the following situation. You file a trademark application on behalf of a client (when you filed, you remember well the client's instructions--"no need to do a clearance search prior to filing"). The jurisdiction in which the appliction has been filed only examines the mark on absolute grounds, i.e. whether or not the mark is too descriptive to be registrable. The mark sails through examination and it is published for opposition.

Days before the end of the opposition period, you receive a Notice of Opposition. You examine the grounds for the opposition and you conclude that the Opponent has a strong, indeed a very strong, case. One year has passed since the application was filed. During that time, your client has been using the mark on the branded product bearing the mark, supported by substantial marketing and advertising. The client is pleased with the commercial results of the product and believes that the mark has acquired brand equity. The opponent is not in the business of using the mark, but rather warehouses registrations and applications and then waits for an opposition opportunity -- such as yours.

The question is how to advise my client. Having particular regard to the inevitable "compare and contrast" with the patent troll situation, here are my first thoughts:

1. The operative assumption is that the opponent's basic goal is to extract payment in exchange for agreement to withdraw the opposition and to agree to allow the applicant to use the mark in an unimpeded fashion.

2. That said, the circumstances described above only involve the right of registration. Even if the applicant fails to register the mark, any challenge by the opponent to use of the mark must be separately brought in a civil action. In most jurisdictions, it is relatively inexpensive to maintain an opposition proceeding. To the contrary, an infringement action will likely be substantially more costly (for both parties). Unless the jurisdiction allows an award of costs, each party will have to bear its own costs with no likelihood of recovery.

3. The threat of an injunction, if an infringment action should ultimately be filed, may well less potent than in the patent troll situation (even after the "eBay" case in the U.S.). In principle, there are an infinite number of words and signs that one can choose as a mark for a given product. Unlike a patent suit, where there may not be any viable alternative if the defendant is enjoined from using the invention, an injunction regarding trademark use merely requires the defendant to choose another mark. In most situations, this will not mean that end of the product.

All of this brings me back to situation described above. I assume that neither my client nor the opponent wishes to reach the litigation stage. My client wants to continue to use the mark while the opponent seeks payment of a sum of money. However, the opponent also knows that if my client chooses to withdraw the application, the value of the mark for my client (and hence any payment to the opponent) will become zero. The challenge, therefore, is for the parties to find a way of reaching an agreement, especially where the threat of a zero payment hangs credibly over the head of the opponent.

In particular, the sum cannot exceed the amount that the applicant will reasonably be required to expend, should it choose to withdraw the application and to adopt a new mark. This is the rub -- how can we come up with a rough metric to quantify this amount? The following comes to mind:

(i) The easier part is to calculate how much has been directly spent on creating, protecting and promoting the mark. (ii) But what about indirect costs and the amount of the brand equity, if any, that might be lost if the marked is discontinued? (iii) And what about the time value of money, as the negotiations trundle forward against the backdrop of continuing costs, both direct and indirect, in connection with the use of the mark?

At least with respect to the applicant, the information that might enable it to come up with an amount that is presumably within its knowledge and control. What about the troll? True, the troll should be able to quantify its expected costs, both for the opposition and any infringement action. But unlike its patent cousin, this troll must always be fearful of the "nuclear option" of withdrawal and presumably ascribe a discounted value to reflect this risk. All of this would seem to make the trademark troll situation more uncertain than its patent counterpart.

Rolls-Royce - patent suit follows engine failure

There was mild interest in the engineering press in August on the news that aero engine manufacturer Rolls-Royce had launched a patent infringement action in the Eastern District of Virginia against US rival Pratt & Whitney. RR’s share price rose by around 1% whilst that of P&W’s owner, United Technologies, barely changed.

This has turned into headline news in the mainstream press with the announcement on Friday that Pratt & Whitney has retaliated with actions before the US International Trade Commission and the England and Wales Patent Court. The fact that the Trent 900 engine complained of had recently failed on a Quantas A380 aircraft doubtless contributed to newsworthiness of the item. Bloomberg reported a 4.9% fall in the RR share price, with UT’s share price rising just under 1%.

This case has some interesting ingredients: even if the Patents Court action fails to halt manufacture of the Trent in the UK, Bloomberg notes that the ITC action could prevent RR from shipping Trent engines to Boeing for use in their new Dreamliner aircraft. The RR patent has already been the subject of protracted interference proceedings. Of more interest still are the underlying commercial conditions that have driven the two companies to litigate despite them already being joint venture partners in International Aero Engines AG. Hopefully the actions will shed more light.

India: a follow-up

Just when you thought it couldn’t get more confusing … Following on from the previous post on the Microsoft shrink-wrap case, I came across a Advance Ruling given to GeoQuest Systems BV (a Dutch company) by the Indian authorities in August.

Remember that the Delhi Tax Appeal Tribunal pretty much held that all software payments are royalties, and withholding tax needs to be deducted from payments, even if for shrink-wrap boxed software? Well, the GeoQuest Advance Ruling concludes that a payment for the licensing of special purpose software does not constitute a royalty – so no withholding tax on payments made from India.

The customer was granted an exclusive, but non-transferable, right to use the software and the associated proprietary information. but no rights to modify the source code, make copies or transfer the software to any other person. The software had to be returned at the end of the licence period.

The Advance Ruling confirmed that:

• unless the right to directly exploit copyright in the software (by copying it, amending it or similar) is granted to the payer, the payment should not be considered a royalty under Indian domestic law; and


• a payment for the use of a product that has an embedded copyright is not the same thing as a payment for the use of the copyright.

Now, see, these points make sense. The Advance Ruling makes it clear that income from a supply of software constitutes business profits rather than a royalty, so that no withholding tax should apply. Now, could they just explain this to the Tax Appeal Tribunal?

Beware withholding taxes on software to India

In an early start to the pantomime season, the earlier sensible decision on shrink-wrap software of the Bangalore Tax Appeal Tribunal appears to have been thoroughly ignored by the Delhi Tax Appeal Tribunal, which has held that payments received by Microsoft from end users in India through distributors for sale of Microsoft off-the-shelf, shrink-wrap, software are taxable as royalties (and so are subject to Indian withholding taxes).

Ok, so this only applied to payments made before January 1, 1999, while Microsoft had direct arrangements withIndian distributors for the software sale, on a principal-to-principal basis. But it still holds good for other companies' sales of software now. In effect, the decision means that any sale of software to India should have tax withheld from the payment, no matter what form the software actually takes - that's going to make quite a difference to some profit margins.

The reason it doesn't apply to Microsoft's sales since January 1, 1999, is that since then Microsoft software has been manufactured and distributed in India by Gracemac Corporation (a US company) under an exclusive licence. The Tax Appeal Tribunal also held that payments for software licensing should be treated as royalties for tax purposes, which makes a little more sense than their decision on shrink-wrap given that Gracemac is actually exploiting the intellectual property by manufacturing the CDs (not a lot more, assuming that the licence doesn't actually allow Gracemac to change, adapt or otherwise directly use the intellectual property).

There was also some outrageous comments on the ability of Indian domestic law to override tax treaties - that's not IP specific, but it's got international tax lawyers choking.

More R&D tax relief claims needed!

HMRC has published the latest set of details on the number and value of R&D tax relief and R&D tax credit claims, covering claims in 2008-9. There is an increase in the number and value of claims, but it is surprisingly small considering that 2008-9 was the catch-up deadline to get in claims for relief on expenditure over the previous six years (the relief now has to be claimed in the company tax return or amended return, so companies have a much shorter time limit to claim).

The total number of companies claiming the relief was 8,350 in 2008-9, an increase of just 10% in a catch-up year that was well-publicised - that seems a very low number, and it may make the tax relief vulnerable to change/removal in the upcoming consultation on how IP is taxed in the UK.

Operation Smoking Dragon

There is often discussion about whether product counterfeiting supports terrorism and drug trafficking. Westlaw News reports the latest example of counterfeiters also dabbling in both terrorism and illegal drug importation. A California jury recently convicted a man of trafficking millions of dollars worth of counterfeit Marlboro cigarettes and illegal drugs. He also attempted to import counterfeit US Dollars allegedly printed in North Korea. As if that wasn't enough, he and his partner attempted to sell Chinese surface-to-air missiles to undercover FBI agents as part of a sting operation called Operation Smoking Dragon. More and more frequently, agents investigating potential counterfeit shipments discover connections to narcotics dealers and terrorists.


Though there are already enough reasons for brands to be vigilant in their anti-counterfeiting efforts, the possibility of finding counterfeit products bearing their trademarks amidst a shipment of narcotics or weapons is yet one more.