Ritter Sport Wins Trademark for Square Chocolates: Bitter Consequences of Trademark Maximalism

In a surprising ruling by the Federal Supreme Court of Germany (BGH) recently, well known German chocolate brand, Ritter Sport (“Ritter”) won exclusive rights to square packaging for its chocolates. The Court rejected the appeal by competitor Milka, a Swiss chocolate company that had been trying for almost a decade to challenge Ritter’s trademark protection for shape.

Decision and Reasoning

The Judges held that the square shape of the bar was not functional as it did not add any essential value that could induce consumers to buy it over products of competitors. It was held to be distinctive inasmuch as consumers associated the square shape of the bar with Ritter and expected it to conform to the quality of chocolates manufactured by the company. Ritter had also advertised its chocolates as “Square. Handy. Good” for years.

Analysis

There are two broad things to prove for registration, firstly, the distinctiveness of the mark in question and secondly, that it is not functional. When a mark acquires distinctiveness because of being widely known, arguably the law’s role is not (and should not be) to protect the owner’s monopoly to internalise all positive externalities arising out of its use. If the use entails only obtaining a benefit from another’s investment, i.e. expenditure on promotions of the mark, without any detriment to the producer, consumer or society, then prohibiting the use leads to avoidable social costs. Thus, the law must also check whether the owner is seeking to monopolise a mark that is valuable because of its inherent functionality and could serve as an attractive selling feature for other producers.

These are two independent requirements and conflating them to hold that given the acquired distinctiveness of the mark and consumers’ brand association with it, their decisions are not influenced by its shape but by the shape’s association with Ritter, is faulty. This fails to acknowledge that the association of an attractive selling feature (for instance the shape of chocolates here) with a company doesn’t discount the attractiveness of the selling feature itself. Existing trademark protection for Ritter prohibited competitors from selling chocolates in square packaging, allowing the producer to monopolise the shape mark. However, it is still unlikely that consumers will be confused if a competitor like Milka were to package and brand its own chocolates in square shape with its own logo. If any company tries to pass off its products as those of Ritter, it continues to have the common law remedy for passing off.

For granting registration and exclusivity over a shape as ordinary and common as a square for packaging of consumables like chocolates, the standard to be followed should not just be that consumers’ decisions to buy a particular product are largely influenced by the functionality of the mark but that the mark adds some value to the product in question.

German and Indian Trade Mark Statutes

As per section 9(3) of the Indian Trade Marks Act, 1999, shape marks are prohibited from registration if they consist exclusively of the shape which

(a) results from the nature of the goods themselves; or

(b) is necessary to obtain a technical result; or

(c) gives substantial value to the goods.

There is a disjunctive requirement here of the shape mark obtaining a technical result OR adding substantial value to a product, which would prohibit its registration. The determination will not pivot exclusively around the rationale for the BGH’s decision in this case- consumers buy the chocolate not because of any essential value added by the shape but because of the shape’s association with the brand, making the mark registrable. The fact that the shape obtains a technical result, can fit into a sports jacket or is more convenient to carry, suffices to preclude registration. Ritter’s square chocolate bar dates back to 1932. As per company legend, Clara Ritter came up with the idea and is recorded to have said, “Let’s make a chocolate bar that fits in everyone’s jacket pocket without breaking and weighs the same as a normal long bar.”  This clearly demonstrates the function and technical result achieved due to the shape. Further, as per the European Court of Justice’s ruling in Koninklijke Philips Electronics v. Remington, registration of shape marks achieving a technical result could not be justified by the existence of “other shapes capable of achieving the same technical performance.” Thus, other shapes that might also be convenient to carry in pockets than rectangular chocolate bars cannot justify protection of square packaging for chocolates.

As I have previously explained here, the functionality doctrine guards against the anti-competitive effects of granting a monopoly over a useful product feature to a single producer. This is because the protection of designs and functionalities for a limited time lies within the ambit of patent and not trademark law (which affords perpetual protection). Interestingly, even section 3 of the German Trademark Act, 1995, precludes shape marks from protection if the shape is, a) due to the nature of goods themselves, b) necessary to receive a technical effect or c) gives the goods an essential value. These requirements are also disjunctive, except that demonstrating the provision of ‘essential value’ due to a shape may arguably be a higher burden than demonstrating ‘substantial value’, as under the Indian statute.

Conclusion: Objective of Trademark Monopolies

The justification for allowing trademark monopolies is that trademarks reduce consumers’ search costs so that they can rely on their prior experiences with a brand, which thereby incentivises brands to maintain high quality for their goods and services.

The goal of IP is to grant “as little protection as possible, consistent with encouraging innovation.” Of late, courts and commentators across the globe are increasingly treating IP not as an exception to the norm of free competition, but as a good by itself.

The rising property rhetoric in IP discourse, ignores that physical property is depletable, rivalrous (consumption by one prevents simultaneous consumption by others) and excludable by its very nature, unlike IP. As the Ritter’s case illustrates, there is no consumer or societal benefit that accrues from trademarking square packaging for chocolates, whereas it does limit competition. Milka can use square packaging without increasing consumers’ search costs or causing any confusion between its chocolates and those of Ritter. Trademark protection in these cases stems from regarding the mark, i.e. square shaped packaging, as property in itself. Once, Ritter became the first brand to market and use square packaging for chocolates, it is used to justify property-like protection for Ritter’s shape mark to prevent ‘free riding’. This approach by Courts regards any use of a trademark by another party as unjust. The underlying rationale is not that the mark’s usage causes a detrimental effect on the sales of the owner, consumers or society, but that the idea of using square shaped packaging for chocolates occurred to Ritter first and should not benefit another brand. The benefit is thought of as taking something that did not belong to the competitor. This approach of trade mark maximalism disadvantages free competition and the choice available to consumers. For instance, Milka and other competitors are deprived of packaging their chocolates in square shapes and consumers are deprived of being able to choose from among different brands selling square shaped chocolates.