Uncertainty of the LOC test links to costly and time-consuming litigation for both plaintiff and defendant.
Bone 16, Robert, G. Rollie White Teaching Excellence Chair in Law, Professor of Law and Robert Kent Chair in Civil Procedure at Boston University School of Law, clerked for United States District Judge, associate at the Boston law firm of Hill & Barlow, professor at University of Southern California, selected to give the 2000-2001 Boston University Lecture in honor of his scholarly achievements, recipient of Boston University’s highest teaching award, the Metcalf Award for Excellence in Teaching, voted UT Law Professor of the Year for 2012-2013, member of the American Law Institute, professor at University of Texas Law School, 03/25/22, Bone, Robert G. "Notice Failure and Defenses in Trademark Law." Boston University Law Review, vol. 96, no. 3, May 2016, pp. 1258-1261, K)
By creating uncertainty, notice problems can impede effective licensing. For example, uncertainty about ownership, boundaries, and rights-scope can lead parties to assign such different estimates to the value of a license that they are unable to reach agreement.63 Also, uncertainty about rights reduces the value of any license, which reduces the royalty payments that upstream innovators receive and thus dampens incentives to create.64 Licensing, however, plays a much less important role in trademark law because trademark is not about incentivizing innovation.65 To be sure, there are some settings in which trademark licensing is important. The modem franchise arrangement, for example, depends critically on licensing marks.66 But franchising takes place today without any apparent ill effects from notice problems. Also, firms today count on licensing popular brands for use on Tshirts, coffee cups, and other merchandise. 67 But there is no reason to believe that willing licensees have trouble reaching agreement because of uncertainty about the ownership or scope of trademark rights.68 3. Increase in Information Costs When formal notice fails, parties might try to obtain the same information in more costly ways. For example, greater uncertainty about liability might lead prospective trademark users to consult lawyers more often.69 But it is unclear how much this would increase information costs.70 Trademark law is technical enough that a prospective user worried about potential liability and able to afford a lawyer has good reason to seek legal advice entirely apart from any notice problems. Moreover, changes that make the LOC test more certain can produce costs of their own. For example, formulating liability in terms of simple and clear rules improves notice, but it also generates problems of understanding over-inclusion. I shall argue later in this Article that modifying the LOC test is desirable, but not because it reduces information costs. 4.
Increase in Litigation-Related Costs This leaves litigation-related costs. It is important to distinguish between the direct costs of litigation and the indirect costs of litigation threats. Direct costs include the actual costs of litigating and deciding a case. Indirect costs include the social costs created when parties are discouraged by litigation threats from making lawful uses of a work, invention, or mark because of the fear of incurring high direct costs. For example, trademark owners regularly send cease-and-desist letters threatening litigation.7 ' These threats might not have a major impact on large and wealthy companies, but they can intimidate risk averse individuals and small firms. 72 The effectiveness of a litigation threat depends on two variables: (1) the probability that a lawsuit will be filed, survive early dismissal, and proceed far enough into discovery to impose meaningful costs on a defendant, and (2) the magnitude of those costs if this litigation were to occur. As for the first variable, it should be fairly easy in most cases for a trademark owner to allege enough to survive a motion to dismiss and push the suit into discovery, even when the challenged use is perfectly lawful.73 To be sure, litigation is costly for a trademark owner too, but there are reasons why trademark owners would be willing to incur these costs. For one thing, a trademark owner might not know for sure that its lawsuit is meritless, given the uncertainty associated with the LOC test. 74 More importantly, a trademark owner has reason to file even a clearly meritless suit in order to leverage a favorable settlement and bolster a credible threat to sue in the future.75 As a result, someone contemplating use of a mark should anticipate a significant probability of having to litigate at least through the discovery stage if he ignores a cease-and-desist letter.76 The second variable-the magnitude of the litigation costs incurred when a trademark suit survives early dismissal and proceeds to discovery-requires a bit more discussion. There are reasons to expect discovery and summary judgment costs to be quite high in trademark suits. The LOC test places a premium on expensive surveys and expert testimony and creates many opportunities for adversarial litigation.78