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Winter 1996 - Volume 1, No. 3

Intellectual Propert in Foreign Markets - The Case of Gallagher Guitars
by Dr. Lara Short, Assistant Professor of Accounting, MTSU

J.W. Gallagher and Son, one of America's premier manufacturers of folk guitars, is located in Wartrace, Tennessee. For over thirty years the Gallagher's have been making steel-string acoustic flattop guitars for musicians in several foreign countries as well as throughout the U.S. Today their catalog offers fourteen different models of six and twelve string guitars priced from $1486.00 to $2750.00. Each guitar is still made to order by hand. Most of the company's sales are through its catalog, but Gallagher and Son will also custom make guitars.

High quality has always been the focus of the company. This was never more evident than in the late 1980s, when changes mandated in the lacquer industry by the Environmental Protection Agency affected the formulation of lacquer applied to Gallagher guitars. When a customer contacted Don Gallagher and informed him that the lacquer finish on a newly purchased guitar was cracking, Gallagher decided to stop taking orders, though he had eighty guitars in his finishing room. He halted production of new guitars and laid off his staff. The production of new guitars did not recommence until he had resolved the problem with the lacquer company, and had stripped and refinished all forty of the guitars in the shop.

Gallagher guitars can be readily identified by two unique characteristics. One is the curved or "French-scroll" headstock, and the other is the Old English G inlaid on the headstock. The company has relied solely upon common law trademark protection to guard against use of these unique characteristics by other companies in the U.S. and abroad.

The Problem

In April of 1993 Don Gallagher discovered that he had a serious problem marketing in Japan. He was contacted by a Japanese national named Kotaro Fujii, who wanted to order a guitar as a result of an ad he had seen in Vintage Guitar Magazine. Fujii was happy to discover that Gallagher and Son was still in business: he had read ads in Japan stating that Gallagher was no longer producing guitars and that the Gallagher guitar was being produced by a Japanese company. Don Gallagher then obtained copies of some of these ads, which did indeed state that his company had ceased business, and that the Gallagher guitar was being made by the Kanda Shokai company in Japan. The ads also mentioned Gallagher's most prominent customer, Doc Watson. This was not the first such experience. In the 1970s guitars closely resembling the Gallagher guitars were produced and sold in Japan. However these guitars were marketed as Aria guitars and there was no mention of the Gallagher name in any promotion of the guitars.

Though no action had been taken against the company producing Aria, Don Gallagher decided that the Kanda Shokai ads required action because they actually used the Gallagher name. Gallagher wrote to the Japanese company and demanded that it cease production of the copies and also cease the misleading advertisements. The company replied by letter, indicating that its president had long been an admirer of Gallagher guitar and so decided to produce the Gallagher after he had heard that J.W. Gallagher was no longer living and that the company had gone out of business! The Kanda Shokei company further stated in its letter that it would cease production of the Gallagher copies. However, Gallagher still faces the prospect that the Japanese company may ignore this agreement in the future. He has been advised that Japanese companies respond only to formal legal action in cases like this. Further, he is concerned about the continued distribution of extant copies.

Since first hearing from Fujii, Gallagher has also received communications from individuals in the United States who believed that they also had purchased J.W. Gallagher and Son guitars, but who had in fact purchased lower quality copies. He suspects that the actions of the Kanda Shokai company have resulted in lost sales for Gallagher and Son, both in the U.S. and abroad. Mr. Fujii's order was the first he had received from Japan in several years.

Current Trademark Law

Mr. Gallagher's options are not clear. This is certainly a case of international trademark infringement. While in the U.S. Gallagher and Son has relied solely upon common law protection for its name and distinctive design, protection under Japanese law depends upon explicit registration. Use of the trademark is not a prerequisite for registration, but failure to use the mark within three years of registration leaves the mark vulnerable. Since Gallagher and Son did not register the trademarks in Japan, it is unlikely that the company would prevail in any Japanese court.

Both the U.S. and Japan are members of the Paris Convention for the Protection of Industrial Property, but this compact does not create an international law of trademark. Instead, it is based on the principle that each state's trademark law should apply only in its own country, and that foreign nationals should operate under the same rules as the state's own citizens.

The U.S. Supreme Court has, nonetheless, applied U.S. Trademark law to activity outside the US., notably in the 1952 case Steele v. Bulova Watch Co. This decision was based on three factors. First, the defendant was a United States citizen. Second, the Court found the activities of the defendant had an effect on U.S. Commerce. Third, many of the watches involved in this case had been brought into the U.S. by purchasers who believed they had purchased "the real thing." Following this logic, it is unlikely a U.S. court would engage in an application of U.S. trademark law should Gallagher and Son take the case to an American court. There is no clear evidence that Kanda Shokai has affected commerce in the U.S., and the defendant is not a U.S. citizen. Kanda Shokai's lack of presence in the U.S. would also prevent a U.S. court from exercising personal jurisdiction over the defendant.

Gallagher and Son can certainly take effective action with U.S customs to prevent an unlikely attempt by Kanda Shokai to import into the U.S., but the problems with counterfeit guitar makers in the Japanese market is a far more difficult matter. The problem has been alleviated somewhat by corrections published in several of the Japanese magazines which printed the original advertisements. Also, Gallagher and Son has recently received positive publicity in Japan. In May, 1995, the company was visited by a group of people working on an anthology of acoustic guitars for publication in Japan. Don Gallagher believes that the inclusion of Gallagher and Son in this publication is the result of the Kanda Shokai incident.

Protection in Foreign Markets

The question remains, what can, and should, companies like Gallagher and Son do to protect their intellectual property in foreign markets? Gallagher could have registered its trademark in Japan, but use within three years would have been required in order to protect against a cancellation proceeding. Use of the mark could easily be established through advertising the product, but Mr. Gallagher has been successful in fostering the image associated with the size, location, history, and mystique of his company, which would be defeated by mass media advertising. There is also the issue of cost. Gallagher sells its products in several foreign countries; the cost of registering his trademark in each of those would be prohibitive. Unfortunately, the small business owner is at the mercy of foreign entrepreneurs who file at their local trademark office.

Editor's note: Registering trademarks internationally has just gotten much easier. The European Union has decided to consolidate its registration process. Beginning January 1, 1996, an American company will need to file only one application to register its trademark in all fifteen EU countries. Currently a company must register independently in each EU state. This change will save U.S. firms thousands of dollars in filing fees, and years of processing their trademark registrations.

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