Question: how do you make money from a secret formula for a product that smells and tastes horrible and that no one wants? Answer: you make everyone believe they have a medical problem that only this stuff can solve.
Back in 1879, Joseph Lawrence, a St. Louis doctor, was experimenting with surgical disinfectants. This was a new thing. In the 1860s, a British surgeon named Joseph Lister was the first to perform surgery antiseptically, using carbolic acid as a disinfectant. Inspired by Lister, Lawrence came up with a compound of alcohol and essential oils that seemed to kill whatever bugs it touched. To honor Lister (and presumably to take advantage of his fame), Lawrence named the concoction “Listerine.”
He tried to sell it to dentists but wasn’t getting traction. In 1881, he ran into a local pharmacist, Jordan Lambert, who acquired the secret formula in return for royalties on future sales. Apparently not fully thinking through what “future” meant, Lambert signed a contract that guaranteed payment to Lawrence (and his heirs and successors) $20 for each 144 bottles sold. The contract consisted of two sentences with a total of 127 words.
Later, they agreed to reduce the royalty to $6, and then converted it to ounces, to account for different sized containers. But Lawrence wasn’t earning much on the royalties anyway, because Listerine sales remained sluggish. Even when Lambert took the product directly to the public in 1914, it just didn’t catch on. Maybe it was the foul smell (“like an old shoe”) or the taste (“like petrol”). The company tried promoting various applications besides mouthwash, including as a treatment for dandruff and gonorrhea (don’t ask). They even brought out (very briefly) a Listerine cigarette.
It was Lambert’s son, Gerald, following him as president in 1923, who came up with the idea that would make Listerine the world’s most popular mouthwash – and also make Lawrence’s family rich. If only people could realize that they had a medical condition, they would be willing to use something that tasted awful to fix it. So, Gerald coined the term “halitosis” – from the Latin word for breath and the Greek suffix “osis” which implies some form of disease.
The company spent millions on an aggressive marketing campaign – the equivalent of constant Super Bowl ads – to convince people that “halitosis” was a very serious social problem with a simple, medical solution: Listerine. The ads were early examples of fear-based marketing, usually featuring attractive people who were failing in their personal and professional relationships because of bad breath. Leveraging social anxiety, the ads promised that “your closest friends won’t tell you” and that “they talk about you behind your back.” And worst of all, “you yourself rarely know when you have halitosis.” (You can check out some of the ads here and here.) And if you have something that sounds as serious as halitosis, you need strong medicine, with a real “medicine” taste. A later tag line became “It’s the taste people hate – twice a day.” Advertising professionals now refer to Lambert’s campaign approvingly as a metaphor: using fear to sell a product is called a “halitosis appeal.”
Whatever you think of the social value of fear-based advertising, or about the direct line from there to today’s fear-based social media journalism, it certainly works. For Lambert, the results were astonishing: in the space of five years annual sales of Listerine increased from $115,000 to $8 million (today, U.S. sales exceed $650 million). But all the success attracted other attention to the product, and someone was able to reverse engineer it. The previously-secret formula was published in 1931, leaving the trademark, supported by all that advertising, as the foundation for continued success.
By 1955, when Lambert merged with another company to become Warner-Lambert, Lawrence’s heirs had pulled in a total of $22 million (think of all those actual silver dollars) and continued to be paid $1.5 million a year, even though the property right that Lambert had originally bargained for – a trade secret formula – had effectively disappeared. Figuring that 70 years was more than enough, Warner-Lambert filed a case in New York federal court, asking for a declaration that it could stop paying royalties for something that no longer had any value. It argued that the contract was “indefinite in time” and so should be subject to the rule requiring that a reasonable time limit be inferred. That time, it said, had passed, especially given how much the company had spent on advertising to build the brand.
In its ruling, the court rejected this argument, noting that the promise to pay royalties actually depended on a condition that Warner-Lambert controlled: the continuing sale of Listerine. Just stop selling it, the court explained, and you can stop paying the royalties. The parties to the original contract had to know that there was a risk of disclosure of the secret, and they could have provided for some consequence. Inserting one later would be to rewrite the deal.
As for Warner-Lambert’s huge investment in building the value of its trademark, the judge pointed out that those advertisements promoted the “unique, indeed, almost magical qualities of the formula;” and in any event the company was still benefiting from the “head start” that it had gained in the market, “which has proved of incalculable value through the years.”
Since then, Listerine has continued to sell the terrible-tasting “original” formula, with great success. Perhaps that’s because people still fear “halitosis” and assume that it has to hurt if you’re going to get better. Or perhaps it’s that after 140 years we’ve managed to acquire a taste for it. Just like Australians love Vegemite and Norwegians adore rakfisk. (Don’t know about Norway’s smelly fish? Check it out here). Anyway, everyone seems to be happy, not least the heirs of Dr. Lawrence and those who have bought from them small fractional interests in the continuing royalty stream. Last year, an investor paid $561,000 for just one of those.
So, what is this supposed to teach us? I thought you’d be too distracted by the story to ask. There are actually several good takeaways here.
First, when you’re dealing with trade secrets, the contract matters a lot. Unlike patents, by which the government gives you a limited-time monopoly, trade secrets are by their nature non-exclusionary. So, for the most part (there are some exceptions, which we’ll discuss another time) people and companies are free to draft their contracts as they wish. And that means that those involved have to be sure they read them carefully and understand their implications.
Second, contracts don’t have to be pages long for them to work as intended. This was one of the shortest I’ve seen, and it’s still going strong after almost a century and a half. Lawyers sometimes worry more about the risk of leaving things out than they do about whether everyone understands how the document allocates risk. As the Warner-Lambert case shows, appreciating the risk can be very consequential.
Third, the value of a secret is not entirely about its continued secrecy. Especially in fast-moving sectors, trade secrets can provide what the judge referred to as a “head start,” or what today we call a “first mover advantage.” Where getting access to the secret allows the recipient to capture market share, it may not matter what its lifespan may turn out to be.
Fourth – and this one is important – intellectual property strategy isn’t necessarily about choosing one kind of IP over another, but using them in complementary ways. We’ve already looked at that issue in relation to patents and trade secrets. The Listerine case highlights this same principle regarding trademarks and branding. And it isn’t unique. The 1980s blockbuster sweetener Nutra-Sweet was originally protected by a combination of patents and secret process technology that allowed the company to produce the generic material, aspartame, more cheaply than any competitor. And then to reinforce its dominance, it pressured the makers of Coke and Pepsi to place its trademark on their soda cans – a triumph of brand leverage.
Back in 1881, Lawrence and Lambert probably had no idea about the scope (sorry about that) of commercial possibilities for Listerine. But they managed to strike a deal that benefited both of them and, ultimately, the public. Remember, Listerine is not only “non-poisonous,” but according to other ad copy from 1948, “even the strong odor of fish yields to it.” Somebody please ship a case to Norway.