Tuesday, February 24, 2015

Branding A Necessary Evil: Insurance

Benjamin Franklin once wrote that the only certainties in life are death and taxes.  If he had lived in 2015, he might have added a third inevitable evil:  insurance.

Virtually no responsible, self-sufficient adult in America can function without buying some form of insurance policy at some point in their life.  Whether it is private medical insurance, "umbrella" fire and theft insurance for one's home or apartment, life insurance, vehicle or boat insurance (mandatory if you want to register an automobile or motorcycle), business interruption insurance, professional malpractice insurance, the list of available policies goes on and on...

The ostensible purpose of all insurance is to spread risk.  That is, rather than take the risk that your new house might burn down and lose everything, you fork over a few thousand dollars a year, so that if such a horrendous calamity ensues, at least you can buy a new wardrobe.

It is virtually impossible to imagine an adult successfully prospering in our modern society, fully exposed to all attendant economic risks without insurance.

Driving a car into a tree or hitting a pedestrian can easily bankrupt anyone.  Giving birth to a healthy baby in a public hospital without health insurance could now cost well over $10,000.  That is not to even mention catastrophic illnesses.

Fortunately, ever present are private insurance companies, ready to sell you a blanket policy for a reasonable annual premium.

But how do these "necessary evils" brand themselves to differentiate themselves from one another in the marketplace? By credibly advertising that they will pay all reasonable claims without becoming adversarial?  No, not exactly.

The GEICO gecko has become ubiquitous.  The redheaded, apron-wearing Flo, as portrayed by actress Stephanie Courtney, has become a mainstay of television.  Cavemen, babies, puppy dogs and talking pigs have all become iconic representatives of an industry that isn't otherwise very popular.

Data provider SNL Financial found Geico had spent about $994 million on advertising in 2011. That was fully 22 percent more than next-largest spender State Farm, even though State Farm’s ad spending grew at nearly three times the rate Geico’s did.

The goal is to grab the attention of consumers who would rather not think about insurance. Experts say most people only ponder policies when they have an accident, buy a new car, move, or renew their existing agreement, which usually happens twice a year, at most. 

Today there are about 187 million insured privately owned vehicles on the road. Turnover is relatively low from year to year — 11% of consumers switch their policies while an additional 20% shop but don’t switch, according to J.D. Power. But that still means more than 20 million people are in the market each year.

But the insurance companies' advertising isn't winning many fans among existing customers.

They will wish you good luck trying to collect from the carrier.  

As soon as a claim is filed, some of these same insurance companies that were so cutely advertising their products with ice cream and puppy dogs will hire a team of savvy adjusters and professional litigators to nickel and dime a claimant to death.

But, for now at least, such negative reviews don't seem to be reaching consumers amid the din of talking lizards.

Thursday, February 12, 2015

Borrowing and Branding: Loyalty and Expansion Through Debt

What do borrowing money and creating an established brand have to do with one another?  It turns out, quite a bit.

Here is a simple case study of retail electronics and appliance stores in the United States.

The very first P.C. Richard store opened on September 26, 1909 in Bensonhurst, Brooklyn.  This particular store sold hardware and was run by Peter Christiään Richard, an immigrant from the Netherlands

The first appliance the store sold was an electric iron.  Peter's son, Alfred, would spend all of his time helping his father, as he quit school at the age of fourteen for the sake of the store. 

Within time, A.J. would become the head of the store, and would prove to be highly successful in persuading people to buy appliances. 

As the years progressed, his sons would aid him with the business, as they expanded to a few other locations. To this day, the chain is still run by the Richard family, as A.J. himself would serve as chairman well into his 90's. On December 28, 2004, A.J. Richard died at the age of 95.

Today, P.C. Richard & Son have 57 showrooms in the New York Tri-state area and make more than $1.5B in annual revenue.  It is the largest privately-owned appliance and electronic retailer in the nation.

During the 100+ years that P.C. Richard & Son have been in business, many, many of its competitors have come and gone.  Just a few memorable ones include:
  • The Wiz (founded in 1977, defunct by 2004)
  • Lechmere (founded in 1913, defunct by 1997)
  • CompUSA (founded in 1984, defunct by 2012)

and now...Radio Shack (founded in 1921).

What did each of these defunct (and soon to be defunct) electronics companies do differently than P.C. Richard & Son?  

At least two things stand out:  they apparently never formed a customer base that was truly loyal to their brand, and they took on too much debt to finance unfettered expansion.

Over the decades, P.C. Richard & Son became the "go to" place in New York City for appliances.  The company expanded slowly, buying and building stores over the course of generations, rather than leasing them from commercial landlords.

Such a philosophy of glacial growth over 100 years seems anachronistic today.  In an age where the federal discount rate remains under one percent, banks and investors appear eager and willing to finance companies' expansion plans.

As a result of refusing to accept this type of financing, P.C. Richard & Son does not sell refrigerators in Iowa or toasters in California.  It deliberately chose to stay local and close to its roots.

In contrast, the 94-year old Radio Shack will now shutter 1,100 stores littered across the nation after losing profits quarter after quarter for a decade.

Radio Shack is certainly a more well-known national brand than P.C. Richard & Son, but apparently it does not have a loyal enough customer base to keep it afloat.

And so, the perpetual question that faces every brand is whether their core customer will always return, and whether that perception of brand loyalty ever justifies borrowing tens of millions of dollars to find out.

Wednesday, February 11, 2015

The BigLaw Gap Widens: Winners and Losers

As I have previously noted, one of the most controversial topics of debate and discussion among both lawyers and non-lawyers alike (for various reasons) is law firm profitability, and how many lawyers are perceived as overcharging their clients to engage in legal work.

An interesting article was published on Above the Law which discusses the current state of affairs in the American legal marketplace, among "AmLaw100" law firms.  It is aptly titled "The Imminent Capitulation of Many Big Firms."  This article comes on the heels of recent articles discussing how DLA Piper apparently shortchanged its associates on annual bonuses.

For readers not immersed in the terminology, the American Lawyer magazine publishes lists each year showing America's largest 100 law firms, based on gross revenue, as well as lists of the same firms broken out by average annual profits per partner.

Headcount of total lawyers is one easy to measure variable, so a local New York City-only law firm that has 500 lawyers and boasts $1B can be ranked "higher" on some lists than a law firm with 1,000 lawyers located all across the globe that reaps $500M in annual revenue.  Both firms would probably still be on these lists, but the lower grossing law firm would be ranked "lower."

A few "elite" firms, such as Wachtell, Lipton, Rosen and Katz have only 260 lawyers, including 79 equity partners, making $5M each.  Another such elite firm is Sullivan & Cromwell, which has 800 lawyers, with each of its equity partners making $3.5M each year.

These interesting metrics show that these top 10 "elite" law firms based on profits are pulling away from the rest of the pack, leading to a very, very short list of highly paid lawyers.

However, the rest of the large law firms are struggling to compete effectively for the day to day routine legal work of the large corporate clients.  The American lawyer calls these firms the "Giant Alternatives."  These firms are enormous but not hugely profitable: although they house almost 20 percent of the Am Law 100’s lawyers, they generate less than 14 percent of the revenue.

A big law firm in this vein is DLA Piper, which has approximately 4,200 lawyers practicing in more than 30 countries.  It has total revenue of $2.48B, but profits per partner placing it 54th on the list, with $1.3M in average profits per equity partner.  The world's largest law firm based on both revenue and headcount is Baker McKenzie, which has 4,200 lawyers in 78 offices, reaping over $2B per year.  However, its profits per partner place it 63rd on the profitability list.

So the world seems to agree:  The super-rich firms will become even more superbly rich, and the merely rich firms will lose ground. Where does that leave many big firms?  In a world of hurt.
Why is that?  Look at it from the perspective of a corporate client facing any Intellectual Property legal issue.  If that issue involves facing down Boies Schiller or Ted Olson in the U.S. Supreme Court, the client will need to hire the best lawyer available, whether she charges $1,500 or $1,800 an hour.

However, the vast majority of clients' day to day legal activities in the Intellectual Property arena are relatively routine, such as sending and responding to cease and desist letters, monitoring trademark filings, handling copyright licensing arrangements, etc.

These specialized but routine activities do not warrant paying $1,000 an hour for a partner whose firm maintain dozens of glitzy offices all around the globe.  These clients can look to small, boutique firms with the same experience and specialization but much lower overhead and billing rates to substantially undercut the Giant Alternatives.

And that is just one of the reasons why Giant Alternatives and their ilk are in for a world of hurt ahead.

Friday, February 6, 2015

Katy Perry Dubiously Claims to Own Copyright in Shark Costume from the Superbowl Halftime Show

During singer Katy Perry's performance at the halftime show at the 2015 Superbowl, a variety of amusing costumes depicting sharks and palm trees were used.  It is unclear who specifically designed these particular costumes.  Katy Perry has reportedly utilized Jeremy Scott as her costume designer.

Greenberg then fired off a formal cease and desist letter to Shapeways.com, which had offered to sell shark figures that were based upon Katy Perry's costume design:

So let's scrutinize Katy's copyright claim a bit more...does U.S. intellectual property law really protect this shark costume?

Potentially, no.  The costume itself may very well be a "useful article" under U.S. Copyright law, and not protectable in the abstract, since its ornamental elements are not clearly "separable" from it.  Copyright protection is generally not available to articles which have a utilitarian function.

Under the Copyright Act, the only copyright protection available to these items is for "features that can be identified separately from, and are capable of existing independently of, the utilitarian aspects of the article."  Unfortunately for Ms. Perry, this test is inherently ambiguous when deciding the scope of copyright protection for certain useful articles, such as shark costumes.

Some distinctions are clear.  For instance, a painting on the side of a truck is protectable under copyright law even though the truck is a useful article. The painting is clearly separable from the utilitarian aspects of the truck.  The overall shape of the truck, on the other hand, would not be copyrightable since the shape is an essential part of the truck's utility.

Another commonly considered example is that of clothing.  The print found on the fabric of a skirt or jacket is copyrightable, since it exists separately from the utilitarian nature of the clothing. 

However, there is no copyright in the cut of the cloth, or the design of the skirt or jacket as a whole, since these articles are utilitarian.  This is true even of shark costumes; no copyright protection is granted to the costume as a whole.

That is because costumes, in addition to covering the body, serve a “decorative function,” so that the decorative elements of clothing are generally “intrinsic” to the overall function, rather than separable from it.  See Whimsicality, Inc. v. Rubie's Costume Co., 891 F.2d 452, 455 (2d Cir. 1989) (observing that garments' decorative elements are “particularly unlikely to meet [the] test” of conceptual separability); but see Chosun Int'l Inc. v. Chrisha Creations, Ltd., 413 F.3d 344 at 329 n. 3 (2nd Cir. 2005) (expressing skepticism that Halloween costumes that permit wearer “to masquerade” have a utilitarian function other than to portray appearance of article).

The idea for an upright “shark costume" is not an original copyrightable element, standing alone.  General character types are not protectable by copyright law.  See Hogan v. DC Comics, 48 F. Supp.2d 298, 310 (S.D.N.Y. 1999).

Further, as for a potential claim of "trade dress" or the tort of commercial "misappropriation," Ms. Perry would need to show that she is uniquely associated with this particular shark costume in consumers' minds.  While that is possible given the immense publicity and viewership that the Super Bowl halftime show receives, there are functionality issues there, as well.

Finally, below are photographs of a few similar shark costumes that appear to have been created and sold long before Katy Perry's costumes were created.  It is unknown if any of these designers successfully have claimed copyright or trade dress rights in their designs.  However, it would appear that the scope of Ms. Perry's intellectual  property rights, if any, would probably be quite narrow, if they exist at all: