When thinking about the strength and value of your company, it’s essential to think beyond a single sale or a day’s receipts. Instead, you want to consider customer lifetime value (CLV)—how much a customer will bring to your company, over the lifetime of the relationship. In accounting terms, CLV is the net earnings of a customer’s sales—revenue minus all costs to get and keep the customer, from marketing to product production. Beyond general principles to improve CLV, it’s also important to realize there are hidden legal issues that can dramatically affect CLV. Let’s look at one such case to decipher how an understanding of CLV and related legal issues could have protected two companies; the famed jeweler, Tiffany & Co., and discount behemoth, Costco.
As reported by the New York Times, in 2012, Costco was selling “Tiffany diamond engagement rings” in their stores. Tiffany & Co. learned of this when a customer complained to Tiffany that it was allowing Costco to sell its jewelry. However, Tiffany had no such deal with Costco. Upon investigation, Tiffany learned Costco was indeed promoting and selling engagement rings as “Tiffany.” And while the so-called Tiffany jewelry available at Costco was less expensive than similar merchandise at Tiffany & Co., they were by no means so inexpensive that an alert, savvy buyer would think something was up. Roughly speaking, Tiffany rings start at approximately $12,600, and Costco rings were available for $4,000. But, Costco was also selling rings for as much $40,000. All told, Costco made a profit of $3.7 million in its “Tiffany” line ring sales.
Tiffany complained to Costco, who stopped the practice. But a year later, Tiffany sued Costco on many grounds including trademark infringement, counterfeiting, deceptive business practices and false advertising.
Costco’s main defense was that “Tiffany setting” was now a generic term for a particular design of engagement rings, and therefore a “Tiffany ring” no longer meant that it was from Tiffany & Co. In August 2017, after four years of litigation, Tiffany won, and the court ordered Costco to pay the jeweler $19.4 million in earnings and punitive damages. Costco said it would appeal the verdict.
How could each company have used to CLV to help them come up with a better legal strategy?
TIffany & Co.
Even though we’d expect an engagement ring is a one-time purchase, Tiffany sells its rings as a CLV—each ring includes a lifetime warranty for the diamond. They sell anniversary rings, and jewels for celebrations as well as other occasions. They sell the brand as a legacy firm that has been around forever, and they want you to know they’ll be there for you for your lifetime.
Therefore, Tiffany & Co., a legendary, luxury-brand known for iconic styles, has held trademarks since the 1920s—even the blue color of their boxes is trademarked. And now, Tiffany & Co. is widely known for actively protecting their brand. But they apparently weren’t always, because they missed the retail industry’s use of Tiffany to describe a specific diamond ring cut and setting.
Over time, “Tiffany design” became an industry standard term that no longer exclusively applied to rings that came from Tiffany & Co., but rather to any ring with that design.
Costco was arguing that the use of the term “Tiffany design” was genericide. Basically, genericide occurs once a trademarked name becomes a generic name for a type of goods or services. Then the mark is “killed” and no longer eligible for trademark protection. That’s because the intent of a trademark is to identify a particular manufacturer as the source of a product. Thus, if the term is used to describe an entire category, then these marks can no longer identify or distinguish a company or manufacturer, and the trademark is effectively voided.
A classic example of genericide is the word “jacuzzi.” Jacuzzi used to be a brand name for a producer of heated whirlpools. But because the manufacturer failed to properly use or protect its name, jacuzzi began to represent the category of heated whirlpools itself. Therefore, the word became generic and lost its trademark protection. Other candidates for genericide are “Google,” “Kleenex,” “Band-aid” and “Xerox.”
Tiffany now aggressively and correctly fights for its brand protection. Because lack of enforcement can be seen as implicit approval for anyone’s use of the mark—which is how genericide occurs—the mark’s owner may not see value in suing every last person, yet suddenly every last person is using the mark as theirs. And now, the owner’s mark is gone.
If we translate this litigation into CLV, consider that Tiffany & Co. has about $4 billion in worldwide annual sales, and 92% is from their jewelry sales. Therefore, Costco’s $3.7 million in its “Tiffany” line of jewelry sales may not have seemed significant. But, if Costco offers a “Tiffany design” ring at one-third the price, and if Tiffany hadn’t sued, you could at least argue that Costco could have weakened the value of Tiffany & Co.’s products by two-thirds.
Even if Tiffany & Co. lost the case, suing Costco was likely still worth the legal fees—because it put other companies on notice that they’d use the Tiffany name at their peril.
Here’s the valuable lesson every business can learn from this example, Tiffany & Co.’s experience reminds us that an idea, a mark, and a brand need to be protected from the very beginning. Marks should be registered prior to items being put into market, and as the use of the term expands, so should registration of the mark and variations.
Brand recognition, including its associated intellectual property, attracts a customer base and creates customer loyalty.
Therefore, protecting intellectual property is a smart short-term expense to ensure customers’ loyalty continues, thus protecting the brand’s long-term value.
Costco thought that selling rings as “Tiffany” would increase jewelry sales. The business did make nearly $4 million in sales—not profit—, yet that $4 million in revenue cost $19.4 million in damages plus years of attorneys’ fees and court costs.
But, it cost even more….
Costco built its reputation on providing customers with high-quality products, even luxury brands, at substantial savings, while respecting customers and employees. And because of that, customers stay with the stores—through paid memberships—year after year.
But once the litigation was filed, Costco was branded as a potential copyright infringer and deceiver of customers in major news publications around the nation. Customers may have lost faith in their ability to trust that Costco’s products were legitimate.
And we cannot forget there is a possibility that these Costco customers could sue for fraud. The FTC or state attorneys general could investigate Costco for deceptive business practices. And if that happens, there could be a shareholder derivative suit.
All of that, because Costco was likely more focused on the single sale of an engagement ring. They forgot that the true value in their customers isn’t the one-time off-shoot, but the CLV.
So let’s start with that $4,000 ring. How much did that ring cost them?
First, there was the cost of the ring. Now, add all of Costco’s legal bills. Now add the public relations and other staff time spent responding to the news media queries.
Then, add embarrassment to the Costco brand. Because during the litigation, Costco called each “Tiffany” line ring purchaser to confirm that each purchaser understood the true source of the ring. Imagine having to call thousands of newly engaged couples to make sure that every fiancée knew her ring was a Costco knockoff.
Now, subtract lost customers’ annual membership renewal fees and the other major purchases they might have made as a new family; Weekly trips for diapers, groceries, clothes too.
Maybe Costco didn’t lose those customers, and they might have purchased the ring there anyway.
But how many of those fiancées will now think every time they pass the Costco jewelry counter; “Remember Honey, how Costco had to call us and tell us my ring was a knockoff?”
But all Costco had to do to protect their CLV—to prevent years of litigation, millions in cash and damaged customer relationships—was to call their lawyers and ask if they should put “Tiffany Design” or “Tiffany” on their in-store signage.
Want to protect your brand or make sure that you take simple steps to protect your reputation and your customers’ loyalty? InPrime Legal can help. Give us a call 770-282-8967 for a consultation.