Dilution, in the context of trademark law, is a type of infringement that arises when someone uses a famous trademark in a way that harms the trademark's distinctiveness. Dilution can be found regardless of whether the "junior mark's" use would be likely to cause confusion with the "senior mark."

One of the oldest cases, tried in Britain in 1898, involved the Kodak Cycle Company, which was selling Kodak brand bicycles. Eastman Photographic, which was already making a pile of money from Kodak cameras, filed suit, and the court issued an injunction to shut Kodak Cycle down. Dilution thus became part of the common law of trademarks in Britain and other Anglosphere countries. The Paris Convention and TRIPS agreements established an international consensus that dilution should be illegal, and the United States codified its dilution laws in the Federal Trademark Dilution Act of 1995.

There are two principles behind dilution law: "blurring" and "tarnishment." Blurring is the notion that consumers associate a trademark with a specific producer, and allowing free use of the mark on other products will reduce that association. Tarnishment is the notion that the image of a trademark can be undermined when used on other products: think of some of the offensive parody T-shirts that constantly pop up on college campuses.

Under U.S. federal law, the prerequisites for a finding of dilution are:

  1. The senior mark must be famous. The standard for fame is based on how long the mark has been used, how often the mark has been used in advertising, the geographical extent of the market for marked goods or services, and whether or not the mark is a registered trademark. This requirement is somewhat lax in application: federal courts find fame in many trademarks you probably haven't heard of. Many state dilution laws don't have a fame requirement at all.
  2. The senior mark must be distinctive. This criterion is not universally accepted. The Second Circuit held that descriptive trademarks could not be diluted in a 2001 case involving The Children's Place, while the Third Circuit reached a contrary conclusion in a suit between The Sporting News and the Las Vegas Sporting News, holding that fame should be synonymous with distinctiveness for the purpose of proving dilution. Arbitrary or fanciful marks, like UNIX and Pepsi, are clearly distinctive and can be diluted under either interpretation of the law.
  3. The junior mark must be used for commercial purposes. This is usually obvious, but not always. If a person registers "microsoft.info" and does nothing with the domain name, they are not diluting Microsoft's trademark. But if they create an actual website at that address, they can be liable for dilution. (Note that cybersquatting laws apply to the domain owner regardless of whether they're violating trademark or not.)
  4. The first use of the junior mark must occur after the senior mark becomes famous.
Once these are established, the plaintiff must prove that the junior mark dilutes the distinctive quality of the senior mark. This criterion is the most important, and it's also where things get fuzzy. Dilution itself is based on:
  1. Similarity - whether the junior mark will conjure an association with the senior mark.
  2. Proximity - how close the junior user comes to the senior user's area of commerce. If the areas of commerce are almost identical, the case becomes a straightforward "likelihood of confusion" case.
  3. Confusion - whether consumers actually confuse the junior or senior marks. This can be proven by survey or by other evidence.
  4. Adjectival or referential quality - whether the mark becomes generic in its junior use. A pet shop would not dilute Pepperidge Farm's trademark by selling fish under the name "goldfish." Nabisco, on the other hand, could dilute the trademark if it sold boxes of assorted crackers including some that are goldfish-shaped—and actually got in trouble for exactly this: see Nabisco v. PF Brands, 191 F.3d 208 (2d Cir. 1999).

Until 2003, many courts allowed dilution claims even when no actual damages were alleged. This ended in the Supreme Court's decision in Moseley v. V Secret Catalogue, 537 U.S. 418 (2003), which held that proof of actual injury to the economic value of the senior mark was needed to win a dilution claim.

Dilution is a completely different issue in corporate law, arising when a company issues stock. The other shareholders' interests are "diluted," as they each end up with a smaller proportion of voting control and (if the stock is sold below fair value) a less valuable equity interest in the company. Because of these issues, many corporations have preemptive rights written into their articles of incorporation, so that the company cannot issue new stock without offering at least a proportional amount to existing shareholders.