Coca-Cola's Secret Formula: its Brand

When an entrepreneur starts a new company, one of the first things he(*) worries about is how to protect his new idea. And usually the choices are two: file a patent, or keep it under lock-and-key as a trade secret.

(*-or she, but we'll keep the masculine only here)

The trade-off for patents is clear: in exchange for a 17-year monopoly, the inventor has to disclose his methodology (or other invention) to the world, so that others can build off his patent. Indeed, the entire patent regime is is like a giant Jenga puzzle, with almost each patent "built" in effect upon previously-issued patents.

Trade secrets are the opposite: the inventor makes a decision that protection of the idea would be better served by keeping it private. Although there are some legal protections for stolen trade secrets (for instance, claims for misappropriation or theft, or unfair competition law), but even if an inventor insists on a non-dislosure agreement, if the secret is valuable enough, he may not be able to recover full damages from a breaching party.(*)

(*-The breaching party, even if insured, may not have assets large enough to make the inventor whole, for instance.)

For years the gold standard in trade secrets was the formula for Coca-cola. Urban legend has claimed that the only copy was held in the vault at the SunTrust bank in Atlanta, and that only two Coke executives (at any one time) had access to the document.

But in 1979, a columnist for The Atlanta Journal and Constitution ran an article that identified a ledger book with a formula for "Merchandise 7x"; over the weekend, the popular NPR radio show "This American Life" re-awakened interest in the 1979 story -- and the formula that goes with it. It is currently a viral sensation on the web -- this year's Susan Boyle.

The reality is that the formula -- or something very much like it -- has been "out" in the public domain for years. Type in "coca-cola formula" into a search engine and you'll find a number of recipes that will probably come very close to the taste.

But after a century of making the soda, Coca-cola now relies on a different intellecual property tool to protect itself: its trademarked brand. And trademarks don't expire (if subject to continuous use).

A lot of drinks may taste like Coke.

But only one can call itself (legally) the "Real Thing."

1907

With the defeat of the 'Bailout Bill' in Congress yesterday, one can't help but think of the Panic of 1907, which occurred almost 100 years ago.

In 1907, horse-drawn carriages and 'special' trains were state-of-the-art. But while financial markets change, the core elements of a panic remain the same: financial innovation runs ahead of regulation; a short-squeeze; interlocking and connected financial institutions, resulting in a domino-effect of falling institutions; the spread of the contagion; and then, most dangerously, a run on previously-healthy banks.

The 1907 Panic was stemmed on the evening of November 2-3, when JP Morgan famously locked a number of presidents of trust companies (which were the financial innovations of the day, as derivatives and credit-default swaps are today) in his library; they were not 'released' until they all agreed to subscribe to a $25M loan for the Trust Company of America, an otherwise healthy institution that was facing a run. And like in 1907, it is collective action -- individuals acting against their own personal short-term interests for the good of all -- that can stem a panic.

The House vote yesterday was a political version of the 'Prisoner's Dilemma.' The bill would help everyone, but it was in many member's interest to have been able to vote against an unpopular bill. But once it became clear that the House Republicans were not near the 100 votes that Speaker Pelosi wanted, Democrats were not going to pass a bill with little or no GOP support.

The good news, if any, is that the lessons of 1907 still hold; the meeting in Morgan's library was not the first time that "Pierpont" had tried to stem the tide. More than a week earlier, on October 23rd, 1907, Morgan had summoned the trust presidents to his office and urged them to help TCA; but at that time, they were still more concerned about their own cash position, and Morgan had trouble raising $10M. (A week later, it required considerably more money -- $25M -- to stop the run on TCA.)

And as the contagion spread throughout the stock market, Morgan had to inveigh upon then-President Teddy Roosevelt to allow the takeover of Tennessee Coal, Iron & Railroad by US Steel. Roosevelt was known as a 'trust buster', so politically he was contradicting his well-established position. But TR did what was needed to be done, and so avoided (in his words later) "a panic and general industrial smashup at this time."

867-5309

As Sacha Pfeiffer of the Boston Globe writes (Saturday edition):

If you're a radio listener of a certain age, the telephone number 867-5309 is burned forever in your brain.

Now, apparently two companies are fighting over the 'rights' to the digits made famous in a pop song by Tommy Tutone in the 1980s.

The number appears to be quite popular in the plumbing business, and is now the subject of competing claims, as described in the article.

Who would have thought that an anthem of the early 80s would end up being used as a jingle for stuck toilets?

iPhone (TM) Update

Apple and Cisco (as earlier posted) have apparently agreed to settle their trademark dispute over the use of the "iPhone" name to describe (i) Cisco's phone and (ii) Apple's forthcoming cell phone. According to the WSJ,

Under their agreement, Cisco, of San Jose, Calif., and Apple, of Cupertino, Calif., are free to use the iPhone trademark on their respective products throughout the world.

It also has come to light that Cisco apparently failed to make use of the name "iPhone" during the six years following registration, and therefore the validity of any claim that they had against Apple was under suspiscion. A good reason to settle.

Apple and IP Rights

Two bits of news related to Apple this week.

First, on Monday, Apple announced the resolution of its ongoing battle with Apple Corps (the Beatles' record label) with regard to teh use of "Apple" in connection with music. Originally a trademark dispute, the two sides reached an agreement in 1991; however, with the expansion of Apple's business into music and music delivery (via iPod/iTunes), Apple Corps brought suit on an apparent breach of the 1991 settlement. The new settlement gives Apple rights to use "Apple" in connection with music, and licenses the name back to Apple Corps in certain areas. The guess here is that in addition the license rights, Apple Corps received a hefty check. Next step: getting the Beatles' music on iTunes. And then turning to resolution of the Cisco dispute over 'iPhone.'

Second, yesterday Steve Jobs released an open letter calling for a music industry-wide move away from Digitial Rights Management (DRM) software. Jobs states that when Apple went to license music from the major labels, it was required to create, update, and monitor use of the music and protect it via DRM; as the result, music sold through the iTunes store will only work on Apple products (iPods). (Apple argues that providing the 'keys' to permit DRM on third-party products will result, inevitably, in the disclosure of the keys to the public and therefore the 'unlocking' of the DRMs.) Moreover, as Jobs also points out, the labels' sell millions of CDs to the public without any DRM at all. (Apple, by the way, calculates that only 3% of the music currently loaded onto the world's iPods was purchase through the iTunes store; but that 3% still equals 2 billion songs.)

As the leader in portable music (and looking to extend that lead with the iPhone), Apple has the most to benefit from elimination of a DRM regime that seems flawed to begin with; and what is good for Apple, in this case, looks like it would be good for consumers as well.

Apple v. Cisco

Lost in the tumult over Apple's (very successful, apparently) launch of its new cellphone was the fact that Apple was sued the next day by Cisco for trademark infringement. Cisco, it seems, has been selling a VoIP phone of that name since the spring of last year. (Cisco, in turn, acquired the mark when it made an acquisition in 2000.)

A few thoughts: first, Apple and Cisco apparently had been negotiating through the weekend (with the announcement looming over the talks) over licensing rights to the name. Wonder what the difference in prices were at the end?

Second, the USPTO does recognize the same "mark" in different categories, so Apple may be betting on the ability to differentiate the two phones (so as not to confuse the public, which is essentially the test the USPTO applies). But at first blush, it seems that Apple has an uphill battle to prove that the cellphone and VoIP phone markets are so distinct that consumers won't be confused.

Third, it's interesting to note that Apple was also involved in a high-profile litigation with Apple Corps (the Beatles' label) over the use of the "Apple" in connection with music (iTunes, iPod, etc.)

Finally, it's rare to see two corporate giants litigate head-to-head. Enjoy the show.