The Marketing Consequences of Competitor Lawsuits

On July 20, 2005, readers of The Wall Street Journal’s Opinion pages were greeted with the headline: “Tech Times Are Good, So Why Not File a Lawsuit?” The accompanying column by Holman W. Jenkins, Jr., discussed a suit by Advanced Micro Devices, Inc. against rival Intel Corp. and argued that Hector Ruiz, CEO of AMD, is “shrewd enough … to realize that a lawsuit can be a branding exercise, a way to garner free media for an ‘AMD Inside’ message to answer Intel’s own long-running and expensive sloganeering over its chips.”

Assessing the merits of the AMD suit against Intel is beyond the scope of this article. However, The Wall Street Journal op-ed column raises an interesting topic that is seldom discussed publicly: the marketing implications of lawsuits, particularly those filed by one competitor against another.

Managers considering whether to file lawsuits traditionally have taken into account the cost of the suit, the likelihood of obtaining damages and the amount of those damages. Attorneys advise them on each factor by estimating legal costs, including the time of managers who would provide evidence; by attaching a probability to winning a settlement or, if the case actually went to court, winning a suit; and by estimating the amount of a settlement or of damages.

Such considerations, however, may not represent the entire cost/benefit calculation. Another issue involves the costs and benefits of a given lawsuit from a marketing perspective. Once a company assesses not only legal but also marketing consequences, a decision to file may take into account the possibility that a suit against a competitor may be portrayed unfavorably in the press and lead to a decrease in revenue if perceived negatively by customers. Conversely, the legal costs associated with such a suit may be offset not only by financial gains from a settlement or legal judgment but also by increased revenue from what could turn out to be a publicity coup. Conflict, after all, is news.

Consider, for example, a case involving Pizza Hut, Inc. based in Dallas, Texas, and Papa John’s International, Inc., a rival pizza company in Louisville, Kentucky. In 1998, Pizza Hut filed a false advertising claim against Papa John’s, disputing as false and misleading a Papa John’s claim that its ingredients were better than Pizza Hut’s. Pizza Hut was initially awarded damages of $467,000 in the case, and although both the verdict and the award were later overturned on grounds that the Papa John’s claim was simply “nonactionable puffery,” a great deal of publicity followed the initial pro-Pizza Hut verdict.

The initial verdict and resultant publicity spread two messages favorable to Pizza Hut: Its pizza was not inferior — and its rival’s advertising was deceptive. That verdict followed testimony about tomato sauce, preparation processes and crust, including a finding that in blind taste tests, consumers showed no preference for either company’s pizza crust over the other’s. Although there is no reason to believe that obtaining news coverage was one of Pizza Hut’s aims in filing the suit, the media certainly did communicate the Pizza Hut perspective following the initial favorable verdict. Furthermore, the news coverage presumably conferred greater credibility than advertising that contained the same message could have provided.

Litigation to Protect a Brand Name

The two cases mentioned involve long-standing rivals, but marketing consequences can also flow from legal action that seeks to prevent erosion of a brand name — in effect, seeking to keep a nonrival from becoming one. Consider a recent legal battle between a small business and a well-known large corporation. This dispute involved Starbucks Corporation, a coffehouse chain headquartered in Seattle, Washington, and Bell’s Old Quarter Acoustic Café, a bar in Galveston, Texas, that markets “Star Bock” beer, described by its owner as “combining the names of the Texas brand Lone Star Beer with Bock beer.” As the bar owner explained the inspiration for the name on his Web site on the topic, “A guy said ‘gimme a Lone Star,’ and then he said ‘no, gimme a Bock,’ and I said I’ll give you both; I’ll give you a Star Bock.”

When the bar owner, Rex Bell applied to trademark the name of the beer, Starbucks unsurprisingly opposed his application. Bell then sued Starbucks, requesting a declaratory judgment barring Starbucks’ opposition to the trademark application. This suit between a large corporation and a small-business owner received considerable regional publicity as well as some at the national level. The bar owner’s Web site on the subject, which for more than a year thereafter listed newspaper and even television stories devoted to the case, included Bell’s comment that “I’m just a small-time bar owner trying to make a Bock.”

A federal district court judge in Galveston ruled in August 2005 that the bar owner could continue to sell his microbrew Star Bock Beer and could continue to sell promotional items with a specific “Star Bock” logo at his bar but could not expand outside Galveston or vary the logo because “broader use … would likely cause infringement, unfair competition and dilution to the Starbucks brands and trademarks.” Bell depicted the ruling as a victory for his bar in news stories that extensively publicized the decision.

The Marketing Consequences

A legal battle such as this one offers a template within which to analyze the marketing costs and benefits to both parties. In this case, given a well-known opponent and a sense of humor, Rex Bell gained publicity that at a minimum can be expected to attract customers from nearby Houston, the source of many Galveston tourists. Will these visitors stop by for a Star Bock? Probably some will.

From a marketing perspective, Bell has significantly increased awareness of his small business. Furthermore, now that this bar is “in print,” any search engine may turn up articles about it when a prospective tourist searches for a Galveston bar. Companies and organizations that run party buses to Galveston from Houston may find it, too.

Meanwhile, Starbucks, in filing opposition to the Rex Bell trademark application, faced the risk of appearing the bully in news stories. This legal battle is the sort that is best avoided by a major corporation and instead turned over to a public relations expert with a sense of humor, like that of the bar-owner plaintiff. Such an expert might well have suggested a negotiation instead, possibly along the lines of an offer that the trademark application be withdrawn in exchange for several thousand dollars’ worth of free signs, labels, mugs and T-shirts for some other appealing and available trademark — and a $1,000 credit at the local Starbucks.

Not every small plaintiff, of course, will fare as well as the bar owner in this decision. Such plaintiffs may find that their target competitor countersues and that the costs in dollars and managerial time result in serious negative implications for their businesses. For a small firm, a lawsuit may deplete financial resources that could otherwise have been put to use in new product development, promotion of current products, geographic expansion or other marketing initiatives.

On the other hand, some large firms may be wise to avoid lawsuits involving competitors because such a suit can lead to negative publicity that could become a serious marketing threat. Any company with image problems based on a reputation for poor labor relations, pollution, unfair competition or excessive executive pay — just to name a few negative associations — runs that risk. In such a situation, a competitor that is sued may be quoted in the media on not only the legal issue in contention but also on other negative characterizations of the plaintiff firm as well.

Thus, from a marketing perspective, one risk of lawsuits for large companies is the negative publicity that may follow a lawsuit by a market leader against a smaller rival with limited financial resources. By contrast, the smaller company that sues a larger rival may benefit from publicity, but bears the risk of adverse financial consequences if the suit drags on and its costs consume funds needed for other undertakings. A small firm combating a larger rival in the legal boxing ring may also find itself countersued and knocked out by large damage awards.

An additional risk for any litigant is the threat that a lawsuit will be deemed frivolous; however, such a risk is increasingly rare. A frivolous lawsuit is one found to violate “Rule 11,” which applies to suits filed “for any improper purpose,” including harassment, delay or a needless increase in the cost of litigation. Penalties can be severe, but such sanctions are very rare. Also rare, but technically possible, is a ruling of sham litigation under antitrust laws. Such a ruling is made if a dominant firm seeks to block competitors from entering a market, or seeks to drive up the competitor’s costs, with an “objectively baseless” suit — and if the competitor can prove the complete elements of an antitrust claim.

One additional perspective may be helpful in assessing the marketing consequences of lawsuits between competitors. If the case attracts significant media attention and is essentially “tried in the newspapers” as well as in the courtroom, the effects may parallel those associated with negative comparative advertising. Competitor A is denigrating Competitor B — naming that competitor — with statements condemning the imitation of intellectual property, deceptive advertising or whatever else might have prompted the suit.

Academic research on ads that disparage a competitor’s brand has generally found such tactics to be effective. Negative information is assigned a greater weight than is positive information in an individual’s evaluation process. A study by Sorescu and Gelb in the Winter 2000 issue of the Journal of Advertising, “Negative Comparative Advertising,” which was designed to tease out more specific effects, found that negative communication about a rival company’s products was viewed more favorably than communication disparaging the rival company itself. The same study found that customers of the brand attacked by the rival’s communication viewed that communication less favorably than did customers of the brand doing the attacking. One reasonable conclusion to draw from these results is that the effects of a well-publicized lawsuit against a competitor will vary in degree and direction, depending on the claim against the rival and the audience for the resultant publicity. However, a company would be overly optimistic to believe that its customers will reflexively take its side, particularly in situations where customers have only a few potential suppliers from which to choose.

Given the range of potential marketing implications, both positive and negative, of lawsuits involving competitors, companies may be motivated to include their marketing managers in “shall we sue?” discussions when legal grounds bring up such a suit for consideration. We may well have reached a time when managers weighing the costs and benefits of any legal action they are considering will also routinely factor in its potential marketing costs and benefits. And, just as importantly, they should understand how likely their competitors are to do the same.